“During the next 3-5 years one or more $1 billion companies will emerge to become regional leaders, joining the ranks of Alibaba, Mail.ru, and Rakuten to represent the MENA region in the club of the biggest Internet companies in the world. ”
Consumer online businesses in the Middle East and North Africa are headed towards an era of hypergrowth. During the next 3-5 years one or more $1 billion companies will emerge to become regional leaders, joining the ranks of companies such as Alibaba, Mail.ru, Rakuten, and others to represent the MENA region in the club of the biggest Internet companies in the world. To understand why this bold statement is true, it is important to understand how consumer online businesses have evolved in other emerging markets as opposed to developed markets.
While being technology driven indeed, consumer online businesses are what their name tells, consumer businesses, and the key driver behind them in developed as well as developing market is consumer demand, more than innovation, research and development, or technical development. The key driver in the growth of the Internet industry in any market starts with telecommunication companies, who continued to provide faster and cheaper access to the Internet via dial-up, broadband, and mobile since the dawn of consumer online access in the early 90s.
In developed markets, primarily the US, the increase in number of Internet users (driven by the proliferation of consumer online access) was embraced by an existing venture capital and innovation ecosystem, which provided the funding and support required for founders to build consumer online businesses that addressed the need of such users. This has resulted in a smooth and parallel growth in the number of online users, the flow of investment capital, and the creation of wealth out of Internet companies in the US.
However, emerging markets have lacked the existence of such ecosystem, and thus, had behaved differently. The one thing that emerging markets have are strong telcos, driven mainly by strong voice services markets, and later on data services markets, resulting in continuous increase in the number of Internet users. However, those users did not have much to do online in terms of local online services.
In every emerging market, starting from Latin America, and going all the way to South East Asia, through Central and Eastern Europe, Russia, and other markets, you typically witness an inflection point where the number of Internet users, and Internet penetration rate reach a critical threshold at which time international investors capture the moment, start pouring in capital in such markets, and replicate globally proven business models from other developed –as well as developing – markets. They are typically followed by regional or local investors, and in a matter of 3-5 years, at least one $1 billion company is created, and in many cases, listed on an international stock exchange to act as a proxy for international investors to participate in the growth of the consumer online businesses industry in this market.
The MENA region today boasts more than 150 million Internet users, and an Internet penetration rate that is fast approaching 50 percent. Our proprietary research across other emerging markets indicates that MENA has entered the hyper-growth era of consumer online businesses. If we benchmark the market potential in MENA against other markets such as Russia or South Korea where some public companies are now worth more than $25 billion in value, predicting that MENA would produce at least $10 billion of publicly listed Internet companies is not an overstatement.
Such era represents a historic market opportunity that is rarely repeated to capture an immense amount of value, and create a market leader. As a result, a venture capital approach to support the growth of startups is not always the right one. In a fragmented ecosystem founders in our region face a very tough challenge moving smoothly from one phase of their company development to the other, with challenges in fund raising, market expansion, recruitment of high-end talent, and achieving exits, amongst other challenges. A venture capital fund approach assumes a mature ecosystem where companies grow seamlessly from one phase to the other, changing hands amongst an abundance of players until it eventually reaches an exit.
With the lack of players across most parts of the ecosystem, and the concentration of many in certain parts as is the case today in seed and early stage, many companies end up failing not because they have the wrong model, but because they have failed to raise money, expand, or attract the right talent at the right time. With that in mind, an operator with a “mini-ecosystem” the nurtures the growth of startups may be the perfect solution. In this ecosystem, the operator endeavors to provide its companies with the support they need in order to grow and seize the market opportunity, providing all the resources required ranging from funds and talent, to go-to-market strategy and activation.
With the current largely inefficient ecosystem that is still maturing, many “low hanging fruits” and opportunities end up being missed because no founders step forward to seize them. The above-mentioned ecosystem, similar to the one employed by iMENA, allows the operator to build companies and invest in startups, in addition to offering the added value of partnering up with international players that help them expand into the region .
With the right approach and the right partner, there are many opportunities to create a market leader in a very short period of time. This new opportunity will enable one or more start-ups to benefit from the historic opportunity in the region’s online consumer market.