“This is nothing short of a sea change for the region,” says Faisal Ghori, a principal at strategy consultancy Middle East Ventures.

the Middle East has become an “increasingly important” market, says Faisal Ghori, principal at Middle East Ventures, a Washington-based business strategy consultancy focused on the Middle East and North Africa.

“In the next five years, you’re going to see people taking risks on both the entrepreneurial and the invest- ment side,” says Ghori.

Hope is often in short supply in the Middle East, but that may be quickly changing, at least for the region’s entrepreneurs. On August 25, Yahoo!, the Internet giant, announced that it will acquire Maktoob.com, the Middle East’s largest web portal and online community founded and operated in Jordan. As the very first acquisition of a Middle East-based technology company by an American technology giant, this is nothing short of a sea change for the region. Overnight it has bolstered the region with instant credibility and given its entrepreneurs reason to hope that they too can succeed in creating companies. The acquisition, in short, has fundamentally altered the technology landscape in the Middle East.

Earlier this week Yahoo! announced that it will acquire Maktoob.com (read the press release here).

Below, we speak to Samih Toukam, CEO and founder of Maktoob.com; Emile Cubeisy, Managing Director of IV Holdings; and Khaldoon Tabaza, Managing Director of Riyada Ventures.

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MEV: What does this means for you and your organization?

Samih:  This is a great success story for me and the maktoob team. We have worked hard and proved that it is possible to create something good out of the Arab world. We are all proud of what we have done.

Emile: IV Holdings congratulations Yahoo! on its acquisition of Maktoob.com, which opened up broader opportunities for Arab online entrepreneurs and firms.  For Accelerator and IV Holdings, this strengthens our conviction in what we have always believed, that Arab entrepreneurs will play an important role in shaping the global internet and interactive landscape.  An industry and an opportunity that has always sought validation has found it.  For IV Holdings, this is an important milestone, in that it proves to Arab entrepreneurs that if you focus on building true value in your businesses, execute patiently and with professionalism, and go through the full stages of growth, real exit opportunities will emerge.  It proves to the wider investment community that real opportunities for value creation does exist in the knowledge-based talent pool in the Arab World, and validates the existence of quality entrepreneurs that can pull it off.

Additionally, Maktoob’s history of working with regional VCs to build itself up towards global relevance validates the importance of our industry’s role in helping Arab entrepreneurs achieve their full potential, something that IV Holdings is a first mover in committing itself to.

Khaldoon: The Yahoo! Maktoob deal is an inflection point for the Internet industry in the Arab world, a milestone that indicates that the online market in the Arab world has reached critical mass, and the start of a new phase for start-ups, VCs, and the industry at large in a region that remains largely untapped in terms of its potential, and that will be one of the key drivers of growth in emerging economies in the years to come.

MEV: What does this means for Jordan and the region?

Samih: It’s a success story for Jordan and the region and a message that we can build something big and strong in the Arab world and this is where we should be focusing our investments, in the talents and brain power that we have not in real estate and buildings.

Emile: This reaffirms Jordan as a regional beehive of technology and dot.com entrepreneurs.  In a journey that started in 2000 with Jordan’s focus on its human resources as its differentiator, and its emphasis on global economic relevance, not just local and regional, Maktoob, as one of the first pioneers, has confirmed this belief.  We should expect to see many more such success stories from Jordan, especially due to what they have already proven they can accomplish.  We are ripe with entrepreneurship, and the Yahoo! acquistion of Maktoob will only shed more light on the innovation and the entrepreneurs in Jordan.  The ripple effect to entrepreneurs in neighboring countries will be felt as well in the coming years.

Khaldoon: This will no doubt encourage investors from the region to be more proactive and aware of venture investments, and most importantly, it will encourage international investors to pay attention to the Arab world as a source for deals (rather than just capital). It should also encourage accomplished expatriate Arab entrepreneurs to look towards their home countries for their next venture, as well as encourage experienced Arab talent at home to take the step towards creating new start-ups.

MEV: What does this mean for entrepreneurs throughout MENA?

Samih: It’s a message to all entrepreneurs out there that hard work and innovation will pay off.  Maktoob is just the beginning for many success stories to come.

Emile: While entrepreneurs in the Arab World have always believed, it will be hard for the mainstream to neglect what they have always felt…the region will firmly be entrenched as part of the global internet landscape much sooner than many believe.  For these entrepreneurs, it allows the spotlight to be shifted towards them a little, as they now have a proof point that innovation, perseverence,  passion, and relevance, if effectively executed, can yield globally relevant businesses.

