The first-ever venture capital fund to invest in Palestinian high technology opened for business on Tuesday with almost $29 million in capital and the backing of some of the world's leading technology companies.

Sadara Ventures/The Middle East Venture Capital Fund will invest in Palestinian companies developing innovative, new technology in mobile, Internet content and technologies, social networks and software outsourcing, Yadin Kauffman and Saed Nashef, the fund's two managers, told a news conference in the West Bank city of Ramallah. Sadara's investors include Google and Cisco.

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The Palestinian-administered areas may seem an unlikely place to invest in start-up companies. The West Bank and Gaza are in political limbo, with the peace process stalled and the Islamist Hamas group in control of Gaza. Israel restricts movement of people and goods inside the West Bank with a network of roadblocks and closely monitors trade and travel abroad.

But Nashef said the tiny Palestinian information technology (IT) sector has many of the characteristics today’s most successful Silicon Valleys had in their earliest stages, before they took off.

“Palestine has many strong educational institutions and thousands of very highly skilled entrepreneurs in software and telecommunications. It has a culture of entrepreneurship, and a culture and drive to make and build something," Nashef told The Media Line on the sidelines of the news conference.

The Palestinian IT industry has about $300 million in annual sales and employs about 3,200 people, about the size of a medium-sized US company. Technology exports amount to just $10 million a year. Most companies are providing IT services rather than developing new products.

But the area boasts 10 institutions of higher education with engineering programs, turning out some 2,300 graduates a year. Even more young Palestinians go abroad to further their studies.

"Many have been educated in Western schools and have made it back to Palestine to contribute both on the business and social sides," Nashef said. "All of these elements come together to make a very interesting combination and make the situation ripe for early opportunities. It's a ground floor opportunity."

Nashef himself is one of those returnees. He was born in Jerusalem, worked for Microsoft for six years in the US and is founder and co-managing director of Equiom, a software consultancy with offices in Washington and Colorado.

Nevertheless, the Palestinian-administered areas have no venture capital funds and no experience in the start-up culture of fast-moving, risk-taking entrepreneurship. In a seminar following the news conference, Kauffman, Nashef and other industry figures invited for the day explained how venture funds work and how budding entrepreneurs should pitch their proposals.

"We will be looking at these companies solely on a business basis… businesses that become world class companies," Nashef told the audience. "You need to think big."

Sadara will make two to three investments per year of $2 million to $3 million each, with the aim of creating a portfolio of 10-15 companies. It will generally hold its stake in a company for between four and seven years before selling its shares to another company or floating them on the stock market.

Sadara's $28.7 million in capital isn't a lot by global venture capital standards, but Kaufmann said the funds will go further in Palestine than they would in the US or Israel because Palestinian labor and other costs are much lower.

"For the industry here, it's quite an impressive amount of money and an amount that will enable us to start investing and building a portfolio of about a dozen companies," Kaufmann said.

Sadara also hopes to leverage its investment by seeking co-investors, including capital from its investors that, in addition to Google and Cisco, includes the European Investment Bank, George Soros' Economic Development Fund as well as Steve Case, the co-founder of AOL.

Sadara will also turn to the Israeli venture capital industry, one of the world’s biggest, which Kaufmann said cannot only serve both as a source of joint investment and expertise for Palestinian entrepreneurs but serve as an inspiration.

"In the mid 1980s, high tech was a very small industry. There weren't that many entrepreneurs and there were no venture capital funds before 1985," said Kaufmann, who co-founded Veritas Venture Partners in 1990, one of Israel's first VC funds.

Cooperating with Israel's bigger and experienced technology industry may make business sense, but it may encounter into political obstacles in the absence of a peace agreement between Israel and the Palestinians.  Kaufmann said Sadara's portfolio companies would be expected to make decisions on a purely business basis but that the fund wouldn't compel them to work with Israeli partners.

In spite of the obstacles to doing to business, the Palestinian economy has seen rapid growth in the past several years, Palestinian Authority Telecommunications and Information Technology Minister Mashhour Abudaka told the conference

"The information technology sector in Palestine is witnessing rapid growth despite the standing and recurrent challenges. We are used to them. We are becoming resilient," he said...

Kaufmann said he, too, wasn't deterred by the political uncertainty in Palestine or the Middle East. "What I think distinguishes successful entrepreneurs from those who don't succeed is getting the job done and overcoming any challenges on the way," he said.

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