By Tamara Pupic
Dany Farha, co-founder and CEO of Dubai-based venture capital firm, BECO Capital, talks investment with Tamara Pupic
Building a case for the future of the nascent technology sector in the Arab world might start by following in the footsteps of visionaries from the past.
In the late 19th and early 20th century, the liberal and farsighted economic policy of HH Sheikh Maktoum bin Hasher paved the way for Dubai’s story of rapid progress.
Now, in the midst of the 21st century, the city is making more giant leaps – this time on the back of the tech revolution.
“Why is Dubai so successful?,” asks Dany Farha, co-founder and CEO of BECO Capital, a regional venture capital firm focused on technology investments in the Middle East.
“Because it built itself in the middle of the world between east and west as an incredible hub of moving containers and goods.
“The same thing happens with technology. There’s no difference. That’s it.
“That philosophy is what we are doing today, but on a grander scale. It’s important, it’s culture.”
Through BECO Capital, Farha backs tech start-ups across the MENA region with early-stage growth and hands-on operational support, grooming them to become ‘unicorns’ – a term for companies valued at $1 billion or more.
But this is more than his everyday job – it has become his mission.
The Arab world, he explains, squandered the opportunity to participate in the five major technological revolutions over the last 400 years. After the industrial revolution, steam engines, steel, electricity, and automotive production, the latest IT boom should not be missed.
Developing and preserving locally-bred, world-class start-ups that could become next technology titans within the regional ecosystem will, as he explains, create sustainable economic value and contribute to alleviating the standards of living across the region.
“We can catch this one,” he says. “The whole world is building their technology businesses to serve their populous with goods and services. We have to innovate for ourselves. We are no less smart than anybody else.
“We need people to tell us go and do it, money to fund it, and government and private sector regulation and encouragement to be able to push that technological revolution in our own region.”
Not only has he been insisting on inviting others to do their parts in ensuring that the MENA region is next in line for the global boom in the technology sector, but that goal has marked his entrepreneurial beginnings and a transition to a venture capitalists.
His first venture, Intercat, founded in 1996, grew to become one of the largest catering companies in Dubai, employing 2,000 people at one point. Two years later, he started Butlers, a commercial laundry company, which was also a large employer.
Having stepped down from his management roles at both businesses in 2000, he became part of one of the region’s biggest entrepreneurial success stories – Bayt.com. The region’s first online job search engine has become one of the most highly-trafficked websites in the world with more than 17.5 million users.
Ten years into that journey, he decided to exit, but signalled no desire to take his foot off the pedal.
As an active member of the local start-up ecosystem he noticed many entrepreneurs needing not only capital, but also advice, guidance and operational assistance.
Assembling a set of three professionals with a track record across the venture capital, technology, entrepreneurial and financial sectors, he embarked on a mission to ensure that the region doesn’t miss out on any of the giant leaps of its own.
The company’s name is, therefore, an acronym of “booster engine cut-off” to symbolise the support to early stage companies during their turbulent growth periods.
“The answer is 100 percent, categorically not enough money by a vast stretch,” he says when asked whether there was enough money going to the venture capital sector.
According to their research, the Arab region has circa 10-times less money than India, 15-times less money than China, and 35-times less money than the USA invests in venture capital per capita per annum.
However, sailing through the insecure waters of the regional venture capital industry must be easier today than more than more a decade ago when he secured venture capital funds for Bayt.com. “It was tough, but we did it,” he says.
“We were one of very few people that were able to do it. Today, globally, everyone knows that technology is changing the world. It’s getting much easier, but sure we are facing a tough time preaching to investors to invest funds.
“If it’s too easy, there’s a problem. If it’s too easy, everyone is going to be doing it. Easy money gets more inflationary, it gets deployed irresponsibly and sub-optimally.
“So it needs to be tough, it needs to be difficult, and for those who perform, hopefully like us, it will get easier and easier.
“And as soon as you have really clear winners, hopefully, the momentum changes. We’ll have people knocking on our doors saying: ‘Can we invest?’”
And it seems like that time is slowly coming.
Their prediction is that the sector will grow five-fold in the next three years, the traces of which were already witnessed in 2014 when the venture capital funds raised in the region totalled $175 million.
That was six times larger than $29 million raised in 2013. Over the same period the deal flow grew almost four times.
“2015 will equal 2012, 2013, and 2014 together,” he says.
“In fact, when we first started investing three years ago we didn’t realise that the things would grow this quickly. Normally things grow, but they grow straight line.
“And, suddenly we got this incredible trajectory that doesn’t seem to be stopping. On the contrary, it will continue to accelerate itself.”
Being a holding company, BECO Capital continuously raises money from its shareholders’ base which consists of a selected group of super high net worth individuals and family offices.
As a private company, he prefers that their capital and assets under management remain undisclosed, but explains that their primary investment stage is late seed to early venture. This includes funds of about $300,000 at earlier stages, with late seed growing to about $750,000, and the Series A being between $1 million to $3 million.
Although they are primarily focused on investing at the Series A stage, he adds that, on the basis of their market insights, the follow-on funding for the stars and series B could go to $3 million to $5 million.
One of the stars of BECO’s portfolio investments is Propertyfinder, an online real estate portal which has spread across seven markets since the establishment in Dubai in 2007. In December 2014, it was reported that BECO Capital committed to further funding, in total of $5 million since the initial investment, to help its expansion into Saudi Arabia.
Farha says: “When we first started, we realised that there was a lot of money at $50,000 to $200,000 stage. [There was] lots of activity of friends and family, angels, accelerators, incubators, and similar.
