Gobi Partners’ Thomas Tsao: Pilgrimage is Pivotal Opportunity to Invest in the Muslim Market

26 December, 2018

If you were a partner in a global venture capital firm, would you choose to invest in Pakistan?

I asked this question to a Director from JP Morgan. He shrugged and agreed that Pakistan is indeed a market that is largely ignored by American investors. One of the reasons why must be due to religion, as a large number of US investors are also Jewish, so they naturally exclude Islamic countries from their investment strategy. In the Middle East, in fact, Silicon Valley has invested the most in Israel.

However, some Chinese investors believe that this situation has created an opportunity for venture capital firms based in other countries. There are 1.8 billion Muslims in the world, accounting for 24% of the global population, but only 8% of the global gross domestic product (GDP). This fact is the main reason for many conflicts in these regions. During the economic globalization era in the 1990s, Muslims who moved to the Western world performed well. An example would be the Mayor of London, Sadiq Khan, who is a Muslim, and also the numerous Muslim engineers in Silicon Valley.

Looking at the size of the population, Muslim-inhabited areas are undoubtedly attractive — with an annual growth rate of 1.5%, it is increasing twice the rate of the non-Muslim population (0.7% per year); additionally, the median age of Muslims worldwide is 23, which is five years younger than the global median age of 28. 40% of the Muslim population also believe in both faith and modernity.

Gobi Partners, with an investment portfolio in Southeast Asia, Pakistan, and the Middle East, has created a new label for this sector, TaqwaTech, which describes tech companies started by Muslim entrepreneurs who are focused on providing products and services for Muslim consumers, businesses, and communities.

Travel is a huge opportunity that venture capital firms should take advantage of

In 2010, Gobi Partners set up their first office in Southeast Asia; in 2015, Gobi’s Founding Partner Thomas G. Tsao relocated from Shanghai to Kuala Lumpur, Malaysia, and in 2017, they established an investment fund solely focused on Southeast Asia — the Meranti ASEAN Growth Fund. Upon moving to Malaysia, Tom discovered that 75% of the workers are Muslim, and he was very respectful of their customs, such as praying five times a day and their religious celebrations.

Tom began investing in the OTA industry because the massive Muslim population would mean that travel would definitely be a huge market. However, due to the particularities of their religious beliefs, notably that their cooking items should not come in contact with pork, and that their hotel rooms must come prepared with prayer mats and the Quran, many hotels and tour packages have been unable to satisfy the needs of Muslims.

Tripfez, which was invested in by Gobi in 2016, is a typical representation of a TaqwaTech company. The startup is an OTA that was founded in Malaysia. They developed Salam Standard, a hotel rating system similar to Ctrip’s, which reviews hotels in the world that can fulfill a Muslim’s special needs.

The biggest potential of TaqwaTech comes from the mandatory duty of Muslims from all over the world to go for pilgrimage, also known as Umrah. Hajj and Umrah both mean ‘pilgrimage to Mecca’ in Arabic; Hajj falls on a specific period each year (the eighth to 12th day in the 12th month of the Islamic calendar), which is usually announced by official representatives of the religion. Umrah, on the other hand, means a ‘lesser pilgrimage’, and refers to a pilgrimage practice performed in or around Mecca before the actual Hajj and can be done at any time during the year except for the month of Hajj itself.

Due to its limited capacity, Mecca can only accommodate up to 7 million visitors every year, but there are over 1.8 billion followers of Islam and thus, the waiting list to get into Mecca is very long. Tripfez has partnered with a Middle Eastern travel agency, and has applied for a license to provide Umrah travel services online; they are currently the only OTA with this license.

According to Saudi Arabia’s General Authority for Statistics, a total of 18 million pilgrims visited Mecca in 2017, or more specifically, 1438H in the Islamic calendar (2 October 2016 to 20 September 2017). During that period, approximately 6.75 million visitors performed Umrah, and it is Saudi Arabia’s goal to increase that number to 30 million by 2030.

The Muslim economy has sizable room for transformation by the Internet. Today, users can even pre-order or purchase Umrah travel services using their mobile phones, and even rate the Muslim-friendliness of hotels around the world, which opens the way for more business opportunities.

The potential for Merger and Acquisitions (M&A) opportunities between Middle East and Southeast Asian companies in the next three to five years

From Southeast Asia, Gobi has now found other densely populated Muslim countries to invest in, including Pakistan, Bangladesh, Saudi Arabia, and others. Tom believes that the markets of these countries are able to support local startups, and that they can, upon finding success, expand quickly to similar markets. For example, a successful Pakistani company can choose to expand to either the Middle East or North Africa.

Pakistan is a developing nation that is currently experiencing rapid economic growth. The country has a population of 200 million, and an average GDP per capita of over US$15 K, which is comparable to the earlier stages of China’s economic development. Following the recent changes to America’s immigration policy, an increasing number of Pakistani students who studied in the US are opting to establish their startups back home, specifically in the tech industry; this development is heating up Pakistani’s entrepreneurial ecosystem.

Alibaba and its ecosystem already has its sights on Pakistan. In May 2018, Alibaba acquired Pakistani e-commerce company Daraz, and back in March 2018, Ant Financial invested US$185.4 M and acquired 45% of Telenor Microfinance Bank’s (TMB) stocks, which is a subsidiary of Norway’s Telenor Group in Pakistan.

