Venture capitalists eye start-ups

Abraaj chief sees more funding choices and leads the way with $200 million in new fund to assist entrepreneurs.

Start-ups and growing businesses looking for funding will find more options than ever this year as the regional venture capital industry reaches what many think is a crucial turning point. Investors are showing unprecedented interest in putting their money into venture capital and private equity funds targeting smaller businesses, leading to a growth in new funds and support systems for entrepreneurs.

"I genuinely believe that there will be more capital dedicated to the entrepreneur in the coming years," said Tom Speechley, an executive director of the Dubai-based investment bank Abraaj Capital. "In my view, this year will be an inflection point for entrepreneurs and venture capital in the region." Mr Speechley is leading Abraaj's push into investing in small to medium-sized businesses, spearheaded by a new US$200 million (Dh734.6m) fund targeting the sector. The fund is built around the Jordanian venture capital firm Riyada, which was acquired by Abraaj late last year.

Governments in the region have increased the attention being paid to smaller businesses, seeing it as a sector of the economy that is less prone to cyclical downturns and offering greater growth potential and employment prospects. With that attention meaning more public funds are available to support entrepreneurs, venture capitalists are rushing to complement the new flow of capital with their own skills in mentoring and guiding small businesses.

"Governments are now backing their words with capital, which is very good news," Mr Speechley said. "But it is about much more than money. Capital is important, but there's more than that. It is a broader package of institutional support, governance, guidance, introducing new systems and technologies, a whole ecosystem for entrepreneurs." IV Holdings, one of the region's most well established venture capital funds for the internet industry, is currently finalising a new fund targeting small internet companies after making seven investments in recent years. The new fund was planned to be launched in 2011, but has been brought forward due to a number of investors, known in the industry as limited partners (LPs), wanting more investment options.

"To move forward the launch of a fund because of such a growth in LP demand, that sends a very important message," said Emile Cubeisy, the managing director at IV Holdings. "We found ourselves growing faster than we had anticipated - both in investors interested in participating and in the pipeline of companies coming to us for funding," he said. "We've gone from looking at maybe three deals per month in April 2008 to almost a deal a day now. There's a renewed vigour for supporting entrepreneurs. It's coming in from all segments."

While both entrepreneurs and investors are taking small business much more seriously, Mr Cubeisy still speaks of a "canyon of death" facing the region, describing an imbalance between the number of large funds looking to invest tens or even hundreds of millions of dollars into successful companies, and the handful of venture capitalists supporting the small businesses that feed this pipeline. Last month the Jordanian private equity firm Foursan raised a $100m fund to invest in medium-sized companies in the region. It expects the fund to grow to $200m by the end of the year.

Nashat Masri, the co-founder of Foursan, said the economic crisis had made private equity investors a more important part of the funding ecosystem in the region. "This is the perfect time to be launching this kind of fund, because valuations are a lot more realistic than in the past," he said. "A couple of years ago it was very hard to sit with someone and say 'yes, your friend in Dubai who did an IPO is trading at 20 times earnings'. They would say 'we're in the same business, so why are you valuing us at much less?'"

At the smaller end of the investing spectrum is Diwanee, a new venture based in Dubai, formed by a group of former advertising and media executives. Diwanee will provide early-stage "seed" funding of up to $250,000 to what its co-founder, Herve Cuviliez, described as "talented people with a great idea and a powerpoint presentation". "We see so many opportunities for entrepreneurs in the internet and media right now," he said. "We decided to move here and ride the growth."

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