There are two major annual reports into the funding for start-ups in the Arab region carried out by Dubai-based research and funding platforms. One, carried out by Arabnet in collaboration with Dubai’s Mohammed Bin Rashid Establishment for SME Development (Dubai SME), looks at the investments in the digital space across 11 countries(1) in the Arab world.
The second, by Magnitt, a Dubai-based start-up platform that provides entrepreneurship research and data, looks at funding from angel to growth capital stages in 16 Arab countries(2).
- According to the Arabnet/Dubai SME report, the number of active investors in the market increased by a compound annual rate of 31 percent between 2012 and 2017, from 51 in 2012 to 195 last year. It said around 40 new funds were created between 2015 and 2016 and around 30 new funds between last year and May 2018. Of these 30 new funding institutions, around one third are based in the UAE, while one quarter are based in Lebanon.
- A majority of the investors are based in four Arab countries: The UAE hosts 32 percent, Saudi Arabia 17 percent, Lebanon 13 percent and Egypt 10 percent.
- The investor community is almost equally spread between early stage funders such as angel investors, seed funders and incubator programmes, and later-stage venture capital, growth capital and corporate investors.
- According to Magnitt’s report, 318 start-up funding deals were made in 2017, up from 199 in 2016. However, deal volumes for the first nine months of this year declined 38 percent to $238 million, from $383 million achieved in the same period last year.
The start-up success stories in the region are growing, with the best-known so far being Dubai-based Careem and Souq.com.
Careem, which started in 2012, is a local ride-hailing app which has been through many rounds of venture funding, with the most recent $200 million fundraising completed in October bringing its valuation to over $2 billion, according to a Reuters story, citing an unnamed source.
Souq.com was founded in 2005 by Syrian entrepreneur Ronaldo Mouchawar and was sold to online retailer giant Amazon for $580 million, according to documents filed by Amazon in April 2017.
Egypt was home to one of the region’s first incubators, Flat6Labs. It was founded in Cairo in 2011. It was deemed a success and later opened branches in Tunisia, Bahrain, Saudi Arabia, the UAE and Lebanon.
Mirek Dusek, the World Economic Forum’s deputy head for geopolitical and regional agendas, told Zawya in a telephone interview in September that the increasing interest by investors in the start-up scene is driven partly by governments, but also by local, private sector interests.
“We have a different picture than from five to ten years ago and that picture has changed dramatically because of the involvement of the family businesses, the traditional long-standing family firms that we have seen in the Arab world are now setting up venture capital arms and also sovereign entities, PIF (the Pubic Investment Fund) in Saudi Arabia or elsewhere are increasingly active in this space.”
“Sovereign entities, particularly through sovereign wealth funds are setting up arms that are specifically targeting SMEs or start-ups in their home economy... This is quite healthy as long as it does not crowd out other competitors,” he added.
The Pubic Investment Fund (Saudi Arabia’s sovereign wealth fund) is an investor-partner in ecommerce platform Noon, which was founded by UAE-based businessman Mohamed Alabbar. The portal was launched late last year with an initial investment of $1 billion.
Abu Dhabi's Mubadala, a state-owned investment company, has pledged $15 billion to the $100 billion Softbank Vision Fund, a tech fund run by Japanese technology company Softbank in May last year, while Saudi Arabia's PIF was the fund’s biggest investor, with a $45 billion commitment.
According to the Arab Competitiveness Report 2018 released in August, “research has shown that countries and regions characterized by higher entrepreneurial activity tend to have higher growth rates and greater job creation, the main pathways through which to grow the global middle class”.
The report, which was compiled by the International Finance Corporation (IFC), the World Economic Forum and the World Bank, added: “Global experience shows that entrepreneurship stimulates job creation in the economy, as most new jobs are created by young firms, typically those three to five years old.”
Saudi Arabia, the Arab region’s biggest economy, needs to create 1.2 million jobs by 2020 to reach its unemployment targets, Reuters reported in April, quoting an official in the Ministry of Labor.
The unemployment rate for Saudi nationals stood at 12.9 percent of the population in the second quarter of 2018 – the latest for which figures are available.
Anass Boumediene, one of the founders of Dubai-based eyewa.com, an online portal that sells spectacles and contact lenses that expanded to Saudi Arabia last year, said the region still lags behind others with regards to the size and type of support provided by governments to start-ups.
“What needs to be improved in the region is governments’ involvement in fostering entrepreneurship. In Europe, Asia, or the U.S., governments are a lot more active in supporting entrepreneurs, providing access to simple and cheap legal frameworks for startups and VCs (and) government funding in the form of grants, loans or equity to both startups and VCs, and other ecosystem-building infrastructure facilitating access to talent and technologies,” he told Zawya in an interview in September.
