Palestinians attempt to create their own start-up nation

posted on: May 3, 2016

A buzzing bazaar in Ramallah © Giuliano Camarda/Redux/eyevine

by: John Reed
Financial Times

When Faris Zaher, a Palestinian Jerusalemite, graduated in Hong Kong with a masters degree and returned home at the peak of the financial crisis, he drifted for a bit, working in consulting and property, and starting a website for classified ads.

Then he hit on his big idea: a start-up travel portal catering to the $50bn market for hotel bookings in the Middle East. There was no regional competitor back then and with the web opening up the prospect of borderless business, the West Bank city of Ramallah was as good a place as any to set up.

Less than five years later, Yamsafer is one of the region’s largest hotel booking sites, according to its founder. It recently closed a $3.5m funding round in one of the biggest venture capital deals the Israeli-occupied Palestinian territories have seen.

Yamsafer employs 70 people in Ramallah, a place where too many young university graduates are chasing too few jobs. “The people we hire are more hungry than people you would have hired in Dubai, Jordan or elsewhere,” Zahar, who is 29, told me recently.

Employees at the Yamsafer offices in Ramallah

The problem is, Yamsafer is the exception. When I went to Ramallah recently to interview businesspeople about young entrepreneurs — and expressly asked them to exclude the West Bank’s older billionaire tycoons — its name kept coming up.

There were a few others, including WebTeb, a health and medical information website; Batuta, a travel portal. But Palestinian high tech has no equivalent of blockbuster Israeli start-ups such as MobilEye, the disruptive “assisted driving” company, or Waze, the Google-owned navigation app.

What the Palestinians do have are a lot of business accelerators and incubators, some funded by aid money, others by the private sector. Bank of Palestine and Zahi Khouri, the Palestinian-American businessman who runs the local Coca-Cola franchise, are backing Ibtikar (“Innovation”) a fund raising $12m to invest in everything related to the internet, software or apps.

In the Gaza Strip, there is an accelerator with the wonderful name of Gaza Sky Geeks.

Foreign donors, led by the American USAID, see the online world as a boundless new domain that will allow enterprising Palestinians to metaphorically vault over the checkpoints, planning hurdles and other economic roadblocks and gainfully employ the region’s legions of university graduates. If Israel can conquer the world with its high-tech companies, the thinking goes, there is no reason to prevent the Palestinians from following suit.

Much of the Arab world’s current innovation in technology is indeed coming from the Levant. Jordan has a strong start-up scene that marries the kingdom’s cheap programming skills to the marketing expertise and rich consumer markets of the Gulf. “This area is providing a lot of the talent in technology,” Habib Hazzan, Ibtikar’s general manager, says. “We can see the innovative hunger; people have a drive to create new things and change.”

There is certainly enough goodwill from donors: not one but two economic plans for the Palestinians have been drafted, one of them using the conservative (and safe) assumption that the political status quo will not change. But stripping away the hype, Palestinian businesspeople and foreign advisers privately say the conditions for a serious start-up hub in the Occupied Territories are just not there.

In fact, the backing for incubators and accelerators, they tell me — though none will say this on the record — is producing an artificial bubble of demand. The problem is that there are simply not enough entrepreneurs giving their all, or burning the midnight oil. “Nobody is working as hard as if the company were their lifeline,” one seasoned observer of the Ramallah business scene told me.

Too few of the companies are able to execute on their business plans, much less scale up to the point of attracting private financing.

Is culture to blame? I doubt it. Consider Jordan and its scrappy tech companies: more than half of the kingdom’s population, after all, are Palestinians. In the West Bank, business people say, one of the main problems lies in education: the computer science and programming courses that do exist at schools and universities, emphasise rote learning over entrepreneurship and critical thinking. Institutions have been less enterprising than their world-class Israeli counterparts in forging foreign research architects.

Israeli security forces scuffle with a Palestinian man during a protest near the Jewish settlement of Kiryat Arba demanding the reopening of Shuhada Street in the Israeli occupied West Bank city of Hebron and to commemorate the Ibrahimi Mosque massacre of 1994, on February 26, 2016

Tension rises between a Palestinian man and an Israeli soldier © AFP/Getty

Then there is also the West Bank’s weak legal framework. Companies take a long time to get registered and parts of the corporate code date back to the days of British-ruled Mandate Palestine. Zaher says that Yamsafer registered in Delaware rather than Ramallah because local law does not define employee stock options or offer preferred shareholder rights. Investor protection guarantees, he says, are “flawed”.

In the West Bank, business people say the main problem lies in education, with rote learning emphasised over entrepreneurship
But a bigger, perhaps decisive problem, is what economists call a “crowding out” effect, when government spending is so high that it stifles private initiative and investment.

The Palestinian Authority, the perennial interim government that has tens of thousands on its payroll, is by far the largest employer. With safe government jobs on offer, and no chance of peace with Israel anytime soon, why would anyone trade a paycheck for the risk and hard graft of a new venture?

I witnessed a similar phenomenon when I reported for the FT in South Africa a decade ago: there, the start-up scene was stunted because the post-apartheid transition pulled the most talented black businesspeople into government departments or listed companies seeking to fill racial quotas.

If the Palestinians and foreign donors want to create their own Start-Up Nation, they need to dispense with magical thinking around incubators and focus their minds instead on creating the political and regulatory conditions that will let smart businesspeople help themselves.