PALESTINE AS A START-UP

1. PALESTINE AS A START-UP Opportunities for Investing in Small and Medium Sized Businesses in the West Bank and Gaza The University of Michigan Business School (UMBS)

2. Introduction • This presentation will highlight a new investment vehicle for the West Bank and Gaza (WBG) region as it emerges into a new state. State of Palestine (expected in September 2000) Presentation Purpose: To demonstrate an opportunity for investing in small and medium sized businesses in the WBG. • Agenda: • Business Environment Overview • Small Business Needs Assessment • Investment Opportunities • Organizational Options • WBG Small Enterprise Equity Investment Fund

3. Business Environment • Reviewing the business environment uncovered serious economic challenges which must be addressed with targeted investment to spur growth. Per Capita GDP has dropped as Unemployment has soared

4. Business Environment • To date, significant investment has been made in large infrastructure projects and micro-lending programs... Capital Access WBG Businesses (50,000 businesses) Capital Sources • International Finance Corp. ($87M) • Palestinian Investment Funds ($80M) • Commercial Banks ($minimal) • Microlending Programs ($25M) • World Bank • United Nations • US Foreign Aid Very High Low Very High >100 Large Small & Medium 5-100 employees <5 employees (95% of total businesses) Micro

5. Non-Family Owned 5% Growth Companies 5% Family Owned Lifestyle Companies Business Needs Assessment • …but small and medium sized businesses still find it difficult to access capital and business assistance for business expansion. Investment Gap Profile • Family owned businesses have limited experience with financiers • Growth limited by size and skills of family Small & Medium Sized Businesses 5-100 employees (2,500 businesses) • Lifestyle companies work to meet basic needs • Growth companies reinvest for expansion

6. Business Needs Assessment • Much like a start-up business, WBG faces an ambiguous future with a series of investment risks that must be mitigated to secure a return. • Business Risks in the WBG: • Israeli obstacles (closures, trade restrictions, etc.) • Restrictive WBG/Israeli borders • Unstructured legal and regulatory environment • Limited knowledge in international marketing • High unemployment • Political uncertainty The ¼ mile border crossing into the Gaza Strip.

7. Potential Cluster Software Develop. Web Design Info Tech Computer Coding ISPs Potential Rollup Agri-Products Rollup Israeli JVs Micro Businesses Investment Opportunities • In light of the business risks, there are still promising WBG sectors. Strategic investment coupled with innovative business models will lead to growth. • Growth Sectors • Construction & masonry • Specialty crafts • Information technology • Exotic agri-products

8. Investment Options • The UMBS team investigation uncovered a series of investment opportunities among small and medium sized businesses in the WBG. Investment Options Individual Investment Small Enterprise Equity Investment Fund $1 million Work with SEAF to establish a development fund. Fund will be managed by experts at SEAF. Palestine Innovation Technology Fund $100,000 A revolving fund managed by a US subcontractor and a Palestinian bank that will focus on private initiatives with a technology focus. Masri Seed Fund $100,000-$1 million An off-shoot of the $60 million Peace Technology Fund that will focus on seed investments in Palestinian start-ups. Individual Projects $50,000-$1 million We identified many individual projects including, a shopping center development project, an entrepreneurial training programs, a small business resource center, etc.

9. Traditional VC Model Modified VC Model • Large investments ($Ms) • Limited assistance • Limited assistance • Not provided • Limited network • Seek significant returns • Smaller investments ($50K-$500K) • Hands-on management and technical assistance • Active assistance in finding new customers • Extensive experience in transition economies • Extensive domestic and international contacts • Seek credible returns Investment Opportunities • A modified version of the venture capital model may prove to be the most effective way to invest in Palestinian businesses. Small & Medium Business Needs • Expansion capital • Management assistance • New customers • Risk mitigation • Supportive environment • Return on capital

10. Go it Alone Joint Venture Invest in SEAF • Complete control over fund disbursement • Bear 100% of risk • Major time commitment to manage projects from abroad w/ small network • Must have significant funds to reach critical mass (~$15M) • Shared management burden across other parties • Shared risk • Larger network of human capital resources • Must have significant funds to reach critical mass (~$15M) • Requires in depth knowledge of the region and business climate • Expansive network of business experts, regional contacts, and human resources • Flexibility with level of participation • Projects chosen by fund based on set criteria Organizational Options • Three options for creating an equity fund exist. Partnering with an existing fund such as SEAF provides the highest value. Pros Cons

11. Selected Investment Option After researching WBG’s investment climate, a team of UMBS students determined that an equity fund managed by Small Enterprise Assistance Funds (SEAF) is the best investment vehicle. Business Environment SEAF Equity Fund Organization Options Business Needs Assessment Investment Opportunities

12. SEAF Profile • The Small Enterprise Assistance Funds (SEAF) provide equity and quasi-equity financing to small and medium-sized businesses in emerging markets. SEAF Model A well-documented methodology for firm identification, screening and analysis, provisioning of management assistance, providing innovative equity/quasi-equity instruments, and investment monitoring and evaluation. Replicable Model SEAF Fund Location # of Deals Invested to Date • Baltics 13 $3,261,640 • Bulgaria 25 $6,169,489 • Croatia 11 $1,950,147 • Macedonia 5 $1,680,665 • Peru 15 $3,006,071 • Poland 41 $17,234,646 • Nizhny Novgorod, Russia 18 $4,019,032 • St. Petersburg, Russia 10 $2,592,305 • Total Invested 138 $39,913,995

13. SEAF Profile • SEAF has shown consistently that the provision of targeted capital and business assistance to growth-oriented companies will drive economic development. Average Annual Portfolio Revenue Growth vs. Economic Growth SEAF Portfolio Growth Country GDP Growth Percentage Change

14. SEAF Profile • The value of its network distinguishes a good venture capital firm from a great one. SEAF will leverage its network to directly benefit its investees in WBG. Local Businesses Aid Agencies Fund Investors SEAF Equity Fund Business Associations Int’l Businesses Business Assistance Volunteers

15. Investment Benefits • The purpose of this presentation is to encourage investment in the WBG for the sake of developing a start-up nation and achieving a favorable return in the process. Your $1 million investment will ... Foster the link between economic self-sufficiency and lasting peace Tangibly contribute to the development of a new nation by growing its business sector Increase legitimacy and impact of SEAF equity fund Realize a credible return

16. Conclusion • The SEAF business plan for the WBG Equity Fund will be provided to all interested individuals. • Purpose of presentation: • To demonstrate the need in the emerging state of Palestine and the opportunity for sound investments. • To point you to SEAF as a high-impact and profitable way to invest in the area. Small Enterprise Assistance Funds Robert Sims Retired CEO Software Services Corp. (734) 761-9491 bobsims@umich.edu Tom Gibson Chairman (202) 737-8463 tgibson@seafweb.org