Early Investors See Promise in Palestinian Start-Ups DUBAI - When Yadin Kaufmann helped start Veritas Venture Partners in 1990, Israel's technology industry barely existed. Only a handful of companies had gone public on American exchanges and financing was tough to come by. Since then, his firm has nurtured dozens of companies like Accord Networks, a videoconferencing company that went public in 2000, and Ubique, an instant messaging pioneer that was bought by AOL in 1995. Now, Mr. Kaufmann, 51, believes the Palestinian market holds similar promise for investment and growth. Over the last three years, he and his partner, a Palestinian businessman, Saed Nashef, have raised $28.7 million for a new fund. The firm, Sadara Ventures, which has the backing of prominent institutional investors including Cisco, the European Investment Bank, the George Soros Fund and Google, is poised to make its first investment. "There's a small but significant number of very educated entrepreneurs who need capital and access to international markets," Mr. Kaufmann said. Sadara Ventures is joining a growing wave of investors plowing money into the Palestinian territories. Rasmala Investment Bank, a regional investment banking group with a head office in Dubai, started a Palestinian fund last May with plans to raise $100 million over the next three years. Siraj Fund Management began its $60 million private equity fund, Siraj Palestine Fund I, last year. And last month, Abraaj Capital raised $36 million for its Palestine Growth Capital Fund. Sadara plans to invest exclusively in Palestinian technology start-ups and aims to take stakes in about 15 companies over 10 years. "What's happening in private equity at this stage has never been like this; it's unprecedented," said Mohammad Mustafa, chairman and chief executive of the Palestine Investment Fund, which has provided $10 million in seed capital to Abraaj Capital's fund and $15 million to Rasmala Investment's fund. Such funds are still in their infancy, but analysts say there is potential. "At this stage, most of the funds launched are by firms with specific regional interest, backed by people with underlying social motives," said Taufiq Rahim, director of the consulting firm Globesight. Fund and deal sizes are small, and it's not the major private equity firms setting up shop. But it's definitely a strong start. The Sadara Fund has been able to tap the connections of its founders. Mr. Kaufmann, a lawyer by training, has worked with international technology companies over his last 25 years as a venture capitalist. He has had a long-standing relationship with Cisco since the company acquired Class Data Systems, a Veritas investment. Other partnerships have taken years to cultivate. He and Mr. Nashef met Google representatives during their first visit to Ramallah in March 2009. The two followed up with Google's representatives in London and subsequently at the Aspen Institute's Middle East Strategy Group meeting in September 2009. Their initial proposal to Google did not get much traction, according to Mr. Kaufmann. But by late 2010, Google was on board. "There is a relative lack of local Arabic content online, and more content means more Internet users and greater penetration; focusing on places like Palestine will contribute to growth in this area," said Debu Purkayastha, a member of Google's business development team in London, who also sits on Sadara's advisory board. Google definitely wants to play a part in developing the tech ecosystem in a place where youth are so empowered by the Internet. With the backing of such companies, Sadara is evaluating start-ups to make the fund's first investments. Mr. Nashef estimates that there are more than 300 technology companies in the West Bank and Gaza Strip, with about 3,200 people working on mobile apps and innovative Web sites like yamsafer.com. Mr. Nashef, 42, the founder of the software consulting firm Equiom and a former Microsoft software engineer, said that potential encouraged him to return to the region from the United States. The broader economy, too, is proving resilient amid the revolutions that swept the regions. Last year, the Palestinian stock market was among the best performing in the Middle East. "Our investors often ask us about political sensitivities when fund-raising, especially during the Arab Spring, but the truth is that Palestine is not new to instability," Mr. Nashef said in a telephone interview from East Jerusalem. Palestinian people have been living under occupation for a long time and despite hardships, people still need to put food on the table. This has resulted in a lot of savvy entrepreneurs with resilient, adaptive business models. Even though venture capitalists often expect to wait years for a payoff, Mr. Kaufmann said potential investors were initially skeptical that Palestinian start-ups would ever yield good returns, given the changing political climate in the Middle East. He reminded them that Israeli technology firms faced similar concerns in the 1980s, when many foreign investors refrained from putting money into Israeli technology companies for fear of possible war and because the sector was still unproven. But bold early-stage investors then reaped significant rewards, as a number of start-ups turned into billion-dollar public companies. For example, M-Systems Flash Disk Pioneers, financed by Veritas, went public on Nasdaq and was eventually acquired by SanDisk, another Nasdaq-traded company with Israeli roots, for $1.35 billion in July 2006. Technology companies in the Palestinian region certainly face unique hurdles. Checkpoints and curfews imposed by Israel create a restrictive operating environment for businesses. Israel also monitors airwaves and restricts access to faster Internet speeds in the occupied Palestinian territories. While political tensions underlie many other economic initiatives in the Palestinian territories, the Sadara Fund's founders say that they have been able to stay above the fray by emphasizing that the fund's focus on investing in businesses and adding value. No government or political entities are involved with the fund, but the Sadara Fund has the support of the prime minister of the Palestinian Authority, Salam Fayyad, and tech entrepreneurs in Palestinian territories. "By focusing on business, not politics, and by demonstrating the ability to add value to companies in which we invest, I'm hopeful that it will overcome whatever reluctance there may be," Mr. Kaufmann said.