It’s not often for an emerging market with a nascent venture capital industry like the Middle East to build a Unicorn. These are rare, hence the name, and are very important in building a prosperous and vibrant startup ecosystem. Why? Because Unicorns create a lot of value, and that value comes in two main forms – capital and talent. This capital and talent will circulate back into the ecosystem in the way of more experienced entrepreneurs and engineers building newer and potentially bigger businesses, backed by the capital through an investment. Not to mention the publicity and awareness a Unicorn creates among the international investment community, and the benefits of that.
Last week I attended the STEP Conference in Dubai. Ray Dargham and the STEP Conference team did a fantastic job of organizing a vibrant and energetic event that was a lot of fun, and further cemented my belief that we, as a region, are heading in the right direction. Various themes were discussed at the event, including Unicorns. Fadi Ghandour was the first to mention that Souq is the Middle East’s first Unicorn in the making, and he’s absolutely right. Souq.com was valued at over $500m in it’s last fund raise done in early 2014, and it’s expected to have now reached close to the $1bn mark. I was invited to join a panel with some friends and colleagues, Habib Haddad, Christos Mastoras, Husain Mishergi, moderated by the ever-inspiring Fida Chaaban, where we discussed exit opportunities for startups in MENA, and shared some interesting insights. Ahead of the panel, I was given the opportunity to spend a few minutes and discuss “Exits from our perspective”, and this is what I’d like to touch on today.
In essence, I believe that the region has lost one of the few opportunities it has to create a Unicorn, with the sale of Talabat to Rocket Internet. This is a bold statement and is by no means a guarantee given the intense competition in the market by the likes of FoodOnClick, HelloFood and other incumbents. However, in principle, there are very few business models that exist today in the Middle East with the ability to scale into something so large. For example, content-based businesses are unlikely to be able to grow to $1bn in value, driven mainly by the fact that they rely on advertising and sponsorships to drive revenue, and the region has a relatively small digital advertising market today that’s dominated by Google, YouTube and Facebook. A food delivery marketplace is entirely different. It has a proven business model, and in Talabat’s case, it was already profitable, and had the capability of scaling to that size.
The utility of food delivery and the repeatability and retention of that service is extremely high, since most people order food delivery and do it on a regular basis, making it an ideal category for an online marketplace. A user would order a meal at a restaurant through the app or website, and the food delivery platform would get a commission of 7%to 10% of the order value in exchange for fulfilling the order and generating a sale for the restaurant. The interesting thing about online food delivery in the GCC is that the maturity of the industry is practically at inception (less than 5%) while the UK is at 20% maturity, meaning the 20% of total food deliveries done in the UK are made through a food delivery platform. This alone, represents a huge upside for GCC players such as Talabat to take advantage of. More importantly, the region has the highest value users relative to other markets. The GCC consumer purchases 60% more often than the European consumer and generates orders that are 40% more in value. They are highly profitable users. These characteristics are very unique and Talabat was able to take advantage of them as they built their business into a $170m company. This is no mean feat, and takes a lot of focus, hustle and execution. We need to applaud Mohammed Jaffar for such an accomplishment, he is a great role model and clearly a fantastic entrepreneur who built an amazing business.
For Rocket Internet, who aims to build the largest food delivery platform in the world, these positive user characteristics, as well as the brand and geographic footprint that Talabat established, made it a perfect acquisition target. Unfortunately, when exiting to Rocket Internet or any international for that matter, the future value that the company is going to create will have left the region. Using Talabat as an example, if the company grows from $170m to $1bn (an uplift of $830m), the increase in value will go to Rocket Internet. Given that Rocket Internet is based in Germany with international shareholders, the value that gets created would likely leave the Middle East and go to their home market. Had we, as a region and investors, backed Talabat and helped it create that much value, we would have been able to bring it back into the region, creating a profound impact to our ecosystem that will hopefully allow us to create event bigger and better companies, and back even more experienced and ambitious entrepreneurs.
The good thing about this transaction is that not only did it surpass that of Maktoob, but it created some much needed awareness and positive news for the region. We’re already seeing the impact at BECO, when talking to outside investors and institutions who are taking a more serious look at the region. Now, with Iran hopefully opening up in the near future, things are even more exciting. From our viewpoint, the region is changing much faster than we ever thought it would, and we’re already seeing various companies that have the potential to become $500m in enterprise value emerging (and hopefully even $1bn). This will happen, and it’s our job as supporters of that ecosystem to make sure we back those entrepreneurs and businesses to the fullest, in order to maximize the value that gets created, and hopefully recycled back into our ecosystem in the form of talent (more experienced entrepreneurs and engineers) and capital (investment into more businesses).
As Fadi Ghandour predicts, Souq.com will get to the $1bn mark, and when it does it will be a great accomplishment and a milestone for startups in the Middle East. This will hopefully bring about a new wave of entrepreneurs and capital to help create the future Souq’s and Talabat’s of our region, and I for one, can’t wait to see that.