Writing blank cheques won't create your startup ecosystem, but demanding real returns will.

How countries like the UAE and KSA should think about their startup ecosystems

I think there is a fundamental flaw in how the UAE and KSA are trying to kickstart their startup ecosystems, but to be able to make my point, I first need to set the stage.

Fact #1 The market problem:
In the middle east you have the problem that no one country has a market that is big enough for venture-like returns. Egypt is a large market with a very low average purchasing power. The UAE is a small market with a high average purchasing power, but it is a non-homogenous market with so many cultures making it very difficult to build for. KSA is the best combination of size and purchasing power, yet still relatively small for venture returns. So what's the solution founders resort to? All of the middle east as one big market. The problem is that every country is different in almost every way, making every expansion like starting another startup. So if success in one country has a 10% chance of success, then succeeding in two has a 1% change of success and so on. It's doomed from the start.

Fact #2 Abundance of capital
Sovereign wealth funds, have a lot of interest in deploying capital to kick-start their startup ecosystems. They are sophisticated investors, but there are more reasons than just economic returns to invest, such as for example soft power. They are however too big to have the time to write small cheques into startups so they work through investing as LPs in smaller VC funds. Many of the managers of these smaller VC funds are unsophisticated investors with no real experience in startups. They are risk averse and would try to avoid taking any "idea" risk, and end up exclusively investing in middle east copycats of american companies, thus only assuming the "execution" risk. The VCs investing in these startups will end up having no returns, but as I mentioned, due to a low expectation of returns, the VCs will continue to be funded. I know people will bring up Careem or Souq, but I think we can agree two exceptions don't make a rule.

So now let's get to my main point. If I am a founder in the middle east, and I see all the VCs only funding copycats with no interest in big ideas, guess what type of ideas I will also come up with? copycats. I believe the only real venture-like returns we can have in the region would come from founders thinking big and building global companies. We don't want someone to build the next "Uber for the middle east", we want founders to build the next Uber. We want founders to go head to head with other founders around the world. We want founders to compete with the best so they can be the best. We want successful exits, with veterans and successful operators taking on roles in VC firms.

So if capital deployers want to kickoff their startup ecosystem, demand real returns from your GPs and from your founders, and back them up to go after big ideas.