in the

2 Venture CapitalAfrica Middle East North

nd &

REPORT

2012 Update & 2011 Year in Review

August 2012

TABLE OF CONTENTS
01. 02. 03. 04. 05. INTRODUCTION CONTRIBUTORS INFORMATION ON VC MENA DEFINITION OF VC IN MENA GCC MENA VC COUNTRY OVERVIEWS KUWAIT UAE 03 04 05 05 06

KINGDOM OF SAUDI ARABIA

EGYPT IRAQ LEVANT

JORDAN

MAGHREB ALGERIA TUNISIA 06. 07. 08. 09.

LEBANON MORROCO

MENA VC INVESTEMENT DATA REPORT SUPPORTERS ABOUT THE MENA PRIVAYE EQUITY ASSOCIATION APPENDIX 1: NOTE ON DATA CRITERIA

17 19 20 21

List of Acronyms KSA Kingdom of Saudi Arabia GCC Gulf Cooperation Council ICT Information and Communications Technology MENA Middle East and North Africa PE Private Equity SME Small and Medium-sized Enterprises UAE United Arab Emirates VC Venture Capital

MENA: For the purpose of this report, MENA refers to the following countries in the Middle East and North Africa: Algeria, Bahrain, Egypt, Iraq, Jordan, KSA, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Sudan, Syria, Tunisia, UAE and Yemen. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is or will continue to be accurate. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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INTRODUCTION

Tarek Kabrit, Riyada Enterprise Development

The Middle East and North Africa (MENA) region has long been seen as a hub for trade, enterprise and discovery. This heritage continues to be championed by its people despite a year of extraordinary political and economic change. Today, the MENA region is approaching a turning point for innovation and entrepreneurship. With the majority of the population below the age of 30, peak levels of unemployment, a spreading sense of youth empowerment, and improved regional prospects, it is the optimal time for entrepreneurs to propel their businesses to the next level. Although small in size, innovative high-growth companies are disproportionately important for economic growth in our region. However, while small and medium-sized enterprises (SMEs) constitute the majority of business activity in the MENA, they lack the necessary support to expand and develop. According to the World Bank, SME bank lending in the MENA accounts for less than 8% of total lending. In the Gulf Cooperation Council (GCC) states, it is dismally low at 2%. Lack of access to capital is often cited as one of the key constraints to the scaling up of SMEs in the region. Yet, this gap also represents an opportunity for private equity (PE) and venture capital (VC) firms to provide the financial and strategic support that such firms need. 2011 has been a challenging year globally for most industries. However, the VC industry fared relatively well, with the United States VC industry growing by 22% in dollar terms from the previous year and recording close to USD 3 billion in VC investments (one of the highest levels in the past 10 years). Similarly, the MENA region witnessed a 28% growth in the number of VC and SME deals executed in 2011 over 2010. This can be partly attributed to the nascent nature of the industry in our region, but it also illustrates the increased attention such investments have received regionally from policy makers, academics and investors. A key difference between the VC industry in our region and the US is that in the US over half of the total transactions that took place were seed and Series A deals, with fewer deals consummated at later stages. This funnel effect is reversed in the MENA region, with more deals taking place at the Series B and C levels. This can be attributed to the fact that we remain relatively risk averse as investors in this region, but it also demonstrates that entrepreneurs and young growth businesses need to be better educated on the VC industry and the benefits that such investment can bring. The future prosperity of this region depends on our ability to support high-growth businesses. It is our hope that the investor community will continue to recognize the vital importance of the SME sector in fostering employment and innovation, and enable its continued development at a time when the regions entrepreneurs need this support most.

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CONTRIBUTORS

This report was a collaboration between the MENA Private Equity Association, the Associations VC Taskforce, KPMG, Zawya and industry professionals. MENA Private Equity Association VC Taskforce Ali Arab, Zawya www.zawya.com Ahmad Takatkah, N2V www.N2V.com Amer Mardam Bey, Merchant Edge www.merchant-edge.com Basel Roshdy, IT Ventures/Nile Capital www.nile-capital.com Emile Cubeisy, IV Holdings www.iv-holdings.com Feroz Sanaulla Ghazi Ben Othman, Malaz Capital www.malazcapital.com Philip Boigner, Dubai Silicon Oasis Authority www.dsoa.ae Sami Beydoun, Berytech www.berytech.org Tarek Asaad, Ideavelopers www.ideavelopers.com Tarek Kabrit & Elie Habib, Riyada Enterprise Development www.riyada.com Walid Hanna, Middle East Venture Partners (MEVP) www.mevp.com William Fellows, Maghreb Advisor, Silatech SME Program www.silatech.com Other Brad Whittfield, KPMG www.kpmg.ae Imtiaz Murshed, National Technology Enterprises Company (NTEC) www.ntec.com.kw Salam Saadeh, Y+ Venture Partners www.yplusventures.com Francoise Giraudon, AMIC

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3 4

INFORMATION ON VENTURE CAPITAL IN MENA

This report is an update on our first MENA VC Report launched in March last year. For further details on venture capital in MENA, including a guide to MENA VC for entrepreneurs and a directory of Venture Capital Firms in MENA and related entities in the Middle East, please see: MENA PE Association www.menapea.com VC Ecosystem Directory www.menapea.com/vcecosystem

DEFINITION OF VENTURE CAPITAL IN MENA

VC is defined as the provision of long-term equity investment and strategic support by financial investors to innovative, scalable companies at the early growth stage. Key criteria used to define VC investments also include: Investments are in non-listed companies (private companies) Investment commitment over the life of the deal can average USD 3 to 5Million but can also reach up to USD 15 Million* A typical plan exit through IPO, mergers & acquisition, management buy-out or trade sale Above average returns expected Seed/angel or investments by non-financial shareholders do not count as VC) VC is not confined solely to technology investments, but technology is often a core factor that creates the level of scalability required in a VC deal

* Revised March 2012 (removed minimum commitment of USD 1 million to reflect the global trend toward investing in
smaller deals)

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MENA VC COUNTRY OVERVIEWS

Overviews of VC and VC type activity, and the entrepreneurial environment in a selection of countries across MENA, based on experience of our taskforce team members and availability of information.

