Jan 272012
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The Middle East and North Africa is on the cusp of creating its own Silicon Valley experience

When Joichi Ito started investing in early-stage Silicon Valley start-ups after the dot-com crash a decade ago, he did not know his bets on companies like Twitter and Flickr would pay off.

Those became household names for microbloggers and photo sharers. Now with an established record of success, Mr. Ito is predicting that the region spanning the Middle East and North Africa is on the cusp of creating its own Silicon Valley experience.

“Early stage investors go to places before everyone else,” said Mr. Ito, who was appointed last year as head of the Media Laboratory at the Massachusetts Institute of Technology. “In five to ten years, I think this will be a very vibrant entrepreneurial hub, but when it is going to happen will depend a lot on how much the governments and big companies are willing to allow those small companies to grow here.”

The region remains averse to risk, and only a cultural change will foster the entrepreneurial spirit needed to emulate Silicon Valley’s success, Mr. Ito said.

“Ideas are cheap, but it is about whether you can find an entrepreneur who is passionate about the idea,” Mr. Ito said. “You need passion, some experience and good investors, but also you need the ability to have structure. Corporate structure is tricky and bankruptcy structure is tricky. Those tend to inhibit entrepreneurs that might otherwise be taking the risk.”

While the legal system differs from one Arab country to another, limits on foreign ownership and the need to have a local sponsor in the Gulf region in particular will limit the extent to which entrepreneurs can flourish. Bankruptcy laws also remain opaque and the interpretation of investor rights is often arbitrary. Censorship of Web sites and the banning in some countries of alternative phone providers like Skype also pose hurdles.

From oil-rich Gulf monarchies to resource-barren states, governments in the region are pooling billions of dollars into projects and detailing plans to create jobs in response to the Arab Spring protests that began in December 2010. But several countries have resorted to stopgap measures, increasing public-sector payrolls and entrenching temporary employees, moves that dissuade citizens from seeking to become entrepreneurs.

“Most of the companies I invested in, in Singapore, were transplanted with entrepreneurs coming from other places,” Mr. Ito said. “Singapore, Hong Kong, Japan and other non-U.S. hubs have fairly easy corporate structures that started to mimic the U.S. Here, if you change the structure a little bit, you attract a lot of entrepreneurs, and then they would create jobs locally.”

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