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Entrepreneurship, innovation become economic growth drivers in Saudi Arabia

Entrepreneurship and innovation have become the new economic growth engines of Saudi Arabia. Tamara Pupic analyses how encouraging new social attitudes toward the kingdom’s innovative youth is about to enact change for the better.

Entrepreneurship, innovation become economic growth drivers in Saudi Arabia

Most start-up founders in the region ponder the question of how to scale their ventures into Saudi Arabia despite daily newspaper headlines potentially leading them to different conclusions since June 2014.

One of the world’s largest oil exporters and the region’s only member of the G20 group of industrialised countries, Saudi Arabia has been hit hard by the price of barrel oil plunging 70 percent due to the recent growth in non-OPEC production and the development of shale oil.

Having cut the country’s sovereign credit rating, Standard & Poor’s ratings agency gave a forecast of Saudi Arabia’s average growth declining from 3 percent to 2 percent from 2016 to 2019. The IMF has projected that the kingdom’s economy will grow 1.2 percent this year.

Due to the last year’s record budget deficit of nearly $100 billion, the oil-reliant country has sought to remedy the problem by announcing various austerity measures, including spending and subsidy cuts.

More recently, it has been reported that the Saudi government is looking to borrow billions of dollars to shore up its public finances.

However, the country is not without alternatives.

In line with the famous adage that necessity is the mother of invention, the current problems of the Arab world’s largest economy could spur its efforts to develop a more knowledge and service-based economy.

One woman has already witnessed the awakening of young Saudi entrepreneurs. “It is something that we always wanted because we thought that if Saudi entrepreneurs woke up, it would be a very good sign for the region,” says Hala Fadel, partner at Leap Ventures, a Beirut-headquartered venture capital firm, and the chair of the MIT Enterprise Forum (MITEF) of the Pan Arab region, one of the 28 worldwide chapters of the MIT Enterprise Forum Global and the organisation behind the MITEF Arab StartUp competition.

For this year’s ninth edition of the MITEF Arab Startup competition, whose final winners’ ceremony will be held at King Abdallah Economic City in Saudi Arabia this month, they received a record of nearly 6,200 individual and team applications, comprising over 16,500 entrepreneurs from 21 Arab countries.

“What was quite noticeable this year is that Saudi Arabia used to account for 5 percent of total applications and it is at about 20 percent this year,” Fadel says. “So there is a huge jump.”

According to a recent survey by HSBC’s private banking arm, Saudi Arabia and the UAE have the youngest successful entrepreneurs in the world with 63 percent of young business owners with a turnover of more than $6.5 million in the two countries being under 35. The survey further points out that Saudi and Emirati entrepreneurs launch their businesses when on average 26 years old, much younger than anywhere else in the world.

The latest statistics dispel the stereotype that young Saudis - who represent around 50 percent of the country’s population - generally lack the education and technical skills the private sector needs and traditionally choose the security of public sector jobs.

“I find entrepreneurs in Saudi Arabia very innovative. They embody disruption. You do not expect such profiles in Saudi. They are so social media and technology savvy, and because they break the image we have about Saudi Arabia being a traditional society, they are both conventional and unconventional at the same time,” says Fadel.

“I think this gives a lot of hope about the future of Saudi Arabia because this youth that we are seeing is very talented, very driven. Of course, they are first time entrepreneurs so they need coaching and help, but they play very well with their red lines. So they never go beyond those red lines, but at the same time they innovate and they stand out in terms of creativity.

“I would say that we need more of them because from a size perspective Egypt is still the number one pool of entrepreneurs, and I think we can expect Saudi Arabia to come close to that. We need more Saudi entrepreneurs, more successful ones. The ones we are seeing are still early stage so this needs to grow.”

Saudi Arabia is a high growth market which offers continued opportunities, firstly due to its dynamic consumer market. According to Euromonitor International the population of Saudi Arabia will have reached 39.1 million, an increase of 24.1 percent from 2015, by 2030.

Bader Alzahrani, managing director at Endeavor Saudi Arabia, believes that Saudi entrepreneurs are aware that they have an edge compared to other regional entrepreneurs. “I have never heard of a Saudi who wants to go to Dubai to do business,” he says. “They always want to do it locally, but they do want to establish a connection to Dubai. Saudis tend to like their environment more because it is easier for them to sell, and similar. They have developed a deep understanding of their market.”

Previously, Alzahrani was heading the SME development and debt financing division at the Saudi Aramco Entrepreneurship Center (WA’ED), where he worked directly with more than 200 start-ups and managed a portfolio exceeding $50 million.

He explains that market dynamics in Saudi Arabia differ from the UAE and other neighbouring countries. “You will not find a non-Saudi who is an entrepreneur [in Saudi Arabia] because, first of all, they are not permitted to do business as easily as in Dubai,” he says. “Secondly, Saudis are entrepreneurs by nature because their ancestors and all the [consequent] generations have had that entrepreneurial spirit in them. If he likes the idea and if it is aligned with his passion, he will do it. This is from my observation in the past five years from engaging with different people.

“The good thing about the ecosystem is that there is not much competition, so everyone is saying: ‘whatever you open, it will make money as long as you are doing it the right way and if your employees don’t steal from you.’ That is a good thing, you can knock and open doors.”

“There are many entrepreneurs in Saudi, but they may not have the right entrepreneurial culture that they can innovate and take their product to the next level, meaning that they lack the right advisory and the right mentorship and the right platform to navigate their business toward the right objective.

“The platform in Saudi is now growing toward helping SMEs and entrepreneurs and that is why the tolerance of failure is higher in Saudi than in Dubai.”

Saudi Arabia is ranked 49th in the most recent World Bank’s measurement of business-friendliness, with only the UAE among other regional countries earning a higher ranking.

The government has implemented a range of initiatives to develop an entrepreneurial culture in the country, starting with education. In 2012 the kingdom announced its National Strategy for Transformation into a Knowledge-based Economy by 2030. The King Abdullah University for Science and Technology (KAUST) stands out among the country’s many new scientific institutions and research centres. Aiming to push innovation forward, in 2015 KAUST invested $80 million in purchasing Shaheen-2, a brand new supercomputer, bringing the total amount spent by the university on supercomputers to approximately $150 million.

For early-stage entrepreneurs, the country has over 40 business incubators and many accelerator programmes, of which around 50 percent have some form of government affiliation, stated Nader Ajami, strategic planning director at Ogilvy & Mather Riyadh, in an article published on the Wamda platform.

Launched in 2012 as an initiative of the King Abdul Aziz City for Science and Technology (KACST), Sirb, a Saudi angel investment network, aims to provide financing for idea-stage start-ups. Opal is another fairly active angel investor group in the kingdom.

In 2015, the development of the SME sector was boosted by the formation of the Council of Economic Affairs and Development and the SME Authority. In addition, the SME Loan Guarantee Programme (KAFALAH), established in 2006 through the Saudi Industrial Development Fund, acts as a guarantor to commercial banks providing credit to SMEs.

In addition, Alzahrani reveals a special type of support enjoyed by Saudi entrepