Venture capital the key to diversification

According to recent market research, by 2006 about US$1 trillion had been invested in the Gulf real estate market alone.

That may be a mistake. It is natural for capital to flow towards investment alternatives that yield the highest returns, but a high return on investments also entails undertaking greater risks. Diversification helps manage those risks. A good investor has investments in various asset classes.

Venture capital is an asset class to date underdeveloped and underinvested in the Middle East. It fills the huge gap currently existing in the region's financial markets. It attracts innovators to the region; it creates high paying jobs so people can afford the high living costs of the region; and it provides diversification opportunities.

Within the realm of venture capital, "technology" is the most lucrative due to its magnitude of wealth creation through disruptive changes.

Those who have invested in technology have also seen the rise of a new class of educated and highly trained professionals devoted to delivering even more sophisticated technology and its solutions, with positive impact on quality of life around the world.

Giants like Google, Microsoft, HP, Dell, Sun, and Apple all got their start with venture capital money.

Clearly, development of high technology-focused enterprises can only happen if the right set of conditions exist that can support and nurture it. I believe that high technology entrepreneurs are the key to creation of knowledge-based society.

Clearly, if the right environment is provided these entrepreneurs will take the needed steps towards creating the businesses that will be more and more knowledge-focused, thus initiating knowledge-based communities of interest.

However, if historical disparities in the environmental factors exist, then alternative methods must be considered to allow for entrepreneurs and socio-economic factors to initiate and then sustain knowledge-based environments.

One well-known alternative is knowledge transfer. Knowledge transfer allows shortening of cycles or bypassing the disparities in the environmental factors.

Knowledge transfer requires an understanding of technology life cycles and processes. Larger technology-based enterprises typically develop knowledge transfer roadmaps concurrent with their research and development work.

This allows them to hand over the required processes which engineering and product development teams across a potentially wide geographical area can use to build the final products and solutions. Smaller companies typically have not developed their systems with knowledge transfer in mind and would only do so as an afterthought.

However, if the right set of conditions is provided, knowledge transfer from smaller, more cutting-edge technology firms can be set up and successfully executed, allowing local entrepreneurs to fill in the gaps - thus igniting a knowledge-transfer process and bringing about knowledge-based economic development.

I believe that the phenomenon in Silicon Valley, where most of the top-tiered venture capital firms got their start, is a great point of reference for this region.

The venture capital firms there have offered investors in the West one of the greatest wealth creation vehicles in the history of financial markets. We have the same hopes for investors in the GCC.

Fred F Korangy is the founder and CEO of New Enterprise East Investments.

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