Gulf Cooperation Council

Kingdom of Saudi Arabia, Kuwait, United Arab Emirates

Kingdom of Saudi Arabia

Ghazi Ben Othman, Malaz Capital In 2012, VC and overall SME activity in the Kingdom of Saudi Arabia (KSA) increased significantly, driven by two key factors, 1) overall robust growth of the Saudi Arabian economy, and 2) the realization by the Saudi government of the importance of SMEs to economic and social prosperity. Entrepreneurship: Buttressed by rising oil prices, the Saudi economy has seen solid growth across the majority of its economic sectors. This has enabled the Saudi government to expand its already massive spending on physical infrastructure and to increase its investments in various sectors. Already the largest economy in the MENA region, Saudi Arabia has now grown into an even more attractive market for SMEs. As a result, we are seeing an increase in the creation of SMEs natively in Saudi and a significant increase in MENA-based SMEs opening subsidiaries in Saudi to tap this market. The robust economic activity has also generated additional wealth in the country. As a result, we are seeing a still nascent but growing appetite amongst sophisticated investors for the VC asset class. This is driven mostly by a desire from investors to diversify their portfolios away from real estate, industrials and other physical investments. After years of invisibility, the Saudi SME sector has finally attracted government attention, with policymakers now viewing the support and promotion of SMEs as a strategic priority. Much of the debate over how to support SMEs and increase their contribution to the economy has thus far revolved around making bank or debt financing more accessible. However, the role of equity financing, especially as it relates to Islamic financing, has now entered the discussion. As a result, the role of VC as a supportive form of financing for SMEs is becoming more understood. We are seeing encouraging signs from various institutions in the Saudi government that are pushing for more VC-style equity financing for SMEs. Just as importantly, those same institutions are also starting to lower or eliminate structural barriers to the native VC industry in KSA. Venture Capital: Several funds using pure equity or structured equity approaches are being launched targeting the KSA SME sector. The Saudi government has announced several initiatives and programs to expand financing access to SMEs in KSA. There is even talk of creating an SME-specific authority in KSA to promote the sector. SMEs operating in KSA are reporting good growth prospects for 2012, driven by strong government and private demand, especially in the information and communication technology (ICT) sector. In fact, the prospect of tapping the growing Saudi market was one driver that led to the recent

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acquisition of a leading KSA internet games developer by a Turkish game development company. While the current level of VC and SME activity in KSA is clearly increasing, it is still significantly lower than what it should be for this half trillion dollar economy. However, the realization of the economic importance of the SME sector and the advantages of VC financing, seems to be making steady progress. The dialogue does not seem to be anymore about whether or not to support SMEs, but rather about what is the best way to achieve that. We would like to see the positive activity weve described above be translated into meaningful sums of money being invested in VC funds in 2012, so that a significant number of innovative Saudi SMEs may be funded in 2013.

Kuwait

Imtiaz Murshed, National Technology Enterprises Company (NTEC) Entrepreneurship: Kuwait has always been commercially active due to its geographic position and natural trade routes, but with its new found oil wealth it has struggled to develop entrepreneurs from this current generation. With the governments commitment to provide a government job to every national that requires one, the unemployment rate is around 3% and Kuwait benefits from one of the highest GDPs per capita in the world, of around USD 40,000. Kuwait is still bustling with entrepreneurs and new businesses, but these are not run by Kuwaiti nationals. The void is filled by expatriates who carve out a living within the minefields of bureaucratic red tape and unscrupulous partners. The market is predominantly made up of tertiary industries, but new governmental and private initiatives are being developed from the ground up in an effort to expand the nations economic activity beyond the hydrocarbon field. Venture Capital: Even though public benefits and jobs may fuel the lack of entrepreneurship, the government has tried to stimulate the VC market via a KD 100 million fund developed by the Ministry of Finance and the Kuwait Investment Authority (KIA) in 1997. The fund was structured to support Kuwaiti entrepreneurs by financing up to 80% of the project costs for start-up ventures. It was first utilized by the Kuwait Small Projects Development Company (KSPDC) and, over the last few years, by Al Raeda and KAMCO. This has helped the current situation, all-be-it at a very slow pace. Several privately owned companies have tried to invest in the local VC market, with some great success. However, over the last couple of years many operations have either been scaled back or ceased due to the current financial situation in many investment companies. One company that is currently trying the bridge the gap between governmental and private VC is the National Technology Enterprises Company (NTEC), which is fully owned by the Kuwait Investment Authority (KIA) but is operationally set up as a private company. NTEC focuses on energy, cleantech and water, life sciences and ICT, where they are actively developing projects in Kuwait and the region by leveraging close links with Kuwaiti ministries and the private sector.

Qatar

Ihab Asali, Qatar First Investment Bank Qatars economy is backed by huge natural gas reserves (third largest in the world), strong consumer spending power (highest GDP per Capita in the world) and sound corporate governance. Moreover, the successful bid to host the FIFA World Cup 2022 has transformed Qatar into a land of opportunities. Official estimates put the planned spending on World Cup infrastructure, hotels and 12 eco-friendly stadiums at about $50 billion. This among other factors, created an environment that fosters business innovation and entrepreneurship. Entrepreneurship: Qatars commercial activity has been constantly on the rise in the past few years due to its geographic position and natural trade routes, but with its relatively new oil and gas wealth it has struggled to develop entrepreneurs from this current generation. Following a period during which the SME sector was generally overlooked, SMEs in Qatar are starting to gain significant attention from the government as well as financial investors. Today, Qatars SME sector constitutes around 10% - 15% of the economy, with most firms focused on the domestic economy. Government support: It has been affirmed that the future of the Qatari economy mainly rests on the growth of the private sector which will in turn boost productivity and provide real opportunities for entrepreneurship and innovation. In this regard, Qatar has established Enterprise Qatar, a QR2 billion initiative for fostering SMEs, to act as the catalyst and principle driver of Qatars entrepreneurial spirit. Enterprise Qatar supports SME development by providing funding, training & education, legal counsel, financial and human resources support, advanced IT bundles and network infrastructures, and advocating new corporate governance policies aimed at the SME sector in Qatar. Moreover, Qatar Exchange is creating a junior bourse for SMEs to give a boost to this sector. The establishment of a secondary market will give SME owners an opportunity to list in the bourse in accordance with more flexible regulations, while gaining access to further financing sources in order to grow and expand their businesses. Venture Capital: To date, venture capital has not taken hold in Qatar, however, the factors outlined below, and the change in the entrepreneurship/SME environment will likely lead to growth of the VC sector in the near future. Financial institutions are dedicating more resources to tap into the SME sector in Qatar. Lending institutions have recently relaxed some of their criteria to provide proper financing to SMEs with major Qatari banks already joining Al Dhameen program an initiative undertaken by Qatar Development Bank to help foster Small and Medium Enterprises. As for Private Equity firms, the inherent risk of early stage SMEs shifted the PE focus towards more sustainable, profitable and established business models. Given Qatars Government latest initiatives together with the 2022 successful world cup bid, PE firms have been increasingly exploring the Qatari market for potential investments in small and medium sized enterprises.

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United Arab Emirates

Entrepreneurship:

Philip Boigner, Dubai Silicon Oasis

The effects of the Arab Spring have provided the United Arab Emirates (UAE) with a ready influx of potential entrepreneurs and educated engineers that are eager to start companies. However, some significant hurdles make the UAE environment relatively difficult for start-ups. The high cost of living in the UAE is a significant impediment to the success of cash-strapped start-ups. In addition, the lack of qualified engineering talent coming from domestic UAE universities makes scaling operations for start-ups in-country expensive and time consuming. This leads to many start-ups remaining in their Arab home countries, while establishing sales and marketing operations in the UAE. Even so, entrepreneurial activity and start-up support in the UAE, especially in Dubai, is quite extensive. In the past year, Baraka Ventures and Dubai for Acumen ran a business plan competition in the UAE. 60 entrepreneurs competed, representing 22 projects. Two groups won a prize of 100,000 UAE AED to startup their business, and received mentoring packages from three organizations to assist them with legal setup, branding and financial business planning. The Khalifa Fund provided 50% of the prize money. The number of incubators and start-up support companies has also increased. Established companies, such as du, a major telecom operator in the UAE, are fostering engagement in the entrepreneur space. New incubation initiatives from free zone authorities, such as Dubai Silicon Oasis, Dubai Internet City, and potentially the Telecommunications Regulatory Authority (TRA), are also expected to be launched. The UAE is also home to two Social VC companies, Baraka Ventures and Willow Impact Investors. Venture Capital: VC firms that are based in the UAE tend to target region-wide investment opportunities and not just those in the UAE. The current landscape of VC activity in the UAE is a mixture of older funds that have reached the end of their investment cycle, funds that are being formed, and somewhat established active funds. However, the fund environment in the UAE is changing, as some institutions are expected to scale down their VC investment activities in the country, while new players have entered the market. The year 2012 promises to be a very exciting one for the venture capital industry in the MENA region, and for the UAE specifically.

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Egypt

Tarek Asaad, Ideavelopers Over the past decade, the ICT sector has emerged to become one of the most significant contributors to GDP in Egypt. Fueled by strong demand for mobile services and infrastructure, the sector has remarkably sustained its double digit growth even in times of economic slowdown. The growth of the sector has enabled local players to go beyond the countrys borders and become regional and international leaders in their sectors. Companies like Orascom Telecom and Raya have established success stories that serve to inspire entrepreneurs and attract investors to the technology sector in Egypt. In 2011, the Egyptian revolution has demonstrated the incredible power of social networks in the country and has driven Egyptians to join the online world. Facebook users from Egypt have almost doubled in the year. Entrepreneurship: Egypt is the Middle Easts most populous country and a traditional center of education and content creation in the region. Egyptian Universities graduate over 14,000 engineers per year out of a total of 330,000 graduates. This large pool of young educated talent is the main driving force behind Egypts healthy entrepreneurial environment. Given the general populations increased adoption of the internet after the revolution, many (if not most) of the start-ups created in 2011 have been focused on Internet or mobile. The start-up scene in Egypt includes a number of me too companies, replicating successful models in advanced economies, and local plays that are built on local technology or business model innovations. With 16 million and 80 million Egyptian users of web and mobile respectively, and with quick uptake of broadband connectivity on both wired and mobile networks, Egyptian start-ups have the advantage of a large platform to leverage. As Egyptians adopt internet and mobile technologies more aggressively, Egyptian start-ups are finding new ways of offering this large connected population ways to buy goods and services, play games, share ideas and opinions, plan and book travel, etc. An emerging trend in Egypt has been the creation of cross-border start-ups that operate in a large established target market, namely the US, and in Egypt. Typically, the client-facing organization is located in the target market country and the Egyptian organization focuses on technology development and operations. Companies with linkages to Silicon Valley (through an investment or mentorship from the valley to local entrepreneurs) are appearing in the market. Although most start-up companies are based in Cairo, the economic hub of the country, Alexandria has seen a fair share of technology start-up companies. Built on the strength of the renowned Faculty of Engineering at the Alexandria University, these start-ups have been able to make inroads in both the local and global markets. A number of incubators have also been formed, serving early-stage companies. Flat6 (the brainchild of the founders of Sawari Ventures), Tamkeen and Tahrir Square in Alexandria are notable ones. Flat6 graduated its first batch of highly promising companies in late 2011 and plans to repeat this cycle periodically. Additionally, Egyptian start-ups have received funding from investors that are not based in Egypt. The new wave of start-ups in web and mobile has attracted funding from GCC countries and, in a few instances, from US-based investors. A number of are a number of NGOs and business associations promoting entrepreneurship and innovation in Egypt are also active, such as EJB (Egyptian Junior Business Association), EPEA

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(Egyptian Private Equity Association), MCSBE / MAKSABY (Middle East Council for Small Businesses and Entrepreneurship), Endeavor, and others. Angel investment: Angel investment has seen a strong ramp-up in activity in Egypt in the past two years. The profiles of these investors include: Egyptian executives based in the region or Europe / US who have returned to Egypt after the revolution wanting to contribute to their home country Established successful businessmen who have created wealth from their existing businesses, mainly in the technology sector Entrepreneurs who have been successful in building technology companies Senior managers in multinational companies Cross-industry investors who are interested in the technology sector

Efforts are still underway to develop a network that connects angels to each other and to entrepreneurs. As of the writing of this report, there was no established organization providing this service. Current angel investment is largely based on personal contacts. Venture Capital: VC investment is still a relatively new concept to Egypt, with only a small number of active players. Egypts largest and oldest VC firm is Ideavelopers, the VC arm of EFG-Hermes. Ideavelopers manages an Egypt-focused USD 50 million fund, sponsored by government-owned organizations such as Telecom Egypt, Egypt Post and other banks and insurance companies. As of the end of 2011, Ideavelopers had 16 active companies in its portfolio including two semiconductor companies, two electronic payment companies, and a number of other start-ups covering different areas of innovation and technology. Ideavelopers has been very active in 2011, investing in three new internet and mobile companies as well as making two follow-on investments in existing companies in its portfolio. IT Investments/IT Ventures, another active VC firm in Egypt, made a number of investments during the period of 1999-2003 in ICT and media/content sectors, and is looking to pursue new investments in 2012. Sawari Ventures is another strong player in the venture space in Egypt. The fund has completed several investments in Cairo and Alexandria with a particular focus on mobile technologies.

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Iraq

Amer Mardam-Bey, Merchant Edge Venture Capital is not yet active in Iraq, however, we highlight below a few points of interest in entrepreneurship. Historically, the power of government dominated everything in Iraq through the entrenchment of welfare and state. Corruption, tribal and religious power exclusion dominated business activities. As a result, government occupations were more attractive than business ownership, thereby slowing the formation of new businesses. The governments control of networks, distribution systems, business revenues and expansion also became a disincentive for entrepreneurship and firm growth. More recent policies (generally after 2003) aimed at recovery and post-conflict reconstruction have specifically targeted private sector and entrepreneurial strengthening, and range from efforts to create regional or international trading partnerships to a large provincial-level growth program. By mid-2009, small business development centers (SBDCs) were established in key cities, usually in partnership with local chambers of commerce. The importance of bank financing for entrepreneurs is traditionally a fundamental cornerstone for any growth in entrepreneurship. Although progress has been made with restructuring and setting up banking activities, interest rates charged by local banks in Iraq on loans to entrepreneurs remain substantially higher than in neighboring countries. As a result, most entrepreneurs access funds through personal and social networks. Other constraints such as political instability and insecurity in certain provinces remain a concern for both investors and entrepreneurs. However, many of these stressors are now being addressed, allowing entrepreneurs to begin playing an important role in Iraqs reconstruction period. As has been the case in other recovering countries, entrepreneurs can often deliver services more effectively, cheaply and reliably than anyone else. Hence the promise of entrepreneurship in Iraq is highly important. Internet access has also begun to catalyze more start-up businesses across the country. In addition, an incubator recently established in Iraq under the name of sYnergy and appears to be active.

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Levant Jordan

Jordan, Lebanon

Emile Cubeisy, IV Holdings For Jordans relatively nascent VC industry, 2011 was in many ways a pivotal year that saw unprecedented activity in the sector and the wider ecosystem that supports it. In broad terms, we witnessed four especially notable developments. First, we saw the entry of a sizable amount of capital into the VC asset class, across all levels - seed, early stage, and growth. Second, we saw a notable increase in the number and volume of investments into Jordanian ventures and entrepreneurs. Third, we saw a considerable increase in global interest in Jordan as a VC and entrepreneurship hub. Finally, we witnessed an accelerated maturing process of the local entrepreneurial ecosystem, driven in large part by grassroots initiatives and the active participation of Jordanian angel investors. Entrepreneurship: On a more qualitative level, among the more exciting developments in Jordans venture industry are the growing grassroots efforts to support entrepreneurs and make them more visible to investors. At Oasis 500, youd be hard-pressed not to find an entrepreneur with active interest from local, regional, and global investors. The popularity of events like TechTuesdays and the proliferation of grassroots entrepreneur and technology gatherings like Startup Weekend confirm that an authentic start-up culture has taken root in Jordan, starting with Amman but expanding slowly into other cities. Testimonial to the vibrancy of this ecosystem is a February 2012 Bloomberg article (Jordan VC Firms Forging Mideast Silicon Valley), which ranked Amman as the 10th best city in the world, and the top Arab city, in which to launch a start-up. Beyond internet/ mobile technology ventures, we are also seeing an expansion of opportunities in diverse sectors, as entrepreneurs enter areas like healthcare, renewable energy, and creative industries. Crucially, an acceptance towards investing in new ideas is becoming more prevalent, and various stakeholders are providing the means to turn these ideas into ventures. The validation of the ecosystem is also being observed beyond a local dynamic, taking the form of increased global interest in and recognition of Jordanian ventures and entrepreneurs. For example, in June 2011, a program called Middle East Technology Pioneers Exchange (METPE) took Jordanian ventures and entrepreneurs to New York City, where for three days they collaborated with various US counterparts to exchange ideas, extend their businesses reach, and build capacity. Leading the METPE effort was Silicon Badia, a technology transfer fund and accelerator aiming to capitalize on this Jordan-to-global dynamic. For example, Silicon Badias Launchpad program, based in New York, took several Jordanian companies to the US in 2011, placing them in a proprietary three-month accelerator program. Such exchanges and collaborations are expected to become increasingly more common with time, driven by the continuing strength and growth of Jordans venture ecosystem. Venture Capital: The increase of capital in the Jordanian VC sector in 2011 was driven by several factors. On an institutional level, several local and regional institutions entered the market with their first Jordanfocused funds. Notable among the former is Oasis 500 , which raised Oasis Ventures I, a USD 6 million fund providing seed-level investments in the USD10,000-50,000 range. Among the latter, one example was the entry of Dubai-based Abraaj Capital with the Jordan Growth Capital Fund, a

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USD 50 million fund investing in Jordanian SMEs. Funding has also witnessed an unprecedented increase from non-institutional sources, with angel investors specifically showing record interest in VC-style investment. Oasis* 500s angel network helped companies raise USD8.8 million in 2011. In terms of investments placed, Jordan saw some record numbers in 2011, both in the number of ventures receiving funding, and in the total amounts invested. At the seed-level, Oasis 500 alone has to date made more than 50 investments from the fund it raised in 2011. While exact numbers for early and expansion stage funding are not available, activity at these stages was also strong, with numerous ventures raising rounds in excess of USD200,000. This included a number of investments by IV Holdings fund. MENA Ventures Investments also made 10 local investments in 2011, with examples including Kharabeesh, a Middle East web media and entertainment network, and Curlstone, a 2D/3D animation studio. Investments into Jordanian ventures also came from international investors. Here, it is worth noting the example of MarkaVIP, a Jordanian e-commerce platform which raised USD3 million from a UK based VC fund and then an additional USD5 million from two U.S.-based funds in 2011. Other examples include Choozon, which raised USD4.5 million from a consortium of local and global VCs and angels, and gaming company Maysalward, which received an investment from Turkey-based Timar Ventures. Jeeran and ShooFeeTV, two of IV Holdings portfolio companies, also raised follow-on funding from global sources, with Intel Capital participating. On a more macro level, another global player to enter the sector in 2011 was Cisco, which announced in May a USD10 million commitment for local funds to invest in innovative Jordanian technology ventures. In broad terms, this increase in global funding is validating the position of Jordan as one of the key centers of entrepreneurship in the region.

Lebanon

Sami Beydoun, Berytech & Walid Hanna, Middle East Venture Partners Entrepreneurship: In parallel to the emergence of the local VC industry, a support structure for entrepreneurs has slowly evolved and taken shape into what is now a vibrant ecosystem of entrepreneurship. There is a full set of organizations providing all types of support for entrepreneurs: incubators, NGOs, mentorship programs, business plan competitions, grant schemes, corporate assistance programs, networking platforms, etc. Additionally, thanks to building a strong network of support through Lebanese expatriates, it has become increasingly easier for Lebanese start-ups to access markets and resources from international hubs in Europe and the US. Moreover, throughout 2011, an increasing number of companies have benefited from the Kafalat Innovative loan guarantee scheme. Venture Capital: During 2011, the VC industry in Lebanon grew from its fragile childhood to a yet immature adolescence. A notable new fund that was launched in 2011 is Abraajs Capitals USD 50 million Lebanon Growth Capital Fund targeting Small and Mid-Cap Lebanese companies, the fund closed its first investment in Nymgo, a VoIP company based out of Beirut. Moreover, most of the existing vehicles have moved rather aggressively into the market, closing several deals. Among the most active are Berytech Fund and MEVP whose portfolios have reached 10 and 8 companies respectively. While Berytech Fund has invested exclusively in Lebanon-based technology companies, MEVP has diversified its commitments across sectors and countries in the MENA. Another positive sign is that several co-investment talks took place and are underway between market players. Berytech has also officially declared its willingness to launch another, much larger

Oasis 500 investments are not included in MENA VC data as Oasis 500 does direct deals and is not a structured VC fund, however, this information included here helps to give a clearer picture of overall VC type funding activities.

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multi-sector fund to cover the region. Performance remains untested, as the market has not yet witnessed any exits. However, the exit environment looks promising, given that several Berytech and MEVP portfolio companies have received second stage financing.

The Maghreb

Algeria, Libya, Morocco, Tunisia

William Fellows, Silatech Following the Arab Spring there is a renewed effort on the part of the governments in the Maghreb to boost entrepreneurship and generate new competitive firms, although policies to this end are still being explored. Two of the Maghreb countries, Morocco and Tunisia, have emerging domestic VC and PE industries that have begun to attract international investors, particularly from Europe. Funds domiciled in the Maghreb raised approximately USD 746 million over 2006 to 2011, according to the Moroccan VC association. Approximately half of this was from international, mostly European, investors. Tunisian fundraising from 2007 to 2010, according to the Tunisian VC association, was approximately USD 280 million, which may be expected to improve with current reforms undertaken by the government to address problems with the old VC framework. Algeria and Libya, both economies historically dominated by state-owned oil and gas sectors, substantially lag behind their two Maghrebi neighbors in development of private, growth-oriented entrepreneurship. These countries have yet to develop advantageous legal frameworks for venture type investment, and lack well-functioning financial and capital markets. To address the Maghreb markets, local VC and PE funds have adopted a broad approach to investment. Most funds are sector agnostic, focusing on investment theses built around innovation for growth and competiveness across a range of industries, from agribusiness to services and industry. Focused on small investment stakes between USD 1 and 3 million, investors target firms with strong competitive potential to export value-added products to both traditional markets in Europe and to new markets globally. As in much of the MENA region, there has been a tendency in policy-making circles in the Maghreb to look at VC from only one side of the equation, as a jobs creation tool, and neglect considerations of how to sustainably attract private investors to invest in VC funds that generate long-term investment in more innovative, competitive firms. However, Morocco and Tunisia have in 2011 begun to promote public-private venture investment fund concepts to support more competitive firms. There is also rising awareness that a more entrepreneurial managerial culture needs to be built. Local managers and business owners have proven to be very conservative in opening up their capital to outside investors and adopting modern management and governance. Also challenging is the environment for exits, with trade sales to regional or international groups being the dominant positive form of exit, due to thin public markets and deep entrepreneur reluctance to go public. Regrettably, intra-regional trade and investment, as well as trade and investment with the wider MENA region, remains low and well below potential. There are signs that the Arab Maghreb Union may see new life and perhaps progress can be made on regional trade integration. However, formal and informal barriers continue to restrict markets to the national level, which impedes the growth of regional companies and more competitive, scalable investments.

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Algeria
Entrepreneurship: Although the Algerian government has made certain efforts to promote private entrepreneurship, the overall climate remains challenging. More Algerian entrepreneurship occurs outside of the country in Europe and North America than in Algeria, while the national economy remains dominated by large state-owned petrochemical concerns. Programs such as the Algerian Startup Initiative (ASI), and Cyberparc Sidi Abdellah are seeking to help kick-start more innovative entrepreneurial activity and to raise awareness for the need to support entrepreneurship. However, little has come of these efforts thus far. Venture Capital: One of the key elements preventing Algeria from achieving its entrepreneurship potential is a general lack of VC or similar financing for innovative new ventures and SMEs in the private sector. The banking sector remains dominated by large state banks that have not proven very adept at financing private sector SMEs or innovative new private firms. Algerias public bourse also remains moribund, with only three equities listed and two bonds traded. The Algerian government recently launched a series of state-backed risk capital funds (e.g. ElDjazar Istithmar Spa) in an effort to promote venture financing and more structured investment in SMEs.. Several Maghreb-region funds are also opportunistically investing in growth opportunities, such as Tuninvest, which has an office in Algiers. Compared to its Maghreb peers Morocco and Tunisia, Algeria lags seriously behind in other forms of venture financing, especially those focused on young entrepreneurs. A sustained increase in innovative, high-impact entrepreneurship in Algeria is unlikely to emerge until a stable enabling climate for private sector SME financing and VC investment emerges.

Morocco
Entrepreneurship: Morocco weathered the Arab Spring well, and its government took lessons from the economic drivers behind the revolutions: to double down on trying to promote more entrepreneurial and particularly higher value entrepreneurial activity. Ten years of infrastructure investment and economic policy reforms have begun to show signs of paying off. Morocco was a World Bank Doing Business reform leader for 2011, and the country has seen a stepped up economic baseline of non-agricultural growth. The outgoing Moroccan government also launched a comprehensive new program for upgrading industrial competitiveness, including integrating new support for innovation such as public-private venture funds and technical assistance financing. Infrastructure investment is also opening up new investment possibilities across the country, although the Casablanca region remains Moroccos economic hub and the center of economic activity, generating roughly 60 per cent of GDP. Seeking to improve economic competitiveness and upgrade its technology base, the government has launched a series of initiatives to boost investment and higher productivity. There are plans for a series of business innovation centers co-located with major universities, and a second main technology centre, the new Rabat Technopolis, was launched, anchored by Nemotek, a semiconductor firm partnered with a leading Silicon Valley technology company, Tessera. Nemotek develops semiconductor products and hosts its own wafer fabrication facility. This

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expands on the Casablanca Technopark, launched roughly a decade ago, and the highly successful Casablanca Nearshore centre, focused on BPO off-shoring primarily for French-speaking markets. The government and private sector are also working on a series of sector-focused technology parks ranging from automotive technology (linked to Renaults new EUR1 billion factory in Tangiers), to biotech and agricultural/agribusiness innovation. Thus, the relevant authorities in Morocco see the need to promote and support higher-value-added, innovative firms and start-ups. Government initiatives such as Maroc Innovation, and the various technopoli and innovation cities, are helping to address market weaknesses. However, the level of effort dedicated to fostering entrepreneurship, and particularly addressing challenges such as legal and regulatory rigidities (financial and corporate), still lags behind needs. The environment remains difficult for young, innovative firms, who continue to face challenges posed by the underdeveloped ecosystem and conservative corporate culture. Venture Capital: Morocco has one of the larger VC and PE sectors in the MENA region, and the largest in the Maghreb. Investment sizes have been and are expected to remain modest compared to the Middle East, given the structure of the economy; some 80% of investments have been less than USD 4.5 million (largely for stakes in the 20-50% range). However, the World Bank and Union of Arab Banks reported that, in 2010, Morocco led the MENA region in the level of bank credit (as percentage of portfolio) available to SMEs. In VC over time there has been a migration to more mature firms after unsuccessful experiences in early-stage investments. However, interest is returning to earlystage investing. In 2011, the government awarded preliminary contracts to two VC management companies for two generalist firms to manage public-private capital funds, one of which is expected to include a significant early-stage allocation. Few funds are sector specialized, although in the last year several new agribusiness funds were launched. While sector-specialist funds have not yet flourished, the past five years have seen greater specialization by investment stage and investment style, with turn-around funds emerging. As in many other MENA region countries, there has been a tendency in policy-making circles to look at VC from only one side of the equation, as an immediate jobs creation tool, and neglect the medium- or long-term considerations needed to sustainably attract private capital to the industry. The Moroccan VC association, created just over a decade ago, has been investing in structuring itself to promote a more balanced view, taking lessons from Europe but also from other emerging markets like South Africa. Representing around one third of the Maghrebs population and as the regions most liberal economy, Morocco has real potential to develop a diversified venture financing ecosystem that could set a standard for early-stage financing for entrepreneurs in the region. That Morocco pulls in approximately 60% of regional (Maghreb) PE investment despite a relative human capital deficit compared to its Maghrebi peers suggests that the countrys liberal investment approach is on the right path.

Tunisia
Entrepreneurship: Tunisia catalyzed the Arab Spring with its revolution in December 2010 to January 2011, which opened up a wave of reforms in the region and domestically. Although Tunisia long enjoyed a reputation as being a liberal economy, the revolution highlighted that the economy was running under two unequal regimes: one quite liberal but offshored, the other not. A genuinely liberal, 100% export zone economy was exempted from most controls or interference, while the onshore economy (populated by any firm not exclusively dedicated to export) suffered from not

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only political interference, but also a heavy-handed regulatory regime that post-revolution Tunisian entrepreneurs have described as capping their ambitions. Despite those handicaps, and a heavy-handed internet censorship regime, Tunisia has continuously been over-represented in entrepreneurship in the Maghreb thanks to an outstanding human resource base with among the best education levels in the region. Tunisia has also established a number of innovation-focused industrial and technology parks around the country, such as the Al Ghazela north of Tunis. But like other such efforts in the Maghreb and wider MENA region, these parks tend to be more appropriate for larger foreign firms seeking to set up off-shoring development or manufacturing than for local start-ups. Parks are often set up in remote locations, presenting transport challenges, and may lack technical services that would attract younger firms. Although recovery from the economic aftereffects of the January revolution is ongoing, there is optimism that the revolution has potential to further unlock innovative, growth-oriented entrepreneurship in Tunisia. Entrepreneurship activity in Tunisia remains healthy, and given the political developments, activity should grow in 2012 and beyond with further government and international support. Venture Capital: Following the January 2011 revolution, the interim government launched a number of reforms to address long-neglected issues for the on-shore economy including for VC, where there was wide consensus that the former system was sub-optimal. A revised and significantly liberalized VC framework was proposed, and is currently being refined. In addition, the government launched several strategic initiatives to help restructure state programs to effectively support innovative new firms. The traditional state bank and related vehicles are reforming their approaches as well. Overall, although there have long been state-sponsored SME and entrepreneur financing options, the removal of historical constraints has opened up significantly improved new horizons for addressing the specific needs of innovative firms or start-ups, but also a wider base of innovative firms. All of the components of a successful and robust entrepreneurship ecosystem are present in Tunisia: human capital, new opportunities for intelligent financing for riskier enterprises, improving infrastructure, and an evolving understanding of these issues. However, like its Maghreb peers, Tunisias entrepreneurship potential is much larger than what is currently being achieved. To truly unlock that potential, there is a need for Tunisia to address policy issues.

Libya
Entrepreneurship: Historically, little innovative high-potential entrepreneurship activity in Libya was discernible under the Gaddafi regime. It is hoped that after the revolution, the factors holding back the emergence of Libyan entrepreneurship, such as an unstable legal and policy environment and a hostile business environment, will be radically improved. Venture Capital: There does not appear to be any substantial or institutionalized funding sources for Libyan SMEs focused on innovation. Some regional funds had undertaken preliminary efforts prior to the revolution. However, the Libyan financial system is not well developed, and not set up to finance SMEs in general, let alone innovative ventures.

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MENA VC INVESTMENT DATA

Data Coverage: The data covers only structured VC funds that meet the MENA PE Association VC criteria. The data does not direct investments, seed, incubation or investment programs investing in VC. For more detail on the data criteria, see Appendix 1. Morocco: For Morocco, we have used data provided by AMIC (The Moroccan Venture Capital & Private Equity Association). However, due to time limitation and differences in data collection, we were unable to upate all the charts below. These differences will be addressed in later reports. For further information on VC in Morocco, refer to the 2011 AMIC Report. Data Limitations: Given the nature and size of VC investments, a significant portion are either not publically announced or, if they are announced, the value of the investment is not. For the purposes of our analysis below, we have focused on transaction volume as opposed to value. Investments: As the MENA region continues to feel the impact of the global financial crisis together with the more recent political instability in some countries, available data suggests that the VC industry has recently experienced an increase in deal activity. While the VC industry in the region is still considered by some to be in the early phases of the industrys development life cycle, the increase in activity indicates there are a number of VC investment opportunities in the region and that the industry itself is growing despite the more macro level challenges.

Source: Zawya Private Equity Monitor and AMIC

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During the last three years 120 VC transactions were completed compared to 62 during the three years 2006 to 2008. This is in contrast to the wider private equity industry in the MENA region, which has seen a significant reduction in deal volume since 2009 (as per Zawya Private Equity Monitor, 219 private equity transactions were completed during last three years compared to 317 from 2006 to 2008).

Note: Due to limitations in provision of data, the above chart is exclusive of AMIC (Moroccan Venture Capital &Private Equity Association): investments data. Source: Zawya Private Equity Monitor

The IT and the software sectors continue to be the most popular amongst the VC investors. Of the transactions in the region since 2006, 46 percent of the transactions were in these two sectors (representing 35 completed transactions since 2006). We note the Others primarily represents the retail, agriculture, construction and financial services sectors.

Source: Zawya Private Equity Monitor and AMIC

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Based on the available data, Morocco, Egypt and Lebanon lead the MENA region in terms of the number of VC investments with 106, 17 and 16 transactions since 2006, respectively. While Morroco and Egypt benefit from large and fast-growing populations, Lebanon has shown resilience to the global financial crisis. VC Funds:

Note: Due to limitations in provision of data, the num of VC funds raising trend line in the above chart is exclusive of AMIC (Moroccan Venture Capital & Private Equity Association) funds data. Source: Zawya Private Equity Monitor

Source: Zawya Private Equity Monitor and AMIC

Source: Zawya Private Equity Monitor and AMIC

Following a strong fund raising year in 2010, there were USD300million of VC funds raised in MENA during 2011. Although MENAs macro-economic fundamentals remain strong, the lingering effects of the global financial crisis together with the political instability in key markets such as Egypt has meant that fund raising remains difficult.

Note: Data includes the Riyada Enterprise Development, which has a focus on growth capital, but many of the transactions meet the Associations definition of VC.

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MENA PRIVATE EQUITY ASSOCIATION RESEARCH SPONSORS

In addition to the VC Taskforce Team and content contributors, the MENA Private Equity Association would also like to thank our Research Sponsors for their support:

SUPPORTING ASSOCIATIONS

Egyptian Private Equity Association (EPEA) Dalia Tadros E-Mail : dalia.tadros@epea-eg.org <mailto:dalia.tadros@epea-eg.org> Tel & Fax : (+202) 333 56 358 www.epea-eg.org Moroccan Venture Capital & Private Equity Association (AMIC) Franoise Giraudon De Donder Email: fgiraudon@amic.org.ma

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ABOUT THE MENA PRIVATE EQUITY ASSOCIATION

The MENA Private Equity Association is a non-profit entity committed to supporting and developing the private equity and venture capital industry in the Middle East and North Africa. The Association aims to foster greater communication within the regions private equity and venture capital network and facilitate knowledge sharing in order to encourage overall economic growth, and will actively promote the industrys successes to local stakeholders and build trust with investors, regulators and the public regionally and internationally. MENA Private Equity Association Members Abraaj Capital AfricInvest-TunInvest Al Masah Capital Amwal AlKhaleej Capital Trust Group CedarBridge Partners Citadel Capital Dubai Silicon Oasis Authority Eastgate Capital Group EFG Hermes Private Equity Emerging Capital Partners Gulf Capital International Finance Corporation (IFC) Investcorp Bank Malaz Capital Masdar Capital Mubadala GE Capital PJSC N2V National Bank of Abu Dhabi - Private Equity NBK Capital New Silk Route Growth Capital Qatar First Investment Bank ReAya Holding Riyada Enterprise Development SEDCO Swicorp TVM Capital MENA Limited

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APPENDIX 1: NOTE ON DATA CRITERIA

The funds included in the data analysis are those defined in terms of self-reporting by fund mandate or fund manager as VC funds or SME growth capital funds. At this stage of industry development, no attempt was made to determine whether such self-reported funds meet the criteria above. This report also includes growth equity SME investment firms that invest in a wide variety of SMEs including those in traditional industries as well as earlier stage venture deals. The analysis was prepared based on data sourced from the Zawya Private Equity Monitor. KPMG member firms have not initiated any primary research in relation to this draft report and have not sought to establish or confirm the reliability of the data provided by Zawya. In analysing and determining the parameters of available data, it has been necessary to apply certain criteria, the most significant of which are as follows: Funds managed within the MENA region but whose focus is to invest solely outside the region are excluded. Investment size represents the total investment (both the debt and equity portions). However fund size only considers equity invested, as we have no visibility on debt exposure by funds. The fund-raising totals are the amounts closed/committed for fund-raising funds, closed funds, investing funds, fully vested funds and liquidated funds. Statistics are based on the market approach and funds are categorised based on the intended destination for investments (as defined in a funds announced mandate) as opposed to where the firm is located. With regard to multi-region funds, we have included these to the extent that there is a focus on the MENA region.

Fund Size: In the case of funds yet to make a first close or where no close information is available; fund size is equivalent to the target amount and is noted as such. For funds achieving at least one official close, fund size is reported as the capital raised to date, while for funds that have made a final close, the fund size is the total capital raised. Rumoured funds are excluded.

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