By Tarek Ahmed Fouad
Tarek Ahmed Fouad, a Dubai-based serial entrepreneur, analyses the start-up scene in the uae and offers a few recommendations for the country to move forward
According to the World Bank 2016 report, the UAE has ranked 31st in the global index of ease of doing business. In the Global Entrepreneurship and Development Index (GEDI) report, UAE has ranked 19th for entrepreneurial attitude, activity and aspiration, and it ranked 47th in the Global Innovation Index report (INSEAD) for innovation performance.
With the UAE aiming to be among the top 10 countries, if not first in every category, it is believed that focusing on entrepreneurship will enable the country achieve that by 2021.
So, what is currently happening in this space?
Any entrepreneurial ecosystem can be summed up in main six pillars – policy and regulatory frameworks, finance and capital, culture, support institutions and jobs, human capital, and finally a network and a market for innovation.
Policy and regulatory framework
Entrepreneurship comes with very high risks and failing rates and so does innovation. There is simply no way that you can be right all the time specially when doing something completely new.
A topic that is still very important and has been covered extensively in 2016 is the UAE’s insolvency and bankruptcy law. Much like the US Chapter 11 bankruptcy law, the law gives you enough time to restructure internally without the need to sell any assets at lower market price.
One very famous example is the Arcapital’s study case, where the Bahraini headquartered company, which has its office in New York too, filed for bankruptcy amid the crises. A year after tight and regulated restructuring, Arcapital came back stronger closing deals surpassing $100 million in projects in the UAE.
The World Bank’s Doing Business 2016: Measuring Regulatory Quality and Efficiency report, published in October, claims that the lack of a modern restructuring law is one of the biggest barriers to effective business in the UAE.
The report found it is relatively easy for people to set up a company in the UAE compared to other GCC states, yet they face difficulties when confronted with debtors in financial trouble, and further challenges if they run into a sticky financial situation themselves.
The report claims that in the UAE it takes on average 3.2 years to complete an insolvency process with costs amounting to 20 percent of the debtor’s estate and an average recovery rate for creditors of 29 cents on the dollar.
By comparison, it takes on average 2.8 years to complete an insolvency process in Qatar, costs amount to 22 percent of the debtor’s estate and the average debt recovery rate is 56.2 cents on the dollar — almost 50 percent higher than in the UAE.
Compare that with average figures for OECD countries: 1.7 years, 9 percent and 72.3 cents on the dollar. For small businesses, the difference between being able to restructure in difficult times and not is the difference between make or break.
Last autumn, UAE Banks Federation chairman Abdul Aziz Al Ghurair warned that an increasing number of small business owners were fleeing the UAE leaving behind an estimated $1.4bn of unpaid debt.
This is bound to be alarming for a country that is working hard to encourage entrepreneurship and economic diversification in an era of persistently low oil prices.
Finance and capital
Dubai SME has published this year its first authoritative study on equity investment in the UAE.
This is a vital step towards understanding the SME market, the existence or the lack of players and the enablers in the market. It will also shed light on the difficulties SMEs face while raising capital.
With the high operating and starting costs that SMEs find at the beginning and while building their business case, no wonder that the primary reason SMEs availed equity finance was to manage operational costs rather than fund their strategic growth/expansion plans.
The rise of incubators and accelerators in the UAE is definitely a good sign promising a much leaner start for businesses, but the cost per head and the rent for some co-working spaces are equivalent to having an office which, in most cases, is not needed and adds an extensive amount of expense burning the start-up’s capital.
We have seen spaces opening, like Astrolabs, The Cribb and Flat6Labs, that focus on scalable tech businesses that can attract investments and become success stories. With these spaces having access to Silicon Valley individual investors and many other private equity ventures, it is key to understand that the majority of SMEs currently find their finance outside the UAE.
This in return comes with the risk of SMEs migrating to countries, like the US, to grow and access finance and easier business policies, affecting the market of job creation in the UAE. Companies like souq.com, Fetchr and many others have concluded investments with venture capital firms outside the UAE.
However, the rise of venture capital and angel investments is inevitable. In our space just to name a few there is Wamda Capital, Womena, Emerge Ventures, EnvestorsMENA and Beco capital. We have also seen a rise in the amount of crowdfunding platforms led by Eureeca, AfkarMena and Fundrise, the first real estate crowdfunding platform in the MENA region. The list goes on and it is still hard to access finance, especially at early stages. With limited intake of start-ups from VC and angel investors, it is a no surprise that currently the demand for capital is much higher than the supply.
It is certain that in this coming year, more and more VC and angel investors will find the UAE and GCC a new home.
It is fair to say that the UAE has a phenomenal culture towards local entrepreneurship.
Starting from government initiatives and entities purely looking after social and commercial entrepreneurship, such as the Khalifa Fund for Enterprise Development, Dubai SME, the Emirates Foundation for Youth Development, to incubators and accelerators such as The Impact Hub, GlassQube, and other spaces.
We have seen local start-ups, such as souq.com, cobone.com, dubizzle.com, MarkaVIP, Fetcher, and many others, setting the standards for successful start-ups to further disrupt the entrepreneurial space.
We have also seen the rise of the Emirati entrepreneur, including Maryam Matar founder of the UAE Down’s Syndrome Association and the UAE Genetic Diseases Association, Alia Al Mazroui, founder of the Little Haven Nursery, and many others.
We have also seen the recent collaboration between the Expo 2020 Dubai Higher Committee and Wamda to promote collaborative entrepreneurship through intrapreneurship programmes in companies and universities and through direct investments and collaboration with local SME community.
There is still a long way for the UAE in entrepreneurship, but there are clear signs that it is heading towards the right direction.
About Tarek Ahmed Fouad:
Tarek Ahmed Fouad, director at Lean International Group, is a Dubai-based serial entrepreneur with a passion to setup and scale idea labs at universities and companies that believe in bringing up the next generation of entrepreneurs and leaders. Fouad also mentors social entrepreneurs at the Emirates Foundation of Youth Development and Impact Hub Dubai.