“We realised that after all the activity down there, when it gets funded and it was getting funded, where did it [the start-up] go next? There was no one at $1 million to $3 million stage. This is why we raised for that sector.
“Now, because a lot of funds are raised for the Series A, we are seeing two things happening. [Firstly], you have a gap now at $5 million to $15 million, series B and C. Typically, it’s too small for the US guys [investors] to come in, but it’s too big for the local guys.
“And because there’s a lot of money raised for the Series A, there is a bit of a gap at the bottom. We need more micro-seed investing. Angel networks should plug that gap at the bottom beneath us.
“And we will raise to solve that piece [$5 million to $15 million] as well. I know that other peer groups are thinking about doing the same thing, and there are other entities from abroad that are looking into to raise funds to fill that.
“The good thing is that if you have opportunities, people will raise, find the money.”
An opportunity is a MENA-based late seed to early venture company that can serve a large addressable market throughout the region. It should be capable of reaching or exceeding $20 million in annual sales in the future.
The start-up’s team should have already secured early adopter users and preferably some revenues within the limited number of sectors BECO is interested in. Those are business and consumer internet services, mobile services, SaaS, technology infrastructure and digital media.
True to the company’s name, one of the options for interested start-up founders to get in touch with BECO’s team is to hit an ‘apply for liftoff’ button after completing their online application form.
Farha says that 250 expressions of interests were received last year while they expect 500 in 2015 and might make three to four new investments.
“We say no very quickly. We have a policy internally to say no within 60 seconds because we don’t drag you along for the ride for nothing,” he explains.
In seven companies that are currently part of their portfolio BECO has large minority stakes ranging from as low as five to ten percent up to 30 percent. “We don’t want to take more than that and we don’t necessarily want to take less than that,” he says.
“We might start low and work our way up to cap table as we continue to buy some more, primary, secondary, and similar, but we are minority investors.
“We don’t take majority; we are not a buyout fund. It’s the entrepreneurs’ show, not ours.”
Looking forward, he would like them all to become household names. However, the future might hold a different scenario, less preferred by the BECO team, which is the acquisition of a local winning start-up by a strategic buyer or a VC firm too early.
The recent example is the acquisition of Kuwait’s Talabat.com, a food takeaway platform, by the German e-commerce group Rocket Internet for $170 million in February 2015. It is considered as the second biggest regional exit since Yahoo! acquired Maktoob in 2009 for $165 million.
At the recent STEP 2015 Conference, Amir Farha, BECO’s co-founder and managing partner, cautioned the regional venture capital industry of losing their next unicorns if they didn’t support their winners properly and if they didn’t time their exits correctly.
“Some of the unicorns-in-the-making could complete their exits to international strategic firms or venture capital firms sooner,” he said.
“This might sound great if we do not take into account that these companies could be a bigger phenomenon than the region anticipated.
“They could become the unicorns we have been waiting for. So, let’s not miss out on our future unicorns.”
When asked how the regional venture capital industry could prevent this from happening, Farha explains that the current funds are restricted in the size of a ticket they could write for a company. However, that will be the case only until the first $1 billion exit puts the region on the world map of venture capital.
“So when that happens that’s a complete game changer, and that happened last year in India,” he says.
During the last year, a number of Indian start-ups attracted the attention of prominent investors worldwide.
In July 2014, the country’s largest e-commerce firm, Flipkart, raised $1 billion in its latest round of fund-raising. Reported as the largest venture investment received by an Indian online company, Flipkart’s valuation rose to $11 billion.
A few months later, SoftBank Corp, a Japanese telecom and media group, bought a $627 million stake in Snapdeal, another of India’s e-commerce success stories. The company was valued at more than $2 billion.
After China, India is the second largest Internet market in the world with 300 million users. However, since that is only a quarter of the population, the potential of that market is yet to be fully reached.
Adding the increased smartphone usage and e-commerce spend of around $16 billion to the list of factors, Farha explains that those were the reasons why 80 percent of emerging market venture capital dollars were invested in India in 2014.
“What happened was that certain drivers had hit their tipping point. Now if you look at our drivers, the numbers are not far behind India,” he says to explain that India’s success story could build trust among international investors that Middle Eastern start-ups are also capable of achieving scale.
“And what we have in our favour is that we have five times their GDP per capita. We are at $30,000 and they are at $5,000 or $6,000. So an average consumer can buy five times more.
“So those tipping points are becoming interesting now in our region. In three to five years when they hit that big delta, we will have our India moment when all our companies will be big unicorns.”
The favourable outcome, he adds, is needed since the technology sector is one of the few sectors that can quickly make many employment-creating opportunities with modest amounts of capital.
A reason good enough, if one more was needed, having in mind that the Arab world could have a total population of 598 million citizens by 2050, with 149.5 million of its youth unemployed.
To feed the fire, Farha explains that the sector’s unique characteristic is in creating white collar jobs, leading to a higher purchasing power and consequently prosperity for the people across the region.
“An important point to realise is that technology is the best paying sector in the US as of 2014. If we know that’s the sea change, let’s configure ourselves to make ourselves ready to benefit from that dynamics,” he says.
A government-driven policy action to improve access to capital and easier, supportive start-up-related regulation; the encouragement to the local sovereign wealth funds (SWFs) to channel their funds towards start-ups; the private sector’s procurement from small companies, and many more, Farha says, should be initiated in the meantime.
“What needs to happen is that everyone needs to pull their socks up and contribute,” Farha concludes.
“It is a strategic priority for the country and the region. That’s the bottom line.”