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.

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).

The event was attended by startups old and new: Maktoob, Jeeran.com, Ikbis, Kindisoft, Albahith, Akhtaboot, Minerets, Ketab, easyinfo, and many more. There were consultants, bankers, investors and students, all there to discuss there companies, businesses and tech. Princess Sumaya made a surprise appearance as well. Ahmad Humeid has written about the event (here).

This is hopefully the beginning of things to come. Change is not borne overnight. And must be birthed, in Jordan and the Middle East. Over time, we’re going to begin seeing some incredible technology companies emerge and compete not only in Jordan or the region, but globally. And some have already started.

See you all at the next TechConnect!

Doing business in the developing world is not without its own unique set of challenges. Lack of proper roads, internet access, other essential infrastructure, are just some of the problems that entrepreneurs face. Yet entrepreneurs brave these uncertainties to capture a growing market that is no harder to find in America and Europe. As we all know the upside of increased risk, is increased return on investment – or that’s the way things are supposed to work anyway.

I recall when I was in university Bill Draper addressed a conference on investment in China and India. He commented that he thought that over 90% of all investment in India would be lost. If that happens there’ll be quite a few disgruntled LPs. While it is important to be cautiously optimistic of developing markets, it would be foolish to dismiss opportunities in the global South as throwing money away.

One thing that I’ve learned after having traveled to parts of the world where most people recoil in fear after hearing the name of the country, the region or the city, is that there are plentiful opportunities that are worthwhile and should be pursued. And despite the appearance of instability, the situations is always more stable than it may appear at first glance; and certainly more stable than the way it is shown in the press. Things are never as bleak as they seem. Ultimately, no matter what part of the world you may find yourself in, the language of economic empowerment is universal; it is the same for a financier on Wall St. or a child selling roasted corn on the streets of Karachi.

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.

Sept 7, 2007. Ramadi, Iraq: Iraqi and American flags decorate the body armour of US ambassador Ryan Crocker
Photograph: John Moore/Getty Images

It should come as no surprise that the Middle East remains embroiled in conflict. The Israeli-Palestinian conflict has been a constant source of turbulence (at least from 1948) and since 2003 the American occupation of Iraq has led to greater regional instability. And then of course there’s the occasional violence or bombing (Algeria in the past week), or wars  that breakouts periodically (Israel v. Lebanon 2006). Which is to say nothing of the region’s historic instability (see here).

It’s no wonder then that Western investors are hesitant to invest in the region. To a large extent it is a matter of perception: the Middle East in its entirety is viewed as unstable. Yet, much, if not most, of that perception is not anchored in facts on the ground, but rather in sound bites and images. It is foolhardy to dismiss the entire region as not being suitable for investment. Clearly, the beta is higher in the region, but then so are the potential returns. Investing in the region necessitates a balanced perspective. While there are certainly areas where the risk profile would render investment foolish if not downright stupid (e.g. a tourist resort in the Golan Heights or Falluja), there remain sectors and geographies where significant returns can be realized (as evidenced by the boom in private equity investments in the region by firms based in the Middle East and elsewhere).

Jordan’s stability, relative to the region, and its neighbors – a testament to the Hashemite clan’s excellent politicking (with the notable exception of the whole incident with the British) – makes it very easy to forget that the country is squeezed in-between Israel/Palestine on one side and Iraq on the other. It would be naïve, however, to forget that Jordan is intimately tied to both, a good fortune borne of geography. And both conflicts have significantly impacted its own historical trajectory and its present state. There has been much ink spilled as to the economic effects of the large Iraqi refugee population – I won’t add further here. And the same can be said of Jordan’s relationship with Israel.

In spite of misperceptions, Jordan is arguably the most stable country in the region, in terms of its governance and economy. Walking through the many glitzy malls, shiny hotels, American restaurants  and trendy cafes in Amman it’s very easy to forget that one is in the Middle East. That is until you see the ever-present photo of King Abdullah and/or the royal family adorning a public or private space smiling at you.

While Jordan is not Western Europe, it is certainly not Darfur either. When considering the Middle East its behooves the investor to have a balanced perspective of the particular nation of the investment and the region. While the two are intimately linked, none so clearly as Jordan, there are oases of stability where returns remain to be found. And Jordan is one of those locations.