Entrepreneurs look to region to get in on second cyber boom
There has never been a better time to launch an internet start-up and become a paper billionaire when your company goes public. Or at least that's the theory. In practice, launching a successful company is largely a mixture of luck and sheer hard work.
With stock markets excited by the prospect of social networking companies such as Facebook about to go public, small and lesser-known internet ventures are attracting disproportionate investor interest.
At the same time, the software industry is moving towards remote or "cloud" computing, which will enable the provision of increasingly powerful services, particularly for mobile devices, thus creating potentially highly lucrative opportunities for fast-moving internet companies.
This internet gold rush is now spreading well outside California's Silicon Valley where it began, with some countries in the Middle East, such as the UAE and Jordan, now being pegged as promising locations for ambitious start-ups.
According to a new report from the World Bank and the International Finance Corporation, Doing Business 2012: Doing Business in a More Transparent World, the UAE has drastically simplified its requirements for business start-ups.
"[UAE] entrepreneurs now face a less burdensome task of meeting the different registration requirements," says Karim Ouled Belayachi, the co-author of the report.
Reforms undertaken in early 2011 have improved the online process of starting a business in the UAE, enabling entrepreneurs to file a single form for business registration, licensing and membership with the Dubai Chamber of Commerce.
"The UAE has already streamlined some of its business start-up requirements, but an entrepreneur is still required to undertake seven procedures and wait approximately 13 calendar days before being able to start a business," Mr Belayachi adds.
But the UAE now provides start-ups with a far more fertile business environment than many of its Middle Eastern neighbours.
"The process to start a business in the UAE compares well in the Gulf region. It is easier to start a business in the UAE than other regional economies such as Oman, Bahrain, Qatar or Kuwait," says Mr Belayachi.
Internet start-ups are already beginning to feel the benefits of the UAE's new entrepreneur-friendly rulings. One example is SinoMena, a UAE-based business development services company specialising in trade between China and the Middle East North Africa region. According to Sam Connelly, the founder of SinoMena, the new rulings make the UAE an ideal location for building a start-up.
"One can recruit technical talent from countries such as India, Egypt, Jordan and Pakistan at substantially lower cost than western Europe, Australia or North America. Once a company has been incorporated, it is relatively straightforward to bring this talent to work from the UAE," Ms Connelly says.
"The UAE and its pro-business policies make it an ideal place to start an online business."
But would-be entrepreneurs tempted to start a business in the UAE or anywhere else in time to cash in on the coming dotcom boom should exercise caution. For every mega success, such as Facebook or Google, there are legions of failures. Once the dust settled on every tech boom in the past 30 years, it quickly became apparent that only a handful of the fledgling organisations at the starting gate had even a remote chance of eventual success.
Contrary to popular belief, internet-based start-ups often require more work to get them off the ground than ordinary enterprises, not less. Traditional businesses generally tap into established markets and customer bases. And, while internet start-ups often have a theoretical appeal to millions of potential customers, actually finding online customers prepared to part with their payment details as opposed to merely clicking on a new website can be hard.
Advertising-led business models, such as Facebook and Google, generate vast ad revenues while offering users services for free. But Facebook has more than 800 million regular users worldwide. This means that it has more visitors than the entire internet had in 2004.
According to Citigroup, Americans are spending 16 per cent of their total time on the internet on Facebook. Google takes second place, with Web surfers spending 11 per cent on the world's leading search engine site. About 9 per cent of their time is spent on Yahoo.
These figures make would-be entrepreneurs keen to follow in the footsteps of youthful internet moguls, such as Mark Zuckerberg, the founder of Facebook, or Larry Page and Sergey Brin, the co-founders of Google.
But when the big players have the lion's share of the market, it should warn would-be rivals that the sector may be closed to all but the strongest of competitors. For example, even companies with deep pockets, such as Microsoft, have struggled to produce a search engine that even starts to rival Google.
There are, however, growing opportunities for companies offering mobile internet services. Foursquare, the social networking site, for instance, took Facebook-style services to a new level by making them location-based by using global positioning system (GPS) chips in mobile phones. While networking on their smartphones, users can also locate the physical presence of friends who may be close by at a restaurant or shopping centre.
Foursquare executives are fond of dismissing Facebook as passé and "boring", but it remains to be seen if they can maintain their mobile head start over competitors like Facebook. In October, Facebook announced that it would gradually introduce a range of mobile services to its users over the coming months. Search giant Google's new social networking service Google+ also offers a mobile service, +Mobile, which relies on GPS chips in mobile phones.
The social networking sector is now creating a fever among investors, who believe that they can make the same kind of killing that people who bought shares early in stellar tech stocks, such as Google, which went public in 2004, and Apple, which went public in 1980 in the largest initial public offering of shares since the Ford Motor Company listed in 1956.
But entrepreneurs tempted to develop social networking services, particularly in the mobile sector, should be aware of several hurdles. Venture capitalists funding technology start-ups often speak of "first-mover advantage". This means that the first internet company to offer a new service has a major advantage over those who follow.
There is, however, another contradictory saying among technology industry watchers: "Pioneers get arrows in their backs."
The history of Myspace, the pioneer social networking website, proves both tech wisdoms to be correct. Founded in 2003, the website was a trailblazer when it came to social networking and was bought by Rupert Murdoch's News Corporation for US$580 million (Dh2.1 billion) in 2005. The following year, Myspace was reported to be the most visited website in the US, surpassing even Google. But in 2008, Facebook overtook Myspace. Since then, Myspace user numbers have declined steadily and it is reported to have cut its workforce to 200 from 1,600 in the past two years.
But lessons learnt during the dotcom crash a decade ago and reinforced during the recent financial downturn are in danger of being forgotten. Chief among these is that to succeed, an online business should have roughly the same fundamentals as an ordinary company. That means knowing its customer base, hiring able staff and, most of all, managing cash flow.
As Albert Einstein, the great physicist, once famously remarked, "genius is one per cent inspiration and 99 per cent perspiration".
Entrepreneurs, such as the late Steve Jobs, the former chief executive and co-founder of Apple, are usually self-confessed workaholics. Jobs himself is said to have attributed the beginnings of the pancreatic cancer that killed him to the gruelling year he spent running both Apple and the computer animation company, Pixar, in 1997.
But some Middle Eastern entrepreneurs may be forced to grow their businesses more slowly than their Californian counterparts in Silicon Valley, many of which are frequently offered early stage funding at a time before their business has begun to stack up in purely commercial terms.
Tan Rasab, an entrepreneur and the founder of Sensehere, a semiconductor company, has relocated his business from Dubai to China partly because of what some entrepreneurs see as a funding gap in the UAE.
"With regards to the UAE, we found it challenging on number of fronts. The main one being lack of funding, especially for early stage companies like ours that ate R&D [research and development] and have long, two- to three-year development cycles before we can start generating revenues," Mr Rasab says. "The main problem is that the UAE has no early stage VC [venture capital] funds."
According to Ms Connelly: "Raising money for early stage companies could be made easier. At the moment, only Emirati entrepreneurs are eligible to receive funding from government-sponsored SME funds."
But what is perceived as a funding gap by some early stage entrepreneurs could be the UAE's best defence against suffering the aftermath of the kind of boom and bust cycles experienced by the technology industry in the US after previous tech booms.
Published: November 19, 2011 04:00 AM