Are entrepreneurs in the UAE more risk-averse than investors?

Prashant K. (PK) Gulati, a technology innovator, angel investor, and mentor, and Amir Farha, co-founder and managing partner at BECO Capital, shared their thoughts on the issue at the final Arabian Business StartUp Academy of our 2016 series
Are entrepreneurs in the UAE more risk-averse than investors?
Prashant K. (PK) Gulati (L) and Amir Farha (R) making opening remarks.
By Tamara Pupic
Wed 11 Jan 2017 12:11 PM

“In a city like Dubai, if you are a start-up, you have no choice but to go regional or international because the local market is small. It should be a part of your DNA and then the question is ‘when’ more than ‘if’,” said Prashant K. (PK) Gulati, a technology innovator, angel investor, and mentor, in an on-stage interview at the recent Arabian Business StartUp Academy.

Themed ‘Start-Up Lessons from Other Markets,’ the fourth and last edition of the Arabian Business Startup Academy in this year’s series hosted Gulati and Amir Farha, co-founder and managing partner at BECO Capital, to advise entrepreneurs on how to take their businesses to the next level and venture into other regional and global markets.

Once they have built and maintained a local customer base, many entrepreneurs consider taking the next step - expanding across borders. The Wamda Research Lab’s study – “Enhancing Access: Assessing the Funding Landscape for MENA’s Start-ups” – stated that 76 percent of the surveyed MENA-based companies planned to open new offices in the next 1-2 years, especially in KSA and the UAE.

According to our guest speakers, the chosen business model determines the timing of this decision. “A good example is Careem versus PropertyFinder, which are two of our portfolio companies,” advised Farha. “You have Careem which has taken a much more aggressive expansion plan. They have gone across cities and they have taken more of a market share approach, where they are now in more than 45 cities in the span of a few years. PropertyFinder is much more locally ingrained. They haven’t necessarily focused on scaling up into new markets as much as Careem.

“Looking at it from an expansion plan perspective, for the PropertyFinders of this world that are locally entrenched, our advice is to solidify their position in their home market before they look at expanding.

“If you are a Careem model, where you actually benefit from getting into new markets, the sooner you get there, the better, because it increases your value proposition.”

Careem, a taxi-booking mobile application launched in the UAE, has grown from a simple idea to a vast company that has come to operate in 47 cities in less than four years. It recently launched operations in Istanbul, Turkey, with plans to increase presence in 15 new cities in Saudi Arabia, Egypt and Pakistan. It is reportedly also considering a possible expansion into East Africa.

As part of their expansion plans in Saudi Arabia, Careem acquired Enwani, a local home delivery service, back in 2015. Similarly, Dubai-based Propertyfinder Group opted to acquire Moroccan property portal SeleKtimmo as part of its plans to become the dominant player in the kingdom.

“We had an experience early on in our investment life, where we invested in a Dubai-based company and they wanted to expand into the Saudi market,” Farha advised the attendees on how to choose an appropriate market entry strategy.

“What they did was that they actually hired somebody on the ground to roll out their business. What we found with that strategy was that because of the distance between them, the founder was not able to monitor or kind of push them to build his business there.

"After three months, they realised that they were not able to create the traction they needed for it to be a viable expansion, and they had to let go of this particular individual.

“What we saw in that example, which is what I definitely recommend to most of our portfolio companies, was the different outcome between hiring people versus going on the ground and doing it yourself.

“We also have examples, such as PropertyFinder who acqua-hired an entrepreneur who was trying to build up the same business that they were doing in Dubai. That has worked very well for them because that individual is entrepreneurial and he understands what it takes to build a business.”

To get their expansion on track, entrepreneurs turn to investors not only for funding but also for help and guidance. When deciding whether to support a start-up’s business expansion plans, Gulati and Farha agreed, investors bet on teams capable of delivering results.

“We look at the team, how focused and driven they are, how passionate they are about solving the problem that they are tackling, and what kind of domain expertise they have in that particular area,” said Farha.

“Then we look at the size of the market and whether it is a big enough problem that they are solving. We are mainly focused on the Middle East, so we look at the size of that opportunity in the region. If it is big enough, then it is exciting for us.

“Then we look at defensibility and how you create it. Also, if we are aligned with the management on focus and strategy, then it makes the case for a much better relationship going forward.”

When asked whether entrepreneurs who target to expand abroad should turn to foreign investors to support their market entry strategies, Gulati said: “I think it depends more on what you do than on your choice. I have seen very few people who have the luxury of having to choose between different options. But, it is usually better to be well funded when you go for a fight.

“One good example is Zoomato. I still remember when they held a press conference here and said: ‘We are in 12 cities in India and now we have come to set up our restaurant discovery site in Dubai. This is our first international foray, but we already have 5,000 restaurants on our platform, we are number one on Google Search, and we have already got $2mn from our investors to set up our office here.’

