The Middle East has not traditionally been associated with entrepreneurial endeavour but as many of its countries face the need to diversify their economies it may be time to take heed.
Micro, small and medium enterprises(MSMEs) account for up to 45 per cent of employment in emerging economies and up to 33 per cent of GDP, with the numbers significantly higher when taking into account the contribution of SMEs operating in the informal sector, according to World Bank unit the International Finance Corporation.
In higher income economies SMEs contribute nearly 64 per cent to GDP and 62 per cent to employment.
But the market still remains a challenging one, particularly for digital start ups looking for funding, according to Juan Jose De La Torre, VP Strategy & Corporate Development at digital media company Intigral.
“What we find is banks are not open, while angel investors are more inclined to focus on brick and mortar traditional businesses where there is a clear asset and less risk,” he says.
Set up costs too are high in some countries, as Philip Boigner, director of technology investment at Dubai Silicon Oasis Authority notes in the MENA Private Equity Association 3rd Venture Capital in MENA Report.
“Most entrepreneurs are non-UAE nationals and hail from many different countries in the region and internationally. Due to this fact and legal reasons, startups elect to set up in one of the many free zones. The results are expensive business license fees, potential required office space, and restrictions on the number of visas available.”
Sawsen Ghanem founder of Dubai- based e-commerce site Maya’s Closet and Active PR, can testify to the difficulties in starting up a business in the emirate, both with regards to free zone legislation and dealing with the local banks.
“They would ask me questions about the business that were more suited towards a standard business, not an e-business,” she says when recalling her experience in opening an account for Maya’s Closet.
“They also insisted on a nonsensical condition for them to open the business account – a sum of over Dhs5 million. How does that make sense when you are talking about a startup, and an online one at that?”
Yet despite these hurdles many believe the Middle East has great potential for digital start-ups and e-commerce.
“It’s actually one of the more unique markets out there,” says Wassim Kabbara, industry head of retail for the Gulf region at Google. “If you look at the role of digital, we have around 120 million internet users and the potential for really expanding the commercial web is there.”
Google highlights that while much effort has been put into building the Middle East into a travel hub or a services hub, something that is lacking is a knowledge hub, or knowledge-based economy.
To help the region achieve this goal the internet giant has involved itself with a number of start-up aiding initiatives.
The most recent of these was ezstore.me, a joint scheme with online transaction specialist Paypal, logistics company Aramex and website builder shopgo which provides an e-commerce website solution for businesses.
“We understand that we cannot do it alone, so for the most part we partner with people in the industry that can help us to lead more high impact initiatives,” says Kabbara.
Another initiative, afkar.me, is being lead by Saudi Telecom Company and All Asia Networks joint venture Intigral to foster and develop the entrepreneurship ecosystem in the region.
Intigral has been inviting applications from startups from which 10 will be selected to take part in a start-up weekend. The X-Factor-style process will help these 10 fine tune and develop their product ideas before presenting them to a panel of judges.
From there three will be selected for a nurturing programme in which Intigral will inject $20,000 into each startup, without taking any equity, and provide them with an entrepreneurial curriculum of coaching, mentoring and lectures over three months.
Once the product is ready it is then added to Intigral’s service portfolio using a revenue-sharing model, with the entrepreneurs, Intigral’s telco customers and Intigral itself taking a share.
NOT SO ADVENTUROUS CAPITAL
In 2008 Zawya Private Quity Monitor estimates that there were 13 Venture Capital (VC) transactions from structured VC funds in the MENA region. Last year that number rose to 54, with 119 VC transactions completed from 2010 to 2012 compared to 56 between 2007 and 2009.
During the 2010 to 2012 period, 47 per cent of investment was made in the information technology sector, suggesting an appetite among VC funds in the region for digital start-ups.
Omar Christidis, founder and CEO of Arabnet, a digital hub for professionals and entrepreneurs in the region, notes the recent emergence of VC funds.
“We started in 2010 and then there were very few funds around. Since then at least half a dozen funds have come online including the likes of NBC ventures and STC ventures, big companies that are getting into investing into digital media start-ups,” he says.
Angel investor networks have also been conceived, like Egypt’s Cairoangels. A collective that has so far invested EGP 1.1million in four companies and made binding offers of EGP 1 million in a further two.
“The environment is very much improving, and interest in the sector. For me one of the important things is seeing the big businesses are investing in this space, like Etisalat, STC and NBC. It shows you that they’ve seen innovation in digital media and technology startups as something that they need to invest in,” says Christidis.
There is a noticeable difference though in the way in which VCs invest in the Middle East in comparison to the US. While some Western venture capitalists may be happy to invest millions of dollars in companies for the chance of a potential future exit via IPO, there is less of this “patient capital” as Christidis describes it, in this region.
“I see investors regularly investing in companies where they see some kind of transactional model, where there is revenue coming in because of the sale of a product, service, subscription or a B2B model. The kind of let’s shoot for the stars B2C massive consumer play, we’re seeing fewer bets like that,” he says.
Intigral’s La Torre also suggests that VCs in the Middle East are less adventurous when it comes to their investments. He says many are more likely to invest in
an idea that has been successful in other regions than take a risk with a completely new concept. “The risk appetite of the entrepreneurship ecosystem in the region is quite low,” he says.
But overall an increase in MENA’s wider private equity industry during 2012 at $1.1 billion, compared to $0.9 billion the previous year, is considered encouraging. Data suggests a shift in focus from large buyout funds to VC and growth capital funds over the last three years, according to the MENA Private Equity Association report.
THE REGION’S SILICON VALLEY
California’s Silicon Valley has a reputation worldwide for being a start-up hub, giving birth to some of the world’s best-known technology companies. But the economic benefits these companies provide go beyond just their own workers.
According to Enrico Moretti, professor of economics at the University of California, every additional technology job in the US creates five new jobs in its city. Apple created 70,000 indirect jobs in Silicon Valley through the employment of 13,000 staff in Cupertino, he estimates.
But is anywhere in the Middle East developing a Silicon Valley style proposition?
“I think by virtue of having a lots of the region’s talent in Dubai it lends itself to starting new ventures and entrepreneurship,” says Kabbara.
Sawsen also attests to Dubai’s start-up credentials, having opened two businesses in the emirate.
“Dubai is a city that embraces entrepreneurial spirit and one that inspires me every day to do more. There’s so much energy here, lots of opportunities to explore and more,” she says.
But, at least to begin with, Dubai’s high costs can be off putting for entrepreneurs, with La Torre estimating that the cost of a developer in the emirate is around two times that of Jordan. As a result he points to the Jordanian capital Amman as a key regional startup hub.
“To have a good startup hub you need to have access to talent, you need to have available and cheap infrastructure, and you need to have access to funding, and those elements are more or less available in Amman,” he says.
However, for those looking to grow and become regional players, Dubai and Abu Dhabi present better opportunities in terms of investment, market intelligence and networking, according to Boigner.
“If you want to become a regional business, as an entrepreneur, this [Dubai] is the right place to start, maybe not in the first 90 days, but definitely where you’d like to end up as soon as you can afford to,” says Kabbara.
La Torre too sees the potential of the emirate, especially if more is done to help entrepreneurs overcome initial real estate and financial barriers.
“If we pass an ecosystem where we’re able to fill the gap we have at the beginning and attract more people to take the jump then the entire market will benefit,” he says.