If you want your MENA e-commerce venture to thrive, it needs five key factors.
By Khaldoon Tabaza
In the rush to create the next big online success story in the MENA region, it’s useful for our industry to pause and ponder the lessons learnt by founders and investors in developed markets such as the United States, and in other emerging markets more advanced than ours like Latin America.
While advanced and emerging markets share several of the same characteristics, such as business model scalability, they differ in important other ways. These include the existence (or a lack thereof) of barriers to entry, your choice of country to operate in, and the ability to secure smooth and predictable funding sources for your business.
Here are the top five factors that often determine the success or failure of online businesses in MENA:
Founders: It’s a common myth that founders of online businesses are typically fresh college graduates in their 20s. On the contrary, studies show that the average age of a successful founder is around 40. However, in the MENA region it can be quite challenging to find a middle aged founder as they usually have a family to support and several personal loans to finance. This puts them in a position where they can’t afford the long-cycle required to raise funding from investors, and the even longer period it takes to put a business together.
Scalability: The best online business models in the world are characterized by their scalability. The best example is Google. Here was a search engine that was built once, and then used countless times to generate revenue that outgrew the growth in the cost of running the business. Online classifieds businesses are similar, allowing you to use one platform to scale to hundreds of thousands of listings and earn the corresponding revenue. On the other hand, a business model such as fulfillment e-commerce, where you sell electronics or fashion, requires you to add more offline resources as you sell more units online. This often results in very low margins that don’t justify the size of the investment compared to the returns.
Barriers to entry: Despite its critical importance, the tricky question of whether to choose local or global business models is often overlooked by investors and founders. MENA-based businesses that don’t have a strong barrier to entry are often unable to survive or compete against similar, better funded global companies that scale into the region. For example, generic travel websites might trick some founders and investors into thinking they can be combined with local business models, when in fact they don’t possess any barrier to entry and are helpless in the face of similar global websites. Even fulfillment e-commerce websites may not be able to survive in the face of global competition, since all it takes for a global player to offset local companies’ competitive advantage is to open a logistics and fulfillment center in MENA. On the other hand, business models such as restaurant reservations or local mobile taxi ordering require building up a local network, which creates a very strong barrier to entry, rendering global players powerless unless they make a sizable investment to compete and replace local companies by taking over their networks. In almost all cases, it turns out to be more cost-efficient for global players to acquire local ones, thus preserving the value created by the founders and the investors of those business models.
Location: Location is an important factor for online businesses. Having your operation headquarters in a market where you can do business easily, attract talent, and be investor-friendly is a key factor. In that sense, the UAE shines as the best location for an online business. But then again, the largest markets often turn out to be Saudi Arabia, Egypt, and even Morocco, while the cost and time it takes to expand is a huge burden that businesses are not always able to address.
Funding: The ability to secure ongoing funding on short notice is critical, as it allows founders to focus on running their business. There’s a high level of friction between investors and founders in the MENA region simply due to the level of maturity of the market. For this reason, the number of good businesses that are unable to survive because they can’t raise funds is exceeding the number of bad businesses that are failing because of their founders, business models, or market choices.
Considering all the key factors listed above, it’s clear that mature founders, who have all the right factors working in their favor, need investors who can offer certainty to help them build and grow their businesses fast, no matter what resources are requires—monetary or otherwise.
On the investment end, the venture capital business model may appear attractive and it will be, but not at this stage of the MENA market’s development. In fact, Venture capital wasn’t the first model that allowed investors and founders to reap success in emerging online markets. No, it was the operating platform business model.
The latter model is what our team is set out to build at iMENA. We are trying to address all the deficiencies and challenges that obstruct the successful build-up of online businesses in the MENA region by providing mature founders with a high-certainty environment that enables them to build their businesses fast, scale quickly, and receive on-demand funding as they grow.
There’s no doubt that we will see success in the venture capital model in our region as well, but this will likely happen in five to seven years’ time, during which many of the key business models will be won. In the online industry timing can be everything.