“That is a great place to start this fight.

“My personal opinion would be that if you are going into a new market, go prepared. However, your future growth in that market will depend on local investors.”

Talking about the costs of international growth, the conversation with Gulati and Farha turned to the topic of start-up valuations. Globally, entrepreneurs have seemingly become more realistic about their ventures. KPMG and CB Insights recently reported on start-ups’ facing slowdown in global venture capital investments, with an increased number of entrepreneurs accepting lower valuations to raise funding.

“When we talk about valuation, it is like a dance between two people, but it takes time to sink in,” said Gulati. “If you read TechCrunch in the morning, stating that a similar site as yours has raised this or that amount, and then you come and say that you are worth the same, it really does not work that way. You are only worth what people will pay for. That’s it.”

“What we typically find is that entrepreneurs in this part of the world tend to be valuation sensitive,” added Farha. “We try to educate them, but the problem is that some investors, who are not necessarily knowledgeable in the technology space, will come to them and write a million dollar cheque. We find ourselves trying to explain to entrepreneurs that this guy will give them money but that there is no real value that will come with it. The dance for us in this part of the world is more about getting people to realise that they need smart money. They should not be valuation sensitive because that kind of money will only get them where they want to go much faster.”

Most of to those young entrepreneurs choose to set up their business in the UAE. The country is home to the highest proportion (63 percent) of millennial entrepreneurs – business owners aged under 35 years – some way ahead of mainland China and Hong Kong, which both have 44 percent, according to The Essence of Enterprise report by HSBC.

To attract them, the UAE has launched a number of initiatives to make the local business environment friendlier to start-ups. The inaugural Ashish J Thakkar Global Entrepreneurship Index, launched by serial entrepreneur Ashish J Thakkar, founder of Mara Group, ranks the UAE among the world’s top 20 nations offering the best environment for entrepreneurs.

Gulati concluded the discussion by confirming that the country’s start-up ecosystem had also matured from entrepreneurs focusing on business models proven in other markets to them becoming more adventurous and ‘trying to win this technology battle.’

“The trend that I see is people shifting more from B2C to B2B, and WrappUp [a meeting productivity app developed in Dubai in 2015] is a good example of a successful B2B model,” he said.

“People always say that investors are risk-averse, but I think that entrepreneurs are risk-averse. The consumer business is built on a freemium model, and most people have realised that that model does not work in this part of the world unless it is very well funded.

“Since not that much funding is available, this model does not work that well. So, you start seeing entrepreneurs moving towards to a model where they can see a revenue potential more quickly.  So, you will start seeing people looking at smaller, far more innovative and technology-focused markets.

“That is far more valuable, and those companies have a bridge to the world. For example, the problems relating to summarising meeting minutes, which Wrappup is trying to solve, is a problem relating to any language and in any part of the world. That is one trend that I see.

“The second trend that I see is that we will see more people accepting that they do not have to build a $1bn start-up.

“Why should you not look at a start-up which makes $3mn a year to take a $1mn home rather than building a $1bn start-up and take less home.

“People need to start looking at viable businesses rather than trying to be that unicorn start-up.”

The free two-hour workshop was organised in partnership with the Dubai Chamber of Commerce and Industry and ADIB Business.

How to choose your investors wisely?

Prashant K. (PK) Gulati: “The most valuable investor for me is a person who invests his/her time. I think that the term mentor is misused massively in this ecosystem. You should look for an investor who wears multiple hats, somebody who can advise you and help you to go to the next level. It should be a person who will not be worried just about the return on investment, but what is the impact of that investment.

“In most cases, the entrepreneur is young, and he/she does not necessarily have enough experience. So, I would rather take the money from somebody who would commit to invest time and support me. I personally dedicate a lot of my time to this ecosystem. I always tell people: ‘I will give you the first meeting for sure, but the second meeting depends on you.’

“So, look for somebody who will invest time and effort in you rather than just money. The ‘just money’ approach comes much later, when you become a very large company and you start getting larger cheques, and it really becomes just a financial investment.”

Amir Farha: “I think that there is a thin line because investors can sometimes get too involved in a business and can pretend that they know in which direction it can go, and there are the ones who just give you the money, sit back and let you run the show.

“We try to be a balance in between.

“We invest a lot of time, and the only challenge that we have as investors is that time does not scale. We cannot give endless hours to every single company, but we try to be smart about how we add value. We really focus on the challenges our entrepreneurs are having at that moment. If we don’t have domain expertise in some cases, we bring in experts.

“Outside of that, it is that entrepreneur’s story and we don’t get involved unless he/she really wants us to.”

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