MEV: What does this mean for foreign investors investing in tech. in MENA?

Samih: It means that its time to invest in the Arab world. The market is ready and has huge growth potential and there is good talent and brains out there and also good exits for your investments.

Emile: We’ve had our early entrants in our market, most notably Intel Capital, Microsoft, Cisco, among others that should be recognized.  Foreign investors, while their focus may be on China and India, will now take notice of the MENA Region as a viable market in which innovation and value does exist, and where realistic exit opportunities are emerging.  The stars are aligning for the Arab tech and internet industry, a fact global investors are sure to notice more and more over the coming few years.

Khaldoon: As an acquisition that is a first of its kind, all eyes will be on Yahoo!/Maktoob to test the chemistry on the long-term between Yahoo! and the Arab culture and community. On the shorter term, the industry will be closely watching to monitor the integration of Maktoob’s team inside Yahoo!, the delivery on the promises to Maktoob’s employees in terms of their stock options and benefits, and how will Yahoo! deal with many border-line intellectual property issues on Maktoob especially with regard to video music, and software, which made up much of the recent growth of Maktoob as a result of acquisitions in the past few years.

Neither of the cable operators have confirmed the cause or location of the outage but some reports suggest it was caused by a ship’s anchor near the port of Alexandria in Egypt.

As Middle Eastern businesses continue to come online, issues such as this reinforce the desire of others to remain offline. Worse yet, it harms the regions image of having reliable infrastructure for ICT development.

Internet companies with funny names, little revenue and few customers are commanding high prices. And investors, having seemingly forgotten the pain of the first dot-com bust, are displaying symptoms of the disorder known as irrational exuberance.

But, yes there are some astronomical valuations being thrown around. When it comes to valuation investors and entrepreneurs both know its more art than science; and investment bankers are more than eager to help the investors and entrepreneurs reach “the right valuation” (after all, that’s how they get paid). Having said that there are few signs of the “irrational exuberance” from the side of the bankers. They are all too familiar with the collapse of the first bubble and what that meant for their industry.

On the venture capital/entrepreneurial side, however, the matter is different. Entrepreneurs are now demanding sky-high valuations for nascent companies, if not ideas. Entrepreneurs are now often blinded by the valuations of YouTube, Facebook, and other Web 2.0 companies and demand similar valuations. VCs, then, are forced to educate entrepreneurs and temper expectations. While Ning, as the NYT article points out, is being valued at $200mm, some if not most of that valuation is being driven by the previous success of Marc Andreesen (of Netscape and Opsware fame). In the Valley, success begets success and VCs are more likely to invest with a proven entrepreneur than take a risk with someone who’s unproven. VCs are in a difficult position as they are inevitably confronted with the informing entrepreneurs that they are not Marc Andreesen – not an easy task.

Part of the challenge is that there is now an abundance of capital chasing technology deals. As VentureOne and Ernst & Young have pointed out (read it here), VCs invested $7.1bn in 3Q07. Tech investing used to be the domain of seasoned VCs. It is now open to traditional LBO and hedge funds who are now also competing with Sand Hill Road. And unlike VC firms, LBO and hedge funds offer cheaper money to entrepreneurs, meaning higher valuations. As such, when VCs think they’ve spotted a promising company, bidding wars are not uncommon.

At the end of the day, VCs know that there are very few companies that will be able to promise the astronomical returns they seek, so when they spot a company that appears to be a winner, valuations will naturally increase.

The NYT article paints a nearly ominous picture – foreboding of the crash – but what the article fails to point out is that unlike last time, these companies are not going public. Public investors are well aware of the consequences in buying shares of companies that had no revenues. We won’t be seeing an IPO of Twitter anytime soon. But what VCs know, and what the article doesn’t mention, is that companies which have a large and growing number of sticky users, often turn huge profits for VCs (think Hotmail, Skype) and often become hugely successful businesses (which is what Facebook is being primed for and which is why companies like Meebo and Twitter were so sought after for investment).

Having now become accustomed to free, reliable wifi in the Bay Area, it makes it very difficult while traveling abroad to not have such access. In the Middle East, in particular, finding wifi access is nearly impossible; and you can just about forget trying to get it for free.

While internet access is free in most hotels these days, this isn’t the case in Dubai. Not only is it not free, it’s fairly expensive.

For a city that prides itself as being the most modern and cosmopolitan in the region, it’d do well to invest in free wifi. In a city known for grand projects (world’s tallest building, world’s only 7-star hotel, floating cities), the world’s first city with free wifi would certainly draw positive attention. Perhaps, that’s just wishful thinking on my part. But for all the red tape that’s embroiled similar projects in the U.S. there’s none of that in Dubai.

In other news:

Akhtaboot.com get’s some coverage here. We covered them here.

The Maktoob.com portal is held by the aptly named Maktoob Group, which also owns the following internet properties: Bentehalal.com – a matrimonial site, Sport4ever.com – a sports oriented online community, Araby.com – “the first Arabic search engine”, Souq.com – an eBay for the Middle East, and CashU – a PayPal-esque site for the region.

Of all the startups in the region, Maktoob has certainly received more media attention that any else, both locally and abroad. In part this has to due to Maktoob’s age; it was one of the earliest internet sites catering to the Middle East and has seen its share of ups and downs in the global internet life cycle. Samih Toukan, CEO of Maktoob, still refers to this time as the beginning for Maktoob, which then begs the question where is the end?

Maktoob has been profitable for quite some time and given its age, it’s lived the average of two startups in Silicon Valley. It remains to be seen what the exit will be for Maktoob’s investors. IPO’ing is not really in the picture, either regionally or in Europe or America, so that leaves open the door to getting acquired and that’s about it. If and when Maktoob has a liquidity event will not only be good for Maktoon and its investors, but could be the first tech. startup success story in a region where if you have some extra money lying around you invest in real estate.

To date, Maktoob has been backed by EFG Hermes (~$2.5mm), Abraaj Capital ($5.2mm) and Tiger Global ($5.25mm).

I had a chance to chat with Samih Toukan, CEO of Maktoob. The conversation follows below:
Part 1: The Technology Environment in the Middle East
Part 1.mp3

Part 2: Running a Startup in Jordan
Part 2.mp3

VentureBeat provides an interesting analysis of a survey released Sept. 17, 2007 by Dow Jones VentureOne and Ernst & Young. (Press Release can be read here in PDF.)

SAN FRANCISCO (September 17, 2007)—It’s official: Web 2.0 has gone global. What was once an industry focused almost entirely in the San Francisco Bay area has expanded into new markets within the U.S. as well as in Europe and Israel, according to new data released today by Dow Jones VentureOne and Ernst & Young LLP. The global research showed that investors directed US$464.2 million into 101 deals worldwide in the first half of the year, the highest half- year total on record for the sector and more than a 7% increase in investments over the same period in 2006.

Essentially, while investments in Web 2.0 companies are up globally, they have declined in the U.S.

From VentureBeat:

Venture capitalists invested about six percent more into Web 2.0 companies in the first half of 2007, but the increase was attributable to more deals in Europe and Israel.

Notably, early investors in Web 2.0 slowed their pace. For example, Silicon Valley’s Benchmark Capital backed just three deals during the first half of the year, with only one in the Bay Area. In 2006, Benchmark was the sector’s top global investor, with 16 deals. It was a similar story with Omidyar Network, Kleiner Perkins Caufield & Byers and Storm Ventures, the survey found. The data comes from a survey by Dow Jones VentureOne and Ernst & Young.

Is the smart money leaving Web 2.0?

Not necessarily. Sequoia Capital and Draper Fisher Jurvetson, two respected firms, are the most active investors in Web 2.0 globally in 2007. However, both firms invest widely outside of the U.S. Maybe Web 2.0 is over in the U.S.?

In the U.S., investments in Web 2.0 were virtually unchanged from the first half of 2006, with 67 deals and $357 million invested.

Globally, investors pumped a record $646.2 million into 101 deals worldwide in the first half of the year. Within Europe, the United Kingdom posted the most activity, with a record seven deals accounting for $22 million invested. Belgium, Ireland and the Netherlands each saw their first Web 2.0 deal completed in the first six months of 2007, the survey found.

From 2002 to 2006, some 40 percent of Web 2.0 deals were located in the Bay Area. That figure dropped to just 20 percent during the first half. Even New England drew more money for Web 2.0 deals than Silicon Valley, according to the survey.

Finally, valuations of Web 2.0 companies have more doubled over the last year, meaning venture capitalists are having to invest more than double the amount to get the same ownership slice as they did last year.

Jeeran.com currently hosts approximately +570,000 websites and blogs, and is keenly focused in building and growing its online community.

I had a chance to sit down with Laith Zraikat, co-founder of Jeeran. The conversation can be heard below.

Jeeran Statistics:

Part 1: The Technology Environment in the Middle East
Part 1.mp3

Part 2: Running a Startup in Jordan
Part 2.mp3