Oct. 2 (Bloomberg) -- At one end of Rainbow Street, in the heart of Amman’s cafe-filled historic district, sits Think Arabia, one of the hundreds of tech startups that have sprung from the Jordanian desert like so many wildflowers after a rain.
Amid multicolored beanbags, web designers, animators and cartoonists are toiling away on this July day, Bloomberg Markets magazine reports in its October issue. Were it not for dozens of Apple Macintosh screens atop desks, the warehouselike space might be mistaken for a student common room.
Omar Al Abdallat, a well-known political cartoonist, clicks on one of his latest creations for Kharabeesh, Think Arabia’s website: a drawing of a terrified child peeking out of a hole shaped like a map of Syria. Al Abdallat, 32, is recruiting top cartoonists from across the Middle East to provide animated video content for the Arab world.
Founded in 2008 by blogger Wael Attili and some friends, Kharabeesh, which means doodles in Arabic, is creating videos that attract 20 million views a month.
Before there was an Arab Spring, there was a quiet revolution of sorts brewing in Jordan.
The country experienced a tech boom that gained speed as young Arabs toppled regimes from Egypt to Tunisia and millions were driven online for the first time. Jordan now hosts about three-quarters of all Arabic content on the Internet, according to the Geneva-based International Telecommunication Union (ITU).
Can it last? Doubts grew in September when the Jordanian parliament passed a law curtailing freedom of expression on the Internet and giving the government broad powers to block websites it deems inappropriate.
“The law is so vague you could drive a truck through it,” says Abdelmajeed Shamlawi, chief executive officer of the Information and Communications Technology Association of Jordan.
The law, which was passed a few days after demonstrators took to the streets in Amman to protest an anti-Islam video that originated in the U.S. and was broadcast on the Internet, was deplored by groups such as Human Rights Watch as an instance of state censorship.
On a scale of 1 (most free) to 7 (least free), Jordan scores 5.5, or “not free,” according to the Freedom in the World 2011 report published by Washington-based Freedom House.
Still, even with large Palestinian and Iraqi communities inside its borders, and flanked by a deepening civil war in Syria, Jordan remains relatively stable by regional standards.
While online enterprises crop up from Cairo to Qatar, Amman is the closest thing the Middle East has to a Silicon Valley outside Israel and has been dubbed Silicon Wadi (Arabic for valley).
The capital, as a hub for Internet businesses, has the potential to benefit from a growing regional market. Only 29 percent of the Middle East’s population used the Internet last year compared with 68 percent in Europe and 78 percent in the U.S., according to the ITU.
With roughly two-thirds of the population under 30 years old, the region has one of the fastest-growing Internet penetration rates in the world.
From June 2010 to June 2012, the number of people in the Middle East using social media such as Facebook almost tripled to 45.2 million from 16 million, according to the Dubai School of Government.
In Jordan, entrepreneurs have been thriving, aided by an educated, English-speaking professional class and, compared with the pricier Persian Gulf capitals, affordable living costs.
The surge in business activity is luring Jordanian expatriates back to the fold; there’s even a LinkedIn group called Jordan’s Brain Gain, with more than 2,700 members as of September.
Israel, home to the largest number of startup companies per capita in the world, is unchallenged as the region’s information and communications technology powerhouse. Its ICT industry generated 82.5 billion Israeli shekels ($20.5 billion) in revenue in 2011, or 12.1 percent of the country’s gross domestic product, according to the government’s Central Bureau of Statistics.
Although comparable businesses in Jordan produced a relatively small amount of revenue in 2010 -- $2.2 billion -- they represented 14 percent of the country’s GDP, the same share as tourism, and the fastest-growing part of the economy, according to the technology association.
The country remains poor. Jordan had a per capita GDP of $4,666 in 2011, placing it 103rd among nations, one notch above Ecuador and one below Turkmenistan, according to the World Bank. Unlike some of its neighbors, Jordan has no significant oil deposits.
King Abdullah II, who came to power in 1999 after the death of his father, King Hussein, has for years proclaimed his modernization goals. He has tried to create incentives for entrepreneurs to build businesses from e-commerce companies to Web-based media.
Abdullah, who was educated in the U.K. and the U.S. and whose wife, Queen Rania, worked briefly for Apple Inc. and Citigroup Inc., presided over the deregulation of the Jordanian telecommunications industry and increased funding for computer education at schools and universities.
“We are the ICT leader in the Arab world,” King Abdullah said in an e-mail in response to questions. “As a small country that accounts for only 2 percent of the region’s population, imagine what it means to us that we produce and manage 75 percent of all Arabic-language Internet content.”
And yet it was the king who endorsed the new rules that have alarmed Jordan’s growing community of Internet entrepreneurs.
The law requires any website hosted in Jordan whose “activity includes publishing news, investigative reports, articles and comments related to the internal or external affairs of the Kingdom” to be licensed by the government and holds the sites responsible for the accuracy of their content and for user comments posted there.
“It will have a chilling effect,” says Christoph Wilcke, Jordan researcher for Human Rights Watch. “We are seeing a regression on the king’s reform agenda.” King Abdullah didn’t respond to requests for comment on the law.
For now, Jordanian entrepreneurs are creating some of the Middle East’s biggest e-commerce platforms such as Souq.com and MarkaVIP to feed consumer demand -- including demand from wealthy Arab women in countries such as Saudi Arabia and the United Arab Emirates.
“This is the last Internet gold rush to be had,” says Khaldoon Tabaza, the founder and CEO of Amman-based Zad Capital, a venture capital firm, who is building a new holding company for e-commerce startups called iMENA.
