While he was looking for Arabic-language news on the Internet, Habib Haddad found that he could key in Arabic words using English letters, but had difficulty typing them in Arabic. Searching for a solution, Haddad and co-founder Imad Jureidini founded Yamli.com, which allows users to type Arabic without an Arabic keyboard.

Yamli.com, which literally means 'he dictates,' transliterates Arabic words written in the Latin alphabet into their closest Arabic equivalent in real-time, and then runs that query through Google, allowing users to search for Arabic content on the internet using the Latin alphabet.

Yamli's engine recently reached 250 million Arabic words, a milestone for the company, and for the language, which has 400 million speakers and is the fifth-largest spoken language in the world. By some accounts, the Arab world also has one of the highest Internet usage growth rates in the world, with about 60 million online users and more than 200 million mobile users.

In an interview with Arab Knowledge at Wharton, Haddad described his efforts to increase Arabic content on the Internet, his entrepreneurial success and the challenges faced by entrepreneurs in the region.

An edited transcript of the interview follows.

Arabic Knowledge at Wharton: When and how did Yamli come about?

Habib Haddad: The idea came from my personal frustration in interacting with the Arabic language on the web. It seemed unreal that I, an Arabic native speaker, had difficulty using my own language on the web. I asked around, went on social networks and forums, and realized that this problem also affects a large number of Arabic speakers, especially the youth, [who comprise] 70% of the population. This is when [Yamli] started making business sense. But probably the catalyst was during the unfortunate July 2006 war between Israel and Lebanon. I heard that bombs were falling near my parents' house. Phone lines were jammed, so I went online to look for news about it. But because I didn't type in Arabic, I wasn't able to reach any content. This is when I decided to do something about it. I was still at [microchip maker] AMD, but I'd been itching to go back to the startup world. So with Imad Jureidini, a friend and colleague from a previous startup, we started Yamli.

Arabic Knowledge at Wharton: Are there competitors currently in your space? If so, what are you doing that makes you different?

Haddad: A year after we launched, Google, then Microsoft, launched competing products to our transliteration engine. However we had been focusing during our first year on building the brand and distribution channels, which eventually protected us from user churn when the giants came in. Additionally, our agility as a small startup allowed us to quickly iterate and release products, such as smart search technology, browser plug-ins, social networking apps and a transliteration add-on that is used by about 750 websites today. We also deliver solutions to enterprises to help them in Arabic searches, data normalization and other linguistic needs. In a sense, the competition we attracted from Google and Microsoft served us well in validating our market and strengthening our brand.

Arabic Knowledge at Wharton: What are your plans and goals for 2011?

Haddad: We see growth potential in the enterprise space and that will be part of our focus for 2011. It turns out that the technologies we've built to serve the consumer for the past three years can be used to solve tough problems in the banking, government, postal and media sectors too. Take for example anti-money laundering; banks need to regularly check their clients against lists of known databases from multiple sources. But if your computers can't match Mohamed Marwan Abdulnour with Mohammad Salih Abel Noor, then you wouldn't be able to know that they might be the same person. The same problem also affects postal services with addresses and media companies with song [and] video titles.

That's a new area for the company, as we have mainly focused on a consumer ad-driven model. However the online advertising space in the Middle East has not matured as expected. Online ad spending is still low and budgets are still controlled by a handful of advertising agencies, so it hasn't yet democratized as it is in the U.S. On the flip side, I am glad we were forced away from this model, as I believe we have bigger growth potential with our new enterprise approach.

One other area that we are going to also experiment with is the mobile phone space, and we will be launching an iPhone app towards the end of the [third quarter of] 2010.

Arabic Knowledge at Wharton: What were some of the elements that you had to put in place to build Yamli to where it is today? As Yamli grew, what kind of skills did you have to develop in order to transition to running a business of a different size and different dimension?

Haddad: From the day we launched, we obsessed about two things: users and distribution. We made sure to offer users a great experience, listened and acted on their feedback. This helped build a brand that users loved and trusted. As far as distribution, we reached out to anyone we could to convince [them to add] the Yamli plug-in to their site. We were able to build a strong network of partners that multiplied our distribution, and gave us credibility when we were still new.

Coming from an engineering background, I hadn't done much marketing, sales or business development in a professional setting, so I had to learn those skills as we grew the business, and as roles in the organization became more distinct. It was very important though to stay agile throughout all the stages. It's worth noting that we only raised a small seed round of US$125,000, so it was crucial to remain agile as we innovated and iterated over our business model. I think the problem that most big corporations have today is not being agile, as their traditional managerial bureaucracies severely limit innovation and creativity.

Arabic Knowledge at Wharton: How do you see the global media landscape unfolding? And where do you see the opportunities in this landscape?

Haddad: With the proliferation of smart phones, and as mobile connectivity becomes ubiquitous, I see huge opportunities in the mobile phone space. Apple has shown us that it's possible to build an ecosystem around a phone and that companies could become quite profitable by being part of that ecosystem. Moving forward, I think we are going to see a lot of innovation there, be it in hardware capabilities, but more interestingly in the apps built on top of that. The Middle East specifically presents a very fertile ground for mobile apps with an 80% penetration rate and more than 220 million mobile users. So I am very excited to see that space unfold in the next few years.

Arabic Knowledge at Wharton: You have said that Yamli wants to empower the Arabic web. Can you tell why that is important and how Yamli is going to help with the endeavor?

Haddad: Many in the Arab world have already heard this a million times: There is very little Arabic content online, way less that what it's supposed to be. In fact, the Arabic content on the web is less than 1% of the global content, however 5% of Internet users come from the Arabic region.

Now why is that a problem? First, there is the cultural and educational toll that the lack of Arabic content creates. What other native speakers take for granted online, Arabic speakers struggle with. For example, if a young student in Cairo wanted to read more about bacteria online, he wouldn't be able to find enough content, and that's sad considering that Arabs speakers are the fastest growing population online with currently more than 60 million users.

Second, content is often one of the layers that startups build on top of. Access to good quality content is expensive and sometimes non-existent, which means that the startup would have to build the content first, dramatically increasing costs and inhibiting innovation. As Joi Ito, a good friend and a great mentor of mine says, "To increase innovation, lower the cost of failure."

Location Based Services (LBS) are good examples of building on top of content. Startups like Foursquare and Yelp were built on top of existing cheap, or freely available, quality content about business locations. To build a Foursquare in the Middle East, one would have to first manually build the location content that "increases the cost of failure." So while the Arabic content is crucial for the Arabic culture and education, it's a very important part of the startup ecosystem.

Arabic Knowledge at Wharton: What were the lessons you learned then that might benefit other entrepreneurs today?

Haddad: Don't compromise on your team; make sure you have the best people. Also don't do it alone, make sure you have a co-founder and that his skills complement yours. Network, go to events, and meet people. It's by putting yourself in the open that you create serendipity. Iterate in the open and keep on testing new ideas and products. Don't be afraid to fail or to get criticized; otherwise you won't be able to innovate. Innovation is often reached by a series of failed iterations. Use your own products every chance you can. Be your number one customer.

Arabic Knowledge at Wharton: Could you give any examples of mistakes that you made from which you learned?

Haddad: Shortly after we launched, we were approached by one of the big companies for a potential M&A deal. It was pleasantly surprising, but caught us right at our busiest moment, as we were still in our infancy. We got so excited about the potential that we ignored the business; once we decided to turn down the offer, we realized that we had wasted six months on due diligence and negotiation. It's important to not lose sight of the core business and to never take a deal for granted until you are done with it.

Arabic Knowledge at Wharton: As you started Yamli, did you leverage the Middle Eastern diaspora to start and grow your venture?

Haddad: I definitely attribute a lot of early successes to the Middle Eastern diaspora and I am very grateful for that. Before founding Yamli, I founded an NGO called INLET (International Network of Lebanese Entrepreneurs and Technologists) to link Lebanese Americans with Lebanese entrepreneurs and to facilitate technology transfer. I also started a fundraising effort to support the relief efforts after the July 2006 war. It's amazing the number of people I met that wanted to help and give back but didn't know how. After I started Yamli, I went back to a few of them and they were very generous in opening their contacts and giving us advice. One of them was Georges Harik, an early and ex-[Google employee] turned angel investor. He introduced us to his friend Aydin Senkut, also an ex-[Google employee] and co-investor, and both of them ended up investing.

Arabic Knowledge at Wharton: What are the biggest challenges to entrepreneurship and innovation in the Middle East? Are they economic or are there cultural, social and political reasons?

Haddad: The Middle East has a very young population, with more then 70% of the population under 30. The youth unemployment rate is very high, however, at about 30%, and to just maintain the same rate of unemployment, the region needs to create about 90 million jobs in the next 10 years. The youth create a challenge, but also an opportunity for the region, so this is why I believe our focus should be in empowering Arab youth to be more entrepreneurial.

