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Wed 29 Nov 2000 04:00 AM

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$250 Million

That's how much money two Gulf-based investment funds want to invest in New Economy startups. Find out who these companies are, what they're looking for and what their investment goals are.

That's how much money two Gulf-based investment funds want to invest in New Economy startups. Find out who these companies are, what they're looking for and what their investment goals are.

Start drawing up your dot.com business plan. Two new Gulf-based investment funds are in the process of raising a total of $250 million in cash and loan guarantees, and they want to invest it all in pre-IPO dot.com and IT startups.

The Injazat Technology Fund, created by Gulf Finance House and Islamic Corporation for the Development of the Private Sector (ICD) aims to raise $50 million to invest in company equity. It’s already well on its way, as the two founding partners have both put in $12.5 million each. Not only that, but Injazat also intends to secure a credit line totalling $100 million that any company it invests in can tap into for extra capital.

Digital Technology Co., a KSA-based investment fund, plans to raise $100 million. The founders themselves have already put in an unspecified amount of that $100 million and will raise the rest of the money from investors around the region.

The colour of their money is the same but the history behind each fund is slightly different. Injazat believes itself to be the first Islamically structured tech investment fund for and from the region. The fund’s founders are certainly hard-nosed investors but one of the partners, ICD, also has a clear social goal.

As an affiliate of the Islamic Development Bank, the organisation is charged with investing in private sector ventures that will aid in the wider development of the region. “At the end of the day, I have to go back to the investors,” says ICD’s Rami Ahmad, “but I want to serve the developing world, no doubt about that. I want to get into projects where there is a development impact, where jobs are created, where knowledge is transferred.”

Digital Technology Company (Digitel) was set up by four Saudi nationals, two of whom have had extensive experience in the IT world and two of whom served time in the financial services and investments world. They’re now pooling their respective expertise into a venture that will seek out information technology and dot.com investment opportunities both across the Middle East and in North America. They want to stem the endless flow of Gulf capital into the hands of international fund managers and show that Saudi investors know a thing or two about New Economy investing.

“A lot of the digital economy companies that are now being created are tapping into the Middle East’s huge buying power,” says Abdulaziz Jazzar, one of Digitel’s four executive partners. “However, they are located in London, New York or Paris. The idea here is to take advantage of the huge buying power of the Middle East that’s being exploited by worldwide companies.”

$150 million certainly sounds like a lot of money; it is a lot of money. But when you look at the wealth out there in the Gulf states, it doesn’t seem an impossible figure to raise. According to Saudi Arabian daily newspaper, Arab News, Gulf investors lost $4 billion on equity prices in the March NASDAQ crash alone. Suddenly $150 million doesn’t seem out of reach. “We already have a very strong indication of the interest level and we’re confident we can raise it,” says Digitel executive partner, Fahad Almubarak.

According to ICD’s Rami Ahmad, Injazat’s two main sponsors believe that technology represents a major opportunity for the developing world to close the economic gap with the developed world. The word Injazat translates into English as ‘accomplishments’ or achievements.’ The fund is certainly a landmark venture for the Islamic Development Bank (IDB), which has until now almost entirely focused its financing on public sector infrastructure projects across the Islamic world.

It was in the late 1990s, as privatisation and deregulation began to gather pace, that Islamic Development Bank began to realise the need to focus more on the private sector. Thus, the Islamic Corporation for the Development of the Private Sector was created, with a brief to search out private sector investments that could have a noticeable development impact across the geography of its member states.

“We’re distinguishing ourselves from what IDB typically does,” says Ahmad. “We’re not going for easy, steady public sector ventures. We’re going for emerging private sectors like technology and biomedical in the future.”

Injazat Technology fund is the first venture for the Islamic Corporation for the Development of the Private Sector. Its brief is to search out investment opportunities that in Ahmad’s words can, “bridge the digital divide.”

He is certain that technology is the tool by which developing countries can make this happen. “We believe that there is a true chance, if not to bridge the gap, to at least stop it widening,” says Ahmad.

Key to achieving that is reversing the brain drain that sees the region’s brightest and best leaving for places where their skills and business ideas are more appreciated. But make no mistake, this is a fund that intends to make a handsome return for its investors.

Digitel’s four founders are all prominent Saudi nationals who between them have extensive experience both of the IT and investment worlds (they admitted on record to being over 45 years of age.) Abdulaziz Jazzar and Ahmad Al-Sari will dissect the information technology component of business plans, whilst Ahmed Banaja and Fahad Almubarak will decide whether or not a proposal has a chance of profitability. “We have decided to converge the rest of our careers into pursuing a unified goal: investing in the IT world, with a special focus on the international and Middle East’s growing IT/Internet sector,” says Fahad Almubarak.