Amman is the birthplace of the Arab world’s most successful Internet venture: Maktoob, a portal that in 2000 made it possible to send and receive e-mail in Arabic for the first time. In 2009, Maktoob founders Samih Toukan and Hussam Khoury sold the company to Yahoo! Inc. for $175 million.
The deal was a boon to investors. The private-equity arm of Chase Coleman’s New York-based Tiger Global Management LLC cashed in its more than 40 percent stake, which it had begun acquiring in 2006. Tiger Global topped Bloomberg Markets’ 2011 ranking of the world’s best-performing large hedge funds.
The result was a “Maktoob effect,” demonstrating that the Internet in the Middle East offers business potential, says Fadi Ghandour, a Jordanian who founded Dubai-based Aramex PJSC, the largest courier company in the region.
Paving the Way
“Maktoob has become the rallying call for young entrepreneurs,” Ghandour says.
Ghandour, 53, helped pave the way. He was a founding investor in Maktoob and is a backer of four-year-old Kharabeesh along with a dozen other startups. He’s also chairman of Wamda, an Internet platform that tracks entrepreneurship, and has a fund to invest in startups in conjunction with Dubai-based Abraaj Capital Ltd.
Startup success is constrained by Jordan’s size, a lack of venture capital and an obstructive patchwork of multiple customs and immigration authorities in the region. Jordan’s population of 6 million people means that tech startups need to target bigger and wealthier markets for profit.
“Nobody is building for Jordan; they’re building for the region and the world,” says Emile Cubeisy, who manages Accelerator Technology Holdings’ $30 million Badia Impact Fund, which provides early-stage finance for Jordanian tech startups. “We are a region of 300 million people that share one common culture and common language, yet as markets we are completely disconnected.”
Still, Fawaz Zu’bi, Jordan’s minister of telecommunications from 2000 to 2004, says the country’s tech industry could be generating about $4 billion a year by 2017. He founded Amman-based Accelerator Technology, which has raised a total of $80 million from investors such as Chicago-based real estate tycoon Sam Zell and C-SPAN co-founder John Evans.
Zu’bi and Cubeisy have jointly invested in 20 companies, mostly in the Middle East.
One of their most successful investments is Rubicon Group Holding, an Amman-based computer animation company set up by Randa Ayoubi in 1994 with just $150,000. Ayoubi’s firm is generating about $40 million of revenue annually. GrowthGate Capital Corp., a Bahrain-based private-equity firm, took a 30 percent stake in Rubicon for an undisclosed sum. Ayoubi says she’s considering taking her company public.
Investors such as Tabaza of iMENA say creating Arabic content is a rich prospect. While almost 5 percent of all Internet users are Arabic speakers, less than 2 percent of content is in Arabic, according to the ITU.
E-commerce in the Middle East is in its infancy, with only about $11 billion worth of sales, according to Amman-based Arab Advisors Group. Europe, the largest e-commerce market in the world, posted sales last year totaling 246 billion euros ($309 billion), according to the European Multi-channel and Online Trade Association.
Perhaps the most dynamic proving ground for technology startups in the Arab world can be found on the outskirts of Amman at King Hussein Business Park, home to Microsoft Corp., Hewlett-Packard Co. and a new, homegrown technology incubator called Oasis500.
Led by Usama Fayyad, 49, who was Yahoo’s global chief data officer from 2004 to 2008, Oasis500 is aiming to create 500 companies in five years by providing something Fayyad says is missing in the Middle East: seed-stage and early-stage money.
“A lot of ideas get suppressed or die in the desert of early-stage investment,” Fayyad says.
To nurture startups, Oasis500 offers entrepreneurs five-week-long “boot camps” and cash infusions of $15,000 apiece in exchange for small slices of equity. From early 2010 to June 2012, Oasis500 raised about $6 million for early-stage financing. Since September 2010, it has invested in about 55 companies, double the number Fayyad originally projected; only three companies had failed as of September 2012.
Oasis500 has already cashed out of one of its incubated investments, an e-commerce site called Run2sport.com, which bills itself as the first online sports shop in the Middle East.
Last year, after an Oasis500 angel-network event, Fayyad personally invested in Amman-based MarkaVIP, a Middle East-focused, invitation-only shopping site. Offering discounts on designer goods, MarkaVIP says it has 2 million users and is on track to report $100 million of revenue in 2012.
MarkaVIP encapsulates the opportunities and difficulties of Amman startups.
It raised $10 million in April from investors, led by Amsterdam-based Prime Ventures. That funding came on top of $5 million in November 2011 from New York-based Invus Financial Advisors; Antwerp, Belgium-based Hummingbird Ventures; and San Francisco-based Lumia Capital -- all of which demonstrates the region’s potential, says Martin Gedalin, a partner at Lumia who sits on MarkaVIP’s board.
“The Middle East was a region that was being underappreciated by investors in the States,” he says.
On the downside, e-commerce sites such as MarkaVIP have had to battle the distrust in the Middle East of using credit cards online. About 80 percent of its sales are made in cash-on-delivery terms.
Amer Abulaila, one of MarkaVIP’s founders, and his partner Ahmed Alkhatib have spent the past year building hand-delivery and payment systems in Jordan and the U.A.E. and are in the process of setting up Qatar and Saudi Arabia.
“We are trying to make this business scalable,” Abulaila says, chain-smoking as a Mac screen on his desk displays the pleasing sight of that day’s sales ticking rapidly upward.
The Middle East tech business is a work in progress, Gedalin says.
“There’s a lot of consumer demand in these markets, so you see online commerce as the first wave of innovation,” he says. Whether other waves keep on coming will depend to some extent on the future of freedom of expression in Jordan.
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