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. Agenda: Business Environment Overview Small Business Needs Assessment Investment Opportunities Organizational Options WBG Small Enterprise Equity Investment Fund State of Palestine (expected in September 2000) Presentation Purpose: To demonstrate an opportunity for investing in small and medium sized businesses in the WBG.

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... <5 employees (95% of total businesses) employees >100 WBG Businesses (50,000 businesses) Capital Sources CapitalAccess Large Small & Medium Micro International Finance Corp. ($87M) Palestinian Investment Funds ($80M) Commercial Banks ($minimal) Microlending Programs ($25M) –World Bank –United Nations –US Foreign Aid Very High Low

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

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: tIsraeli obstacles (closures, trade restrictions, etc.) tRestrictive WBG/Israeli borders tUnstructured legal and regulatory environment tLimited knowledge in international marketing tHigh unemployment tPolitical uncertainty The ¼ mile border crossing into the Gaza Strip.

7 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 Potential Cluster InfoTech SoftwareDevelop. ComputerCoding ISPs WebDesign IsraeliJVs Agri- Products Rollup Potential Rollup Micro Businesses

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

9 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 Traditional VC Model  Large investments ($Ms)  Limited assistance  Not provided  Limited network  Seek significant returns Modified VC Model  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

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

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 Needs Assessment Business Needs Assessment Organization Options Organization Options SEAF Equity Fund Investment Opportunities Investment Opportunities Business Environment Business Environment

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. 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 Replicable Model SEAF Fund Location # of Deals Invested to Date 1.Baltics13$3,261,640 2.Bulgaria25$6,169,489 3.Croatia11$1,950,147 4.Macedonia 5$1,680,665 5.Peru15$3,006,071 6.Poland41$17,234,646 7.Nizhny Novgorod, Russia18$4,019,032 8.St. Petersburg, Russia10$2,592,305 Total Invested 138$39,913,995 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 Percentage Change SEAF Portfolio Growth Country GDP Growth

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. LocalBusinesses Business BusinessAssociations Int’lBusinesses AidAgencies BusinessAssistanceVolunteers FundInvestors SEAFEquityFund

15 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 Investment Benefits Your $1 million investment will... 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.

16 Conclusion The SEAF business plan for the WBG Equity Fund will be provided to all interested individuals. Small Enterprise Assistance Funds Tom Gibson Chairman (202) Robert Sims Retired CEO Software Services Corp. (734) 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.