MENA Corporates Dive into Innovation Investments

Lynn Bizri, Oct 31 2016

Corporate investment has been steadily gaining traction in the MENA region, with more than a dozen companies investing strategically in new ventures in the past few years. While corporate investors are the latest to enter the MENA investment scene, their number has grown steadily since 2012, and today companies across sectors – from telecom to retail to pharmaceuticals – are launching investment initiatives and activities.

More than half (56%) of the region’s corporate investors are GCC-based companies, according to ‘The State of Digital Investments in MENA’ report, and UAE continues to top the list, with 31% of corporate investors, followed by Saudi Arabia with 25%. In a region where a growing number of entrepreneurs are starting to disrupt traditional markets with their innovative ideas, access to funding from corporate VCs and accelerators is playing a critical determinant in the shaping of the ecosystem, fostering innovation and startups’ growth.

Building vs. Investing in Innovation
Corporate Venture Funds worldwide today amount to approximately 1,300, a number that has doubled in the past five years, according to a new EY report: The Innovation Paradox. In the MENA, in particular, CVC’s are proving to be a route that increases the visibility of the region as an innovation hub while at the same time providing new technologies with a place to grow and prosper.

By funding disruptive innovations accomplished by startups, corporations can leverage the innovation by investing in the startups or even acquiring them. For Lana Ghanem, Managing Director of Hikma Ventures (the corporate venture capital arm of Hikma Pharmaceuticals), investing in innovation was the main reason behind setting up their CVC: ‘investing in digital health is becoming more of a necessity than a nice to have, it’s a way for us to differentiate ourselves as a global player, it’s a way for us to be at the forefront of emerging technologies in the space and…in the pharmaceutical industry’.

Identifying the right startup business to partner with, accelerate or build can be a tricky choice to make for many corporates. For CVC’s, it’s about finding the most compelling and profitable opportunities based on several different criteria. We’re looking to invest in companies or startups whereby we can expedite their growth, so we’re looking to be the pioneers in bringing in emerging technologies in the West to our part of the world, and to taking technologies and companies that are in this part of the world globally’, said Ghanem, who also credits internal resources and expertise for the ease of evaluating opportunities.

As for CVCs for internal start-ups, conceiving and developing businesses and knowing where to drive innovation is an entirely different ballgame. ‘It’s very difficult to have an idea, go through that gestation period which can be up to 2-3 years, and turn it into an operating business,’ admitted Samer Choucair, Vice President of Crescent Enterprise Ventures, an incubator for internal startups. Nevertheless, having a theme or vision to follow simplifies the process. For example, in the case of CE Ventures, businesses developed must be socially conscious, environmentally friendly, and financially sustainable. Once those criteria have been met, the rest of the process is fairly standard, albeit still challenging. ‘The ideas are conceived internally by different members of the Crescent team, and we are left alone to do the research, develop the business plans and build these businesses.’

Notably the biggest challenge faced by these corporate incubators is the task of hiring the right people to run the businesses. ‘We’re looking for people who have the skill set, the knowledge, and the industry know-how while at the same time having the entrepreneurial mindset that will allow them to deal with the challenging environment of a startup,’ revealed Choucair. The hired individuals, more commonly known as intrapreneurs, are individuals that behave like entrepreneurs in major companies; companies that are embracing intrapreneurship in order to stay ahead of the competition, recruit risk-taking individuals, and achieve success.

Accelerating Innovation
According to research and analysis done by Deloitte LLP, in the past three years, corporations have launched more than 105 accelerators globally, with 47 of those in 2015. Corporate accelerators are similar to traditional accelerators in that they invest in early-stage startups, give them access to funds, office space, and expertise and help them grow. Yet while traditional accelerators generally have the goal of seeing a return on their equity investments, corporate accelerators tend to be more focused on gaining access to new concepts and technologies for competitive advantage.

Corporations launching accelerator programs usually either run in-house programs or outsource administration to partners like in the case of Nest. In the partnership model, the partner markets the program, reviews and selects startups, provides mentors and manages the program. Of all corporate accelerators launched over the past three years, half used accelerators partners, Deloitte analysis found.

The benefits of sponsoring an accelerator are many and include insight into emerging technologies and trends; rapid, cost-efficient research and development; economic returns (if a startup is acquired or goes public); as well as access to high-caliber talent. By providing mentorship and support to promising startups, accelerators make it possible for large, slow-moving corporations to stay relevant and competitive. As Gary Stewart, Director of UK Wayra, stated ‘The whole point really is about building or bringing innovation back into the company’.

Corporate accelerators tend to work with companies that focus on an area of need for that company, therefore when it comes to choosing startups for their program; it’s largely about finding the right fit.  ‘The unique part of what we look for is our ability to help accelerate you [the startup] in a way that no one else can. It’s a lesser story of whether you’re [the startup] is a good fit for us, but whether we are a good fit for you [the startup] as well’, said Aaron Fu, Managing Partner of Innovation Nest. Startups that are familiar with a corporates’ accessible markets and strategic partnerships and have a vision on how to make use of them are also at a greater advantage.  ‘What we look for very much is the startup telling us a story around why we are a strategic fit for them, and whether that’s leveraging our networks across the world’.

While this slightly narrow focus may seem like a disadvantage, several advantages come with partnering with a corporate accelerator such as gaining access to equity-free funding, industry-focused mentors, corporate resources and future loyal customers. In addition, start-ups benefit from access to a corporate’s ecosystem of partners, customers, and distribution channels, which can help them scale globally, and usually will continue to receive continuous support and sometimes investments from the accelerator once their time is through.

Nurturing Innovation
‘I think that talent here [in the MENA] is wonderful, but probably needs a little bit of help, in terms of giving entrepreneurs the right platform so that they can really create globally scalable businesses,’ said Stewart. Through the creation of accelerators, VC arms and incubators; corporate investment programs in the MENA today, while still in their infancy, are growing steadily, creating an ecosystem that is enabling innovation, nurturing profitable new entities, and infusing entrepreneurism into the corporates’ operations. The following statement made by Professor Bruno Lanvin, co-author of The Global Innovation Index is an apt description of innovation in the region: ‘Innovation is about infrastructure that enables innovation to happen. The West often says that the market should determine what should be built, that is not so, creativity and innovation need help.’ 

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