The challenges of a VC

Investing in tech companies and realising a healthy return is a tough job in itself, but the region’s lack of economic openness makes it all the more challenging for VC firms like Injazat to succeed.

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By  David Ingham Published  February 5, 2004

|~|rifai.jpg|~|Rifai: “Obviously, the business model has to be sound, but management is what makes us walk away or stay with an organisation.”|~|It certainly isn’t easy being a tech-focused venture capitalist in the Middle East. Since the heady dot-com days of 1999 and 2000, several regionally focused VCs with big plans have disappeared off the radar. One that definitely has stuck around, however, is Injazat Technology Fund and this year the Dubai Internet City-based VC plans to considerably step up its level of activity. “So far, we’ve deployed somewhere in the vicinity of half of our fund; we are hoping we will deploy the other half in the next nine months or so,” says Hussein Rifai, chief executive officer. Just over two years into the fund’s 5-7 year lifecycle, Injazat has six investments in its portfolio, accounting for around half of its $50 million cash reserve. An investment of around $1 million in a seventh company has been written off. The companies in Injazat’s portfolio, such as Ducont, Rubicon and Omnix, might not be household names, but they are well known in tech circles. Each one is performing in line with or better than expectation, according to Rifai. The fund’s investment parameters are clear. $1-5 million is invested in each deal for an equity stake of no less than 15% and no more than 45%. A company also has to comply with Injazat’s Islamic criteria, which means that certain industries have to be avoided and a company’s interest bearing debt must not exceed 30% of its paid up capital. Beyond those parameters, Rifai says that it’s the people that matter as much as the business plan. “Obviously, the business model has to be sound, but management is what makes us walk away or stay with an organisation,” says Rifai. “What we look for is progressive management. They are people who are enlightened, they understand the broader picture, the global picture. In many cases, part of the subscription agreement is that the CFO of that company has to prepare an IPO plan.” Perhaps one reason why Injazat has managed to survive where others have not is the solid credentials of its backers, which are mainly large institutions. Its two main promoters are Gulf Finance House and Islamic Corporation for the Development of the Private Sector, which provided half of the fund’s capital. Other backers are Dubai Islamic Bank, Saudi Economic and Development Company and Iran Foreign Investment Company. The fund was established to invest in tech companies based in the region (its tagline is ‘From the region, for the region’) and it remains committed to that principle. Rifai says Injazat would consider overseas companies if they are coming into the Middle East and making a concrete contribution to the development of its intellectual capital. One reason for Injazat’s longevity could be the noteworthy absence of dot-com companies from its investment portfolio. Of the six firms chosen, STS and Omnix Media are broad technology integrators, whereas Rubicon, Ducont and DocMan are specialists in multimedia, design and animation; wireless software and content; and document management respectively. The identity of the sixth company, based in Egypt, hasn’t yet been revealed. So why no dot-coms? “The way to answer that is to say we maintain our methodology of looking at fundamentals and we did not see a dot-com that had the fundamentals,” Rifai says. “We look at the wider market and the fundamentals of the business. Focus on fundamentals and you can’t go wrong.” Others might wish they had taken the same approach. Finding and investing in the right companies is just one part of the challenges that Injazat faces. Rifai has made several public statements on the need for Arab countries to create a legal infrastructure that not only encourages private investors, but protects them when disputes arise. “One area of concern is all the regulatory issues surrounding registering companies, boards of directors, corporate governance, foreign ownership, cross ownerships — all the regulatory issues that would make it easier to do business,” he says. For example, registering a company in one of Dubai’s free zones might take days, but trying to set up a company elsewhere might take months, years or never happen. If a company can be established, there are frequently complex rules on local ownership to be navigated. Another issue Rifai raises is the question of share options, a device typically used by startups to reward employees and ‘lock’ them into the company long term. In the region, companies either can’t offer them or have to register in, say, the Cayman Islands so that they can. The question of corporate governance is something about which Rifai also has clear views. “There’s a whole bunch of corporate governance issues that need to be addressed — separation of power between management and the board, a minimum requirement of reporting for private companies as well public companies, the ability of external auditors to audit on behalf of the investor,” he says. Then there is the question of not only having the law, but making sure it is exercised in the right way. “How competent are the judges? The fact that I studied in law school does not make me a commercial expert,” Rifai continues. “Modern countries have dedicated courts and very well trained judges to look at disputes, and they look at them from an objective perspective, not an emotional perspective. Capital is cowardly and it will run away from a lack of certainty. That lack of certainty is a very big issue.” One sometimes overlooked area that Rifia touches upon is the need to protect the rights of the individual. “For example, discrimination on the basis of nationality, religion or any other factor should be eliminated, because in front of the law everybody should be equal, local or expatriates,” he argues. “This principle needs to be enshrined in the laws of all countries, so individual rights of citizens are well protected and respected in the court of law.” Operating within the region’s difficult commercial laws is one part of the challenge that regional investors face. Knowing how and when to exit the companies in which it has invested money is something that Injazat must consider carefully. As things currently stand, private equity sale would be the most appropriate way to exit three of the companies and a stock market flotation might be possible for the other three. A listing in each company’s home country would be most appropriate, but multiple listings will also be considered. Successfully floating a tech company on a regional market could be quite a challenge, however. At the moment, it’s hard to name a tech company listed on a regional bourse, so there is no way of knowing how well one would be received by investors. Although regional stock markets are currently riding high, they tend to be dominated by big ticket stocks and overall liquidity is low. Asked how well one of Injazat’s portfolio companies might perform on a regional market, Rifai replies, “Nobody knows right now because there isn’t one [a listed tech company.] Your guess is as good as mine. We hope they will perform very well, we’re hoping that smart investors will continue to look at fundamentals.” Eventually, some of Injazat’s portfolio companies may come to market. In the meantime, the company will continue to seek out suitable investments, working around the challenges that the region throws up. “We try our best to work within the constraints, and we have our hearts and our minds in the region so we put up with it,” he says. “External people might not be so tolerant with the complexities we have to put up with in the region.”||**||

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