In November of this year, Gobi led a Series A round worth US$1.5 M for Pakistan’s OTA platform Sastaticket.pk. Gobi was the only Chinese venture capital firm involved in this round of funding.

“Currently, Pakistan is almost identical to China circa 2003, and is slower in its progress as a country by about three to five years in comparison with Southeast Asia, but as the development of their technology progresses, their funding stages have also been shortened,” said Tom to 36Kr; he has a keen interest in this market, which investors have long believed to be ‘overly risky’.

Sastaticket.pk is similar to Ctrip, providing Pakistani tourists a way to book flights and hotels online. In Pakistan, only 3% of consumers are going online to do these sort of bookings, however, the base number of smartphone usage by the population has been pretty encouraging so far.

“In the next three to five years, Middle Eastern and Southeast Asian companies may even have the opportunity to undergo M&As because they are both serving global Muslim communities. Middle East OTA platform HolidayMe and Southeast Asian OTA platform Tripfez recently announced their merger, and there are even more companies out there that are already closely collaborating with each other,” Tom added that he believes that many have not realized how big the TaqwaTech market is, considering the fact that it encompasses Malaysia, Indonesia, India, Pakistan, Bangladesh, and other countries in the Middle East.

The following is an overview of the Pakistani market:

36Kr interviewed Tom in Karachi. The following are excerpts of the interview:

36Kr: What got you interested in investing in the TaqwaTech sector?

Thomas Tsao (TT): I moved to Malaysia early on, and I’ve always paid attention to the deals happening in Southeast Asia. The proportion of the Muslim population in Southeast Asia is considerably large, plus, if you look at it on a global scale, Muslims make up 20-25% of the world’s population, but only account for 8% of the global GDP. Looking at it from this perspective means that the growth potential is there, and there are good prospects. We have also seen quiet a few exceptional startups in Southeast Asia, which is why we think that the TaqwaTech sector is an opportunity that will make the next 10 years exciting.

36Kr: Gobi just invested in local OTA platform Sastaticket.pk. What got you interested in Pakistan?

TT: Pakistan has a population of 20 million, which is a sizable base population, and a median age of around 23 years old. Its average GDP per capita is US$1.5 K. Compared to India, which has an even larger population, Pakistan is a far less complicated market: India is a country, but it operates more like a dozen states unifying together, which makes it hard for foreign capital to operate. Alongside Pakistan, we believe countries such as Bangladesh, Afghanistan, Egypt, and others also have great potential for investment.

36Kr: if TaqwaTech represents the potential growth of the global Muslim economy, is there potential for global M&A opportunities in the next three to five years? Including mergers between Middle Eastern and Southeast Asian companies?

TT: This is highly possible. There are now already many Middle Eastern companies collaborating with Southeast Asian ones. For instance, Middle Eastern OTA HolidayMe, which Gobi has just invested in, has announced its merger with Southeast Asian OTA Tripfez; they are joining together to serve the travel demands of Muslims in both regions, which include providing options for Muslim-friendly restaurants, hotels, and flights. Moreover, the Middle Eastern population has a relatively younger age structure, and millenials there also really enjoy traveling, which makes the OTA market an excellent opportunity. On the other hand, the need for religious pilgrimage is an opening even harder to come by, it is expected that 30 million people will be performing pilgrimage by the year 2030.

36Kr: What other sectors are exciting in this space apart from OTA?

TT: There are still a lot of opportunities in mainstream sectors such as e-commerce and mobile payment. If you look at the needs of Muslim communities, there are companies focusing on e-commerce, particularly fashion, such as FashionValet and Zawara. Gobi has also invested in food technology, which satisfies the demand for Halal restaurants, like the startup Offpeak. Delving deeper, you also find opportunity in the field of cosmetics technology, which needs to adhere to Halal standards.

36Kr: Can the various business models of Chinese companies be applied to these markets?

TT: Yes, China is a great role model for businesses in these countries. We often discover similar business models from companies in Southeast Asia that have already proven successful in China. For example, we have invested in secondhand car auction platform, and its Southeast Asian counterpart Carsome. The latter has already expanded its operations to Malaysia, Indonesia, Singapore, and Thailand. Other examples of synergies in business models include China’s Camera360 and Indonesia’s PicMix; China’s Tujia, and Indonesia’s Travelio.

36Kr: Looking at development in temrs of progress, what stage do you think Pakistan, Malaysia, and Indonesia are at?

TT: Investing in Malaysia and Indonesia makes me think of China five years ago. Pakistan reminds me of Malaysia and Indonesia three to five years ago; it’s kind of like China in the early 2000s, when everything was still in its inception, and people had the drive for entrepreneurship. Indonesia and Pakistan have a somewhat similar environment in terms of the many motorcycles present, which is why startups like Indonesia’s Go-Jek have appeared in Pakistan.

Of course, it’s also hard to compare these markets against China’s because it is just too big. Anything in China should be seven times larger, because its population is also seven times the population of Pakistan. Companies in Pakistan can also choose to expand their businesses to the Middle East and North Africa, since these markets have substantial potential. They also happen to involved with China’s One Belt, One Road Initiative.