I see three general problems. First, there is a social stigma for being an entrepreneur and a fear of failure. It's much easier for someone in the Middle East to be an employee in the government or a big corporation rather than an entrepreneur. The society also does not really tolerate failure, which prevents risk-taking and innovation. I think this can get fixed by raising awareness among students and the general population. The press has a responsibility here to cover entrepreneurs and startups more often, and even celebrate success stories that could serve as role models.

Secondly, mentorship is key in an entrepreneurial ecosystem and that is somewhat scarce in the Middle East. The best mentors are usually entrepreneurs who succeeded (or even failed) and then decided to give back by guiding younger budding entrepreneurs. However both the older local generation of entrepreneurs and the diaspora should spend more time advising younger startups. Also, the education system here prepares students mostly to be employees; it doesn't equip them with the basic knowhow and skills to become entrepreneurial. Fortunately, there a number of NGOs filling that gap like Injaz and YallaStartup, which I founded.

Thirdly, investing in startups is rare. Wealthy individuals prefer to put their money in real estate than in innovative, 'risky' ideas. Even the local sovereign wealth funds have been directed at investing in U.S. startups and venture capital funds. Fortunately, the downturn has put pressure on governments to look inside their own geographical boundaries for opportunities and [they] have been setting up some early stage funds. Those funds, however, often come with conditions, which is also not the best way to let a startup innovate and thrive.

Arabic Knowledge at Wharton: Do you see a lot of young people in the region taking the entrepreneurial route these days?

Haddad: There is definitely increased interest from the youth in taking the entrepreneurial route and this is manifesting itself in the buzz across the region. However I believe we can do a much better job.

Arabic Knowledge at Wharton: Is venture capital (VC) funding available for businesses in the region? What are the risks for an entrepreneur in getting a VC or VCs involved in a project?

Haddad: VC funding is very scarce in the Middle East and that is actually a problem not only because the sources of funding are limited, but also because it makes it harder for an entrepreneur to negotiate better terms. While local VCs definitely have a lot to give and are innovative in their own way, I also feel that an influx of VCs from the expatriate community might bring a wealth of experience. The problem here is that because Middle Eastern funds tend to be smaller, the management fees cannot attract top expat talent.

Entrepreneurs should look at VC funding as a marriage, for better or for worse. So as much as the VC needs to make his [or her] due diligence, the entrepreneur has to do the same thing by talking to other portfolio companies and asking around to see if it's the right fit. The good VC would help the entrepreneur grow his business by opening doors. The great VC would also know that being friendly to the entrepreneur versus trying to squeeze him is good for business, and how [the VC] could get the opportunity to invest in the next Google or Facebook.

Arabic Knowledge at Wharton: What are the entrepreneurial success stories in the region?

Haddad: The favorite of many is Aramex, one of the largest logistics companies in the world that continues to be a great story, not only by innovating for it's customers but also for the community.

Also very interesting are the success stories of companies that are built using a local competitive advantage, which governments and the private sector could learn a lot from. Take SABIS for example, an educational management organization founded in Lebanon. They were able to use that local competitive skill to build one of the largest educational management systems in the world, impacting about 65,000 students.

Another example is SAKR Group, a Lebanese company that manufactures and sells power generators in the Middle East, parts of Africa and Russia. They first served the local market during the civil wars and were able to build expertise in deploying generators in the toughest environments. This doesn't mean that war should be simulated to create more SAKRs, but there is a lot to learn from how a company was able to scale and compete globally by using a local competitive advantage. I truly hope governments around the region realize that, instead of trying to just emulate Silicon Valley.

Arabic Knowledge at Wharton: Is enough being done to create structures to develop and support entrepreneurship in the region? What about the governments? Are they doing enough to encourage entrepreneurship?

Haddad: There definitely is a massive collaborative effort to accelerate entrepreneurship in the Middle East. Mentorship programs, business plan competitions, workshops and incubators are examples of what is being done.

This hasn't yet trickled down proportionally to more entrepreneurial activity, mainly because in a lot of cases the 'cost of failure' is still high…. Most Middle Eastern countries rank very low on company liquidation. Not only this is important for investor protection, it also reinforces the fear of failure. It's also very important to lower the cost of failure and encourage entrepreneurs to keep on iterating. Innovation is a series of iterations, and unless those iterations can be done quickly and cheaply it will be tough for entrepreneurs to break out.

Governments, in my opinion, can play a big role in that and have started investing a lot more to accelerate entrepreneurship. Although we haven't witnessed a true transformation yet, the changes are happening at record speed. It took 50 years for Silicon Valley to create its ecosystem, but I have a feeling the Middle East will have its own in a much faster time.