Aysha Al-Mudahka, the CEO of Qatar Business Incubation Center (QBIC), told Zawya in a phone interview in September that it is important both for start-ups and investors to feel they have “the consent of the government”. This will make “the private sector feel comfortable to invest in start-ups, especially in the Arab world, as that will lead to better regulations and support for start-ups.”
QBIC is a government-backed incubator, co-founded and solely owned by Qatar Development Bank.
The funding and support network
The Arab world has many public and private incubators and accelerators such as Flat6Labs, Sharjah-based Sheraa, Qatar Business Incubator, Dubai-based Techstars, Abu Dhabi-based KryptoLabs, and others.
It also has a number of established, active venture capital firms, including Wamda Capital, BECO Capital and Middle East Venture Partners.
According to several stakeholders in the region’s entrepreneurial space, there is no right or wrong decision when it comes to whether a start-up should join an incubator, an accelerator, reach out to an angel investor or try to make it on their own, as it depends on the business, its development stage, its requirements and the various connections and opportunities on offer by the various networks.
Young Egyptian entrepreneur Mostafa Elshafey, the ex-CEO and founder of the DCBEgypt direct billing platform, which was sold to TPAY Mobile in July last year, told Zawya in a previous interview that he preferred to fund his business ideas out of his own pocket and even invest in other start-ups in which he sees potential.
“I personally invest in (Egypt-based) start-ups that have good ideas or serving a good cause. But the culture of investment is not very mature in Egypt... In Egypt, it is either the entrepreneurs have a very good idea but do not have enough funds to present a prototype… or all their goal is to get money,” he told Zawya in an interview in July.
Rabih Khoury, partner and chief exit officer of the UAE’s Middle East Venture Partners, told Zawya in an interview in May that “accelerators and incubators create good entrepreneurs, but they don’t create good companies”.
He argued that venture capital firms offer better options for entrepreneurs who have already turned their ideas into a firm business model and are working towards growing the business.
Incubators and accelerators: How useful are they?
Najy Benhassine, practice director for finance, competitiveness and innovation in the World Bank Group, said in a press conference in August that his organisation is working on a system to measure incubators and accelerators’ performance across the world.
“This is not a problem specific to the Arab world … We lack information in that space and we, with the IFC, are starting to develop an initiative to better measure how those instruments are working,” he said speaking to the media via video link from Washington.
In the Arab region, the main difference between incubators and accelerators is that the former are mostly run or co-run by the government, while the latter are privately managed, stakeholders told Zawya.
According to the ArabNet report, the number of accelerators in the 11 Arab countries it surveyed grew by 16 percent in the period from 2013 to 2017.
However, according to Eyewa’s Boumediene, any rating of incubators and accelerators should be done by the entrepreneurs.
“I don’t think the World Bank is in good position to rate the incubators and accelerators. We need to do that for ourselves,” he told Zawya in an interview in September.
According to Sabah al-Binali, a prominent Arab investor and the chief executive officer of UAE-based consultancy firm Universal Strategy, a rating system is not required.
“I don’t think you need a rating system but I think you need just to learn to do your due diligence as an entrepreneur,” he told Zawya in an interview late last month.
“You don’t need yet another entity to sit and tell you what to do. You are an entrepreneur. You are an adult, go ask. Meet with the people who are there… and you will understand which ones are good and which ones aren’t,” he added.
City index: Arabia’s entrepreneurial hotspots
When choosing where in the region to base their business, entrepreneurs need to consider a number of factors, al-Binali said.
“I would pick a country that has infrastructure… as simple as roads and internet, and where the cost of the infrastructure is low and you have high skill sets. This gives us three cities: Sharjah (in) UAE, Manama (in) Bahrain and Amman (in) Jordan,” he argued.
“To me those are probably the three best, with strong infrastructure and they have good skill set(s). Strong infrastructure that is cost-effective infrastructure… So Dubai has strong infrastructure but it is not cost-effective for the start-ups. It is for big companies,” he added.
Dubai is known as the Arab region’s business hub. However, the 2018 Arab World Competiveness Report published by the World Economic Forum in August ranked Qatar as the most entrepreneurial state in the region.
The report used the Global Entrepreneurship Index (GEI) created by the Global Entrepreneurship and Development Institute, a London-based research group. It measured the overall entrepreneurial ecosystem in 137 international countries including 14 Arab states(3).
The GEI used 14 categories to rank nations such as the ease in becoming an entrepreneur,
the availability of capital from both individual and institutional investors and the countries’ attitudes towards entrepreneurship.
Qatar topped the Arab states on the index, followed by the UAE and Oman respectively. The report’s authors told Zawya in an email correspondence in August that Qatar outperformed in two categories on the index - High Growth, which according to the GEI, measures business intentions towards growth and their strategic capacity to achieve it, and Opportunity Startup, which measures how entrepreneurs are motivated by opportunity rather than necessity and government’s support.
“Our ecosystem is growing rapidly. Especially during this time because entrepreneurship is a priority in this country and there has been a lot of initiatives that support local sustainability,” Al-Mudahka, the CEO of Qatar Business Incubation Center, said.
“In the last ten years, local start-ups and SMEs have played a bigger role in the local market and that positive impact has led to more considerable support for start-ups,” she added. Al-Mudahka said her incubator takes in between 30-40 start-ups per year.
According to Boumediene, who initially started his company in the Dubai based incubator in5, and who was part of the Sharjah-based Sheraa accelerator, the UAE is a good base to start a business.
“If you look at the number of headquarters of large companies, or at start-ups being launched, or at funding, or government initiatives to support entrepreneurship... You find that these indicators show that the UAE is much more successful in attracting entrepreneurs, companies, talent and capital in the region. Globally we are behind, but in the region we are ahead.” he said.
The GEI report listed the strongest and weakest areas in all 137 countries it surveyed, including the14 Arab countries(3).
As well as citing high growth prospects for start-ups as Qatar’s strongest area, the GEI highlighted start-up skills as its weakest.
For the UAE, the country’s strongest area was its ability to develop new products and integrate new technologies, but the weakest was the strength of its technology sector and businesses’ abilities to absorb new technologies.
According to al-Binali, the region’s three biggest economies of Saudi Arabia, the UAE and Egypt each has areas of strength and weaknesses. “So Dubai, the strongest point is that the greatest and best talent is here. The challenge is it is quite possibly one of the most expensive in terms of being a venture capitalist. It is a great business environment for existing businesses, for SMEs and for large corporates, but for small (businesses) it is a big challenge.”
For Saudi, he said, “the strongest point for entrepreneurs is that this is probably the greatest opportunity available because it has been liberalising fast recently. It is a huge economy, so that is currently the strongest point. The challenge is that this has started recently, so it will take a bit of time.”
He said that Saudi Arabia has “some well-known, strong venture capitalists”, but added that it would take some time for the broader entrepreneurial community to build.
“Egypt has also a lot of talent and (is) quite large and it is also good at exporting. I remember when Egypt exported movies, I remember that every movie was Egyptian. So they know how to export… The challenge is that investor protection is weak…. When I put money in there, am I going to get it out?” he added.
Saudi Arabia has, over the past two years, introduced a number of social and economic reforms that included removing decades-old ban on women driving cars in the kingdom and reducing state’s spending on subsidies. It has also organised investment events led by the kingdom’s powerful crown prince Mohammed bin Salman aimed at attracting more foreign direct investments to the country.
Egypt had also implemented economic reforms that have included issuing a new investment law and floating its currency. However, prior to its latest programme of reforms, the country had previously implemented several restrictions on capital flows that had scared investors away.
The Arab competitiveness report has praised a number of recent financial decisions for improving the entrepreneurial climate in Qatar and the UAE, such as the passing of bankruptcy laws to make business failure less traumatic. Saudi Arabia and Bahrain passed bankruptcy laws this year, following on from Qatar in 2017 and the UAE in 2016.
A legal system that is sympathetic to business failures is an important part of building an entrepreneurial framework.
“Of course, I failed. It is part of the process or the journey,” said Ahmed-Jacob Aly, a Germany-based Egyptian entrepreneur who is currently the chief technology officer for INVAO, a Berlin-based start-up investment company that specialises in blockchain assets.
“It (failure) led me to where I am today,” he told Zawya in a video interview last week. He said any person looking to make an entrepreneurial journey needed to ask themselves some tough questions.
“How much of risk are you willing to take, expose yourself to? Are you committed enough? Dedicated and willing to keep trying until you make it work?”
Asked for brief advice to give to investors in Arab region start-ups, al-Binali said: “Forget the business plan”. For entrepreneurs, he added: “Learn about investors”.
(Reporting by Yasmine Saleh; Editing by Michael Fahy)
1. The 11 Arab countries covered in the Arabnet/ Dubai SME report are: The United Arab Emirates, Egypt, Lebanon, Jordan, Saudi Arabia, Morocco, Kuwait, Palestine, Algeria, Tunisia, and Bahrain. For the full report, click here.
2. The 16 Arab countries covered in the Magnitt report are: Algeria, Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Iraq, Palestine, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, and Yemen. For Magnitt’s press release about its 2018 Q3 report, click here.
3. The Arab countries covered in the Global Entrepreneurship Index are: Algeria, Bahrain, Egypt, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Tunisia and the UAE. For the full report, click here.
Our Standards: The Thomson Reuters Trust Principles
Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.
© ZAWYA 2018