The Future of Startups in the GCC: Insights from Victor Orlovski

Victor Orlovski, Founder and Managing Partner, R136 Ventures breaks down the future for venture capital and the startup ecosystem in the region

What is your assessment of the current state of the venture capital landscape in the GCC region? Where are the biggest opportunities for growth and investment?

The GCC and especially the UAE is a very attractive market for global capital. We are living now in times of de-globalisation and disintegration, capital in general and banks in particular are the driving force of globalisation that was governing the world order for over 60 years. But in the beginning of 21st century we are witnessing first a slowdown of globalisation and starting from 2009 a rapid deglobalisation which is accelerating now.

Regional hubs therefore are becoming important for capital to land upon. The GCC is clearly one of these hubs. Good governance, low tax, security, tolerance to different cultures and traditions and great quality of life are the driving force of relocation of financial and human capital to the UAE.

Meanwhile, venture capital is mostly a proxy of great entrepreneurial and technological talent. It appeared and started developing in Silicon Valley in the 20th century mostly due to vast migration of talent to this part of the world. In order to build a venture capital ecosystem in the region, it should out compete other regions for the best young entrepreneurial and tech talent.

Venture capital is the most sophisticated, insiders-driven capital that requires a lot of patience, knowledge and special attitude. Venture capitalists aren’t searching for alpha, they are building alpha with the founding teams. For that reason, venture capital knowledge and the ecosystem are yet to be built in the region. It should become a destination not only for the richest but the smartest and the most ambitious risk takers.

It’s a little bit of a chicken and egg problem as talent will go to where it may prosper and flourish the most and capital is inevitably part of entrepreneurial success. The GCC should promote new regulations and regimes building up a proper legal framework in such areas like mobility, robotics, finance, bioengineering, construction and others. It should attract best students through building and maintaining a world-class high education. Venture capital could not be built in years but rather a decade and there is still a lot to be done to make this region a leading hub in global innovations.

In your view, what are the most important factors for the GCC region to emulate in order to build innovation hubs on par with Silicon Valley? What lessons can be learned from Silicon Valley’s success?

To establish innovation hubs comparable to Silicon Valley, the GCC region must focus on several pivotal strategies. Firstly, emulating Silicon Valley’s role as a global talent magnet is essential. This involves attracting a diverse and inclusive workforce from around the world and creating an environment where various perspectives are valued through progressive immigration policies and supportive communities.

Secondly, a culture that promotes innovation and tolerates risk is vital. Silicon Valley thrives on a mindset that sees failure as a learning opportunity, encouraging entrepreneurial risk-taking. To mirror this, the GCC should foster a similar culture, offering legal and financial support to nurture resilience among entrepreneurs.

Additionally, the presence of robust academic and research institutions, akin to Stanford and UC Berkeley in Silicon Valley, is crucial. The GCC should enhance its higher education sector to collaborate closely with industries and encourage an entrepreneurial spirit among students and faculty. Another key element is the development of a dynamic venture capital landscape. Silicon Valley benefits from an ecosystem where sophisticated investors support startups with capital, mentoring, and networks. The GCC needs to cultivate a vibrant venture capital community to provide similar support.

In Silicon Valley, a unique entrepreneurial culture thrives, welcoming people from all nations as equals. There, previous achievements hold no sway, and there are no authorities to appeal to; failure is even appreciated. Success in the Valley is measured by the ambition multiplied by the intensity with which teams pursue their goals. Wealth is not the sole measure of success in this environment.

Despite lacking renowned infrastructure, many choose to stay in the Valley long-term, prioritising its entrepreneurial culture over quality of life. Values such as work ethic, collaboration, and setting ambitious goals take precedence over amenities in this environment.

Larger regional companies are focused on digital transformation and innovation – how can they go beyond incremental improvements and achieve true breakthrough innovations? What strategies or mindsets need to change?

Incremental innovations are the enemies of the breakthroughs, same goes for status quo and prosperity. That’s the reason the most innovations are happening in startups that put “all eggs into one basket” and fail miserably 99 times of 100, but the one that survives becomes the next big thing. The largest GCC enterprises are not different from those in the US, EU, or China.

Certainly, competition drives innovation. State laws should allow this competition to happen. On the other hand, startups need exits and most of them are happening through M&As with larger companies. Large regional companies should learn to innovate through acquisition of smaller-scale innovative startups and learn how to integrate them into their value chain. This is a hard lesson to learn but at the end it will promote both innovations in large organisations and launching even a great number of startups in the region. Also, states should prioritise regimes that help the best international startups to build their hubs in the region.

As technologies rapidly evolve, some will rise to dominance while others decline – what sectors or types of technologies do you think are most promising for investment in the GCC region over the next 5-10 years? Conversely, what should investors avoid?

It is important to follow the trends, but it is also important to avoid investing in hypes. Gen AI is certainly the next big thing – a new industrial revolution which we are witnessing. I would imagine Gen AI framework, which is perfectly adopted for shariah laws, an AI assistant that is perfectly adopted towards cultural customs and traditions of the Muslim population.