Digitel sees investment opportunities everywhere. One of its ideas is to localise and Arabise dot.com business models or even franchises that have proven successful internationally.

The relative backwardness of the region’s entire Internet infrastructure they see not as a dampener on their plans, but as fertile ground for Digitel. “We agree there is quite a bit of an evolution that has to take place for e-commerce and the Internet to reach a reasonable degree of maturity, but we see that as a business opportunity for ourselves,” says Ahmad Al-Sari.

“Security on the Internet is a major element that has to be there, but that’s also an opportunity for investment on our part. The same thing applies to payment,” he adds.

Business to business (B2B) e-commerce is also seen as bright area of opportunity. The partners believe that the Middle East’s companies will have to move towards online procurement in order to remain competitive. “B2C is a lucrative market, but in terms of numbers, transactions and volume, B2B is definitely it,” says Abdulaziz Jazzar. “The whole world is going ‘e’ and therefore the dealers and major merchants of the MENA region will have to go B2B soon, in order to able to procure their supplies.

Both Injazat Technology Fund and Digital Technology Company are targeting a return on their investors’ money of around 25%. All investments will be in pre-IPO companies, both first round and more advanced.

Injazat has earmarked 20% of the fund’s total assets for angel and first round investments. The other 80% will go into companies that are nearer their exit stage. By playing more what ICD’s Ahmad describes as the role of an “accelerator”, he believes Injazat will more effectively safeguard his investors’ return and the developmental goals of the ICD.

Digitel will also invest in a spread of early and mid-stage companies so as to spread its risk. Fahad Almubarak explains the company’s thinking: “The earlier the stage at which you invest, the higher the number that is unsuccessful, but the higher the return on the successful ones.” Because of that, early stage investment are more likely to be in companies closer geographically to the executive partners. This way, they can more closely be involved with the companies, which after all represent a higher risk.

Injazat has already announced its first investment, in a virtual bank that’s being set up by Gulf Finance House. The bank is due for launch around the end of the year and will specialise in Shariah-compliant products and services.

This represents an early stage investment and now Ahmad says he wants to seek out investments in companies at a more advanced stage of their cycle. “We want to look at companies that have been around for a year, maybe two, that have got their thoughts together, know what they want to achieve, have a decent business plan, a reasonable management team and are ready to make or break,” says Ahmad. “We want to make that difference.”

Ahmad believes that a lot of those bright businesses will orientate towards Dubai Internet City. He intends to have a management team located there.

Companies that are candidates for investment will have their debt ratios closely looked at, since Islamic investment principles allow companies to have only a certain amount of debt. Since dot.coms have historically built up a lot debt in their early growth phase, won’t this discount a lot of potential investments?

A certain amount of debt can be overlooked and where companies need more financing beyond Injazat’s investment, the fund can arrange it. “We have $50 million to invest in equity, but we will also arrange for $100 million of financing according to the Islamic Shariah,” says Ahmad. “So if we get a company where our money won’t make such a big difference, we can arrange for lending through Islamic modes of finance.”

Both Injazat and Digital Technology Company see themselves exiting their investments through stock markets and private sales of equity. Injazat would love to see companies it backs exiting on local stock exchanges, but it knows that there is a way to go in the development of local capital markets.

“If I can list some of these companies on NASDAQ, great!” says Rami Ahmad. “However, this will not be the only exit strategy. Another thing about ICD is that we want to encourage regional capital markets. We could go to Bahrain Stock Exchange, Kuwait or Egypt.”Neither of the funds is discouraged by recent fluctuations in technology and dot.com stocks. Rather, they see themselves as well placed to benefit from the experiences and mistakes of others.

They can emulate the successful business models and discard the ones that were failures. “I think what happened in the market is positive for us,” says Digitel’s Abdulaziz Jazzar. “It’s made us wiser and has made us look harder at investments. We’re in the right place, at the right time.”

Nor are they discouraged by facts on the ground, such as regulation of industry and weak Internet infrastructure. “We’re talking about five years [the intended lifetime of the Injazat fund,]” says Rami Ahmad. “Morocco is selling [telecomms and ISP] licenses… Egypt is taking major steps, Jordan too, soon Lebanon and Syria. GCC countries sooner or later are going to take steps. Hopefully, we’ll navigate through these changes for the better.”

You could probably sum up the attitude of these investors as ‘Stop talking about the New Economy and seize the moment!’ “Let’s do something about it, instead of designing seminars and telling people they have to learn about computers,” exclaims Rami Ahmad. “That’s nice and fine, but we want some success stories, some Injazat.”

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