“We will create a new corps of business volunteers to partner with counterparts in Muslim-majority countries. And I will host a Summit on Entrepreneurship this year to identify how we can deepen ties between business leaders, foundations and social entrepreneurs in the United States and Muslim communities around the world.”

- Barack Obama, June 4, 2009, Cairo, Egypt

In past 8 days at least 12 #Egyptians set themselves on fire out of desperation: unemployment, poverty, corruption. #Jan25 #Egyptprotest

@monaeltahawy, January 25, 2010, Cairo, Egypt

I will keep on saying this. Youth Entrepreneurship is key in creating a long lasting impact in the Arab world! #Jan25 #Lebanon #Sidibouzid

@habibh, January 25, 2010, Beirut, Lebanon

As we left Cairo ten days ago to travel home to the U.S. after taking part in the first delegation of the State Department’s Global Entrepreneurship Program, we saw Egyptians huddled around TVs in the airport watching video of the Tunisian uprising on Al Jazeera. We had no idea then that a single “slap to a man’s pride” in Sidi Bouzid, Tunisia could lead days later to fierce protests in Cairo and the defacement of posters of Mubarak. While there is a good chance that the protests will settle down in the coming days in the face of a growing military presence, it’s clear that Egypt is at a tipping point–politically, socially and economically.

The pent-up frustration that Egyptians feel about the current regime is felt in different ways across the population. Our focus in Egypt was on a growing class of educated, tech-savvy entrepreneurs. While the frustration they feel may not be as intense as that of a fruit vendor subsisting on two dollars a day, there are a number of economic and cultural impediments that have historically limited their chances for success. Based on what we found, the promises of Egypt’s start-up scene lie in stark contrast to the desperation of its poor. The next few weeks and months will tell us a lot as to whether there is enough stability in the country to make external investors comfortable with its prospects.

Amr Ramadan is the kind of entrepreneur investors look for: he started his company Vimov with only $1,060 and begins his investor pitch by openly admitting the failure of his first product. His next product was a simulator for iPad developers that sold thousands of downloads at $32 each. His third product was the most popular paid weather app on the iPad, with over 350,000 users paying $.99 each. The next product in his pipeline, an ingenious take on personalized news, sounds even more promising. In Silicon Valley he would have a few hundred thousand dollars of angel money in the bank, and a couple of Series A term sheets from VCs in his pocket. But Amr is not in California, or even the United States. He is in Alexandria, Egypt, and he’s just one of a new class of young, educated and Internet-enabled entrepreneurs in the region.

We watched this narrative unfold firsthand in Egypt, which was selected as the pilot country of theU.S. State Department Global Entrepreneurship Program. The GEP is the government’s effort to promote and spur entrepreneurship around the world, led by passionate advocate (and successful entrepreneur) Steven Koltai. We met with a series of senior government officials, including Prime Minister Ahmed Nazif, who are committed to building a startup-friendly business environment. The Egyptian government recognizes that a nucleus of successful entrepreneurs is critical to catalyzing a sustainable middle class. While no single company is going to cure unemployment or increase the poverty line, an inspiring story of upward mobility could be an important populist spark.

Over the course of four days, we reviewed 32 presentations–culled from over 100 applications–from a variety of Web, mobile and hardware startups. Our delegation included the former CEO of CarMax; an investment banker, an MIT management scientist and a Silicon Valley VC. After two rounds of interviews, we awarded $20,000 to two companies: semantic search engine kngine and hardware accelerator SilMinds.

Haytham AbdElFadeel, the creator of kngine, is a 20-something hacker. His older brother works for him managing servers, while his father works from home as a day trader. “Search engine” are two of the most halting words known to investors. As a prominent VC emailed us, “a direct assault on Google doesn’t strike me as the right approach,” but Haytham doesn’t know any better than to pursue his passion for creating a better Google. He is using the prize money to purchase more servers, since the two desktop computers at his home are limiting his ability to index more of the web.

Dr. Hossam Fahmy is the co-founder and CTO of SilMinds, which has created the only decimal hardware financial accelerator card available in the market. He is a Stanford PhD, a professor at Cairo University, and he helped formulate the IEEE standard for floating point arithmetic. By shifting number processing from general software to specialized hardware, SilMind’s card increases server performance for certain financial service applications as much as 5X.

As an emerging market, Egypt doesn’t suffer from the irrational behavior seeping into the U.S. Internet market (unproven ad technologies raising $30mm, local discount services selling $20 gift cards for $10, etc). Instead, the start-up community in Egypt reminds us of the U.S. Internet market circa 1995, when it was tough to raise capital and when there was less glamour in being a technology entrepreneur; as opposed to the U.S. where Facebook raised $1b at a $50b valuation and “The Social Network” is poised to win an Oscar.

Some investors, sensing that the U.S. Internet equity is “priced to perfection,” are turning their sights towards emerging markets like Egypt. Usually, they look for foreign applications of successful domestic business models, like who is the “Facebook of Africa” or the “Groupon of Indonesia”? Many entrepreneurs (including freshly minted MBA grads returning to their native lands) are quick to adopt this strategy. About half of the start-ups that we saw in Cairo were localized versions of successful U.S. models.

The impressionability of these emerging market startups raises important questions. Although there may be a clear opportunity for the “Zynga of the Middle East” to get acquired in the near term by its namesake, one cannot build a sustainable business based on somebody else’s vision. Will those entrepreneurs who define themselves based on our business models look back at us, years from now, as startup imperialists? If so, will they shut us out from participating in their own economic transformations, just as they begin to scale? One need not look any further than China or Russia for cautionary tales of markets closing down to foreign investors at the most inopportune times.

There are a variety of reasons why Egypt could fail in its attempt to become a start-up mecca: poverty, political instability, poor education, lack of rule of law, difficulty to raise capital and cultural norms that do not embrace risk. For example, it takes two days to form a new company in Egypt, but takes two years to dissolve one, which is problematic because without bankruptcy reform, it is impossible for entrepreneurs to “fail fast” and move on to their next venture.

Despite these risks, there are a number of advantages that Egypt has in its favor: innovation is real, valuations are reasonable, engineering talent is available, real estate is cheap, and the government is motivated to help foster entrepreneurial success stories as a means of inspiring its disaffected youth. Egypt represents a market of more than 80mm people, and is the gateway to the broader MENA market of 320mm people (larger than US, Brazil or Russia). The region’s growth rates of mobile penetration and Internet usage are among the highest in the world.

In recent months, a few venture funds have started to finance these early stage opportunities: Arif Naqvi, founder of Abraaj Capital, the largest private equity firm in the region, recently announced multi-hundred million dollar funds dedicated to early and mid-cap technology companies in the Middle East; Ahmed Alfi, after two decades of successful investing in the United States, returned home to Cairo to form Sawari Ventures, complete with a SoMa style incubator housed in a classic 1940s building on the Nile.

Is it time to invest in Egyptian startups, or will the current political and social instability inhibit exits and investment returns? Who knows if companies like kngine and SilMinds will ever exhibit the same power in Egypt that Google and Intel exhibit in the US–what matters now is that there are Egyptian entrepreneurs with the drive and skill sets necessary to compete in global technology markets. With the Egyptian government’s support, and the organic growth of the population and its technology adoption, we believe that a framework is now in place for Egypt and the broader MENA region to emerge as an important market for early stage investment.

Originally posted by All Things D on January 25, 2011.