Gen AI will bring a revolution into such areas as robotics, pharma, mobility, support and sales automation. These are the areas I would be bold upon. Education tech will evolve rapidly and will change the way we learn. I would invest in clean tech especially solar and fusion technologies. Finally, the GCC may become a leading hub for technologies addressing climate change, longevity and space tech.

I’m less bullish on crypto although adoption of crypto as a means of payment is taking place now faster than ever before. But all these innovations are hard to build and be a leader in every single space. Silicon Valley has become what it is due to being bold on the silicon chips that triggered computers, databases, web, communication and bandwidth, mobility, apps, SaaS, etc.

You could not build the next Silicon Valley as it is already in the past. But if you want to become the next Valley for innovation you should choose your battlefield and be bold in one or two selected areas. If you ask me what this could be for the region – I would say bio (new pharma) with the focus on longevity and bioengineering, new medicine based on new formulas and fusion and solar energy (but this is my choice).

Artificial intelligence is a highly hyped technology – when do you believe we will start to see generally intelligent AI with human-level cognition or beyond? What sectors are most likely to see impact over the next 5 years?

Certainly, the Gen AI (LLM) revolution will take place as the fourth wave of industrialisation after steam, electricity, and microelectronics. Yet it is hard to predict when Gen AI will evolve to a human being level as it is hard to define what this level is. We are not only intelligent beings we are also cautious beings and while AI may become more intelligent than any of us it may still be not as wise as humans could be.

Gen AI will play a major role is service and support (call centres, customer support desks, etc) – this will take 5-7 years, while we will see a high adoption in other areas it will serve in a co-pilot mode, then it will evolve to a perfect cutting edge engineer in different areas such as construction, electrical engineering, bio and pharma, other areas – it will take 10-15 years. In 20 years, we will see a lot of human-like robots in the shops and on the streets.

However, Gen AI is not going to replace us humans as imaginative scientists and creators. It will rather help us to learn, imagine and create new things. The main limitations to Gen AI development is adoption of tech, politics (fears of being a victim of machines), fears to lose jobs and limitations in processing power and data.

What can governments in the GCC do to further stimulate the development of strategic technologies like AI and create a more fertile ground for their adoption?

The recipe is simple but hard to build. The GCC should become the destination for the next generation of Steve Jobs, Elon Musk and Sam Altman like individuals and thousands of their supporters. It should be an early adaptor of cutting-edge legislation and regulation in pharma, new materials, robotics, use of AI and many other areas. It should build a cutting-edge processing and data powers and be a global centre of education and learning for young talent across the globe.

Cybersecurity is a growing concern – how can companies and governments in the region prepare for and address the security challenges of new technologies?

Gen AI powers up cyber solutions but it also powers up fraudsters. Certainly, it’s a growing concern and an issue. Gen AI will put to perfection socially engineered fraud, cyber-attacks and data leakage. It could not be solved on a regional level and should be an effort of all nations. A new cyber tech doctrine should be adopted to prevent a rapid spread of Gen AI-based fraud schemes.

How can regional corporations do a better job of scouting startups for investment, acquisition or partnership? What’s needed to strengthen corporate venture arms?

Corporate VCs are good addons in the ecosystem of venture capital in the region. But although it is important part, it could not be a driving force. The venture capital ecosystem starts with colleges, angels, incubators, studios that attract and invest in best entrepreneurs. Then venture capital is fed by venture capital professional VC and only then time comes to corporate VCs. All these suspects take different kind of risks and Corporate VCs take the least of it.

What advice would you give to entrepreneurs looking to start tech companies in the GCC region? What are the biggest hurdles and opportunities you see?

If you feel yourself as the next Elon Musk, you should convince yourself to start business in GCC region. What would you take care upon? First is talent – you need the most talented team. Is it available in the region? Is it easy to acquire talent? It is hard to acquire and sustain talent in Silicon Valley, yet talent is clearly there.

Second, where would I take my capital from? Are there angels and early-stage VCs there, are there great incubators I may apply to and get the maximum support? And then the market, is market big enough to build a great company? How easy is it to build an international global business out of this place? Are there VCs that may support it? Answers to these questions should be “yes, yes, yes.”

As more capital flows into the region, how can investors identify the startups most likely to generate strong returns versus hype? What due diligence is most important?

Early stage an investor takes only one risk which is a founding team and their ability to attract and manage equally good talent. That’s all you need to know – how good are the founders you are dealing with. When company shows traction other items become important: market size, product, tech and competition, adoption, sales, marketing. And finally, down the road, numbers come in place – revenue, profitability, etc. Most importantly know that investing early requires certain skills to help founders to build and grow their business.

Looking 10-15 years out, what major innovations or new sectors do you foresee emerging that could fundamentally transform our economies and societies in the GCC and beyond?

When we look 10-15 years down the road I would envision our world to go through a dramatic pivot, I would even say existential changes. We are witnessing the next industrial revolution that may change not only the way we live and behave but change ourselves as species.

We are certainly not ready to enter the era of a super intelligence, super mobility, excessive and everlasting almost free accessible on demand energy and ultimate quantum level unlimited compute power. We should dramatically transform our societies, social habits, biases, states governance and the world order. These changes won’t come without a great pain and tensions. But I hope that we are being the most adaptive species on this planet will overcome these challenges and will find our way.

This article was originally published on Arabian Business Magazine