Beginning of Angel investing in UAE & Gulf

Any developing economy, especially ones heavily reliant on oil, need to diversify in order to help strengthen the country's knowledge-base and minimise impact from external events such as the credit crunch.

In October 2007, HH Sheikh Mohammed bin Rashid Al Maktoum announced the opening of the Mohammed bin Rashid Al Maktoum Foundation, which was built to support future generations in devising sustainable homegrown solutions to regional challenges by spreading knowledge throughout the region and fostering ideas and innovation.

The region is facing high unemployment (15 per cent - among the highest in the world) and as such, the MBR Foundation is mandated to create a wealth of regional job opportunities during the next decade.

This was the first step towards diversifying and growing Arab economies, and helped pave the way for the creation of the region's first Seed Capital fund and Business Angel network, the Arab Business Angel Network (ABAN).

Angel Investing has helped create overseas companies such as Pret A Manger, Google, Skype, HP and PayPal. In 2007, a total of 57,120 entrepreneurial ventures received $26bn in Angel funding in the US, and the number of active investors was 258,000 individuals.

These investments were made across software, healthcare, biotech, retail, media and industrial/energy sectors, and have contributed strongly to job growth by creating approximately 200,000 new jobs in 2007.

In the Arab world, raising money for early stage businesses is very difficult due to the limited number of sources available - friends, family and banks.

In addition, there are only a handful of venture capital funds that exist, restricting follow-on funding for entrepreneurs and requiring them to try and raise larger amounts of capital at one time, which is more difficult. This environment is not conducive to supporting growth of startups and often ends up with many entrepreneurial failures because of the lack of financial support.

The concept of an Angel investor is relatively non-existent, and entrepreneurs have to seek potential investors one at a time which is very time-consuming. For the few Angel investors that exist, they find it hard to independently verify the assertions of the entrepreneurs, negotiate valuation and devote time and effort to due diligence.

This is a very similar culture to what existed in the US in the late 1980s and early 1990s, until the launch of the Band of Angels later that decade. Since then, more than 350 Angel groups have been formed to fill this equity gap.

Most entrepreneurs in the Arab world have a fear of failure partly due to lack of financial support and a poor regional track record of success. Investors, typically high net worth individuals, find it difficult to trust entrepreneurs with their capital, do not have the time to get involved in supporting startups, and invest in other asset classes that they feel will generate higher returns, including real estate and private equity funds.

One of the main barriers behind the growth of seed capital and Angel investing in the region is the poor quality deal flow resulting from the lack of adequate research and development, poor education and lack of innovation.

With investors targeting annual returns of over 25 per cent per investment, this makes it difficult for them to identify any appropriate high growth, early stage ventures to fund. However, this culture is changing as we speak.

Taking the UAE as an example, recent recessions in Europe and the US have had a detrimental impact on asset prices globally, and funds and financial institutions are undergoing tremendous restructuring. Investors in those sectors have been hit hard and have lost a lot of confidence, presenting an opportunity for Angel financing to become a more attractive offering.

Although Angel investing is still at an early stage of development in the region, we have witnessed many organisations achieve tremendous success, including ABQ Zawya, Bayt.com, NavLink, Freej and Aramex.

Governments are starting to invest heavily in supporting startup companies through establishing local incubators, providing grants and holding business plan competitions across the region. New business Angel networks are being formed in Jordan, Lebanon, Egypt, Qatar and Saudi Arabia with the help of ABAN.

Furthermore, the recession in the US and Europe has lowered the valuations for startup companies, presenting even better investment opportunities to Angels.

This has also influenced Western-educated, Arab entrepreneurs in wanting to move back to the Arab world and set up their businesses, with similar instances occurring among European and US startups who are finding it difficult in their countries and want to move to a region with more liquidity, lower costs for labor and attractive tax benefits.

With all this in mind, it looks like the Angel investing landscape in the Arab world is heading on an interesting journey with backing from socially responsible businesses and non-governmental organisations, an increase in quality of entrepreneurs and ideas, and an awareness that is being created by local and regional Business Angel networks in the region.

Who knows, perhaps one day we may see a company as successful as Google coming out of the Arab world.

Amir Farha and Walid Hanna are both members of the Young Arab Leaders group.

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READERS' COMMENTS

Islamic investment
Posted by J on Tuesday 3 March 2009 at 22:34 UAE time


How will this work with Islamic investment procedures that have a similar structure in some ways. For instance, no interest rates, but profit sharing, like Musharakah agreements.

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