Homegrown Middle East tech firms are attracting increasing interest from global companies seeking a presence in the region, according to the founder of Propertyfinder Group and other industry leaders.

Buying up established businesses, rather than starting operations from scratch, appears to be the preferred means of entry into the Middle East’s rapidly expanding digital economy, because such deals also provide all-important local expertise.

About $815 million was invested in MENA start-ups in 2016, up 560% versus a year earlier, entrepreneurial platform Wamda estimates. Last year’s investments include Sweden’s Vostok New Ventures’ $20 million purchase of a 10% stake in Dubai-based Propertyfinder Group, the Middle East and North Africa’s (MENA) leading online real estate portal.

“The size of deals will naturally increase because tech companies are getting bigger every year,” says Propertyfinder Group founder and chief executive Michael Lahyani. “Look at FANG - Facebook, Amazon, Netflix, Google - their stock prices have all gained more than 25% this year alone. The leading region's tech businesses are also becoming more valuable each year.”

That trend was underlined in March when Amazon agreed to buy Dubai-based Souq.com for an undisclosed amount, a deal that was nonetheless described by advisor Goldman Sachs as “the biggest-ever technology M&A transaction in the Arab world” after Dubai’s Emaar Malls failed with a last-minute $800 million takeover offer.

Emaar Malls subsequently bought a controlling stake in online fashion retailer Namshi in May, while Mohamed Alabbar, chairman of parent firm Emaar Properties, has also teamed up with Saudi Arabia’s state-owned Public Investment Fund (PIF) to create Noon.com, a $1 billion e-commerce site slated to launch in 2017.

“With the arrival of Amazon to MENA, the digitisation of retail will spur the digitisation of our economies,” says Dany Farha, co-founder and chief executive of Dubai venture capital firm BECO Capital. “Digitisation and non-oil GDP are very strongly correlated.”

BECO has invested in some of the region’s most successful start-ups including Propertyfinder Group, Careem and Duplays.

Farha believes the Souq deal validates the business opportunity provided by the region’s majority young, wealthy and tech-savvy population and demonstrates how “hyper-local, well-funded, defensible businesses win every time”.

“We are young, educated, connected and relatively well-to-do with a thirst to consume and purchase goods and services digitally,” says Farha, who was also co-founder of Bayt.com, the Middle East’s leading jobs site.

UNTAPPED MARKET

According to BECO estimates, just 8% of businesses in MENA have an online presence versus 80% in the U.S., while just 1.5% of MENA’s retail sales are transacted over the Internet versus 16% in Britain for example.

“Plot the graph, it’s a steep increasing curve from left to right, imagine how much value there is to come from the digital economy here,” says Farha.

A.T. Kearney offers a similar assessment, predicting the Middle East’s online retail industry will nearly quadruple in market size from $5.3 billion in 2015 to $20 billion in 2020.

Another deal concluded in March was Delivery Hero’s acquisition of Kuwait’s Talabat.com, which operates in all six GCC markets and has a network of 1,300 partner restaurants including the likes of Burger King, KFC and Subway.

“The Middle East was always a missing piece to our global vision,” Delivery Hero chief executive Niklas Östberg said in a statement announcing the acquisition.

“Talabat built a fantastic business over the last years. We will instantly be in a leading position in a region with tremendous growth potential.”

WHY BUY

Several factors are spurring Western companies to invest in Gulf tech start-ups, according to Propertyfinder’s Lahyani

Among these, he cites the region’s smartphone penetration and social media use, which are among the highest globally and eclipse those of the United States. Other drivers include the limited foreign exchange risk due to Gulf currencies’ dollar pegs and complicated legislation that makes buying established companies a more favourable entry strategy.

Western firms are also keen to acquire local products that are accurately programmed for Arabic, the favoured online search language for a large chunk of the region’s population.

Layhani praises the Gulf’s low tax environment for helping start-ups thrive, although bullish government rhetoric on the region’s tech potential is undermined by high Internet prices in the state-dominated telecom sector.

“Oil-rich countries have long subsidised gasoline and fuel prices - the same should apply to broadband,” says Layhani. “Isn't tech the new oil?”

Broadband in the United Arab Emirates is the seventh costliest worldwide at $87.81 a month for a 10 Mbps connection, according to analysts Numbeo. Qatar and Oman also make the global top 20 most expensive countries, while the same connection would cost less than $30 in the likes of Germany, France and Great Britain, for example.

For every new digital job, 2-4 additional jobs are created elsewhere, an October 2016 study by consultants McKinsey notes, estimating the sector could add $95 billion annually to the Middle East’s economy by 2020.

“It's a big part of the solution to unemployment,” adds Layhani. “Tech businesses are the fastest growing employers, we are constantly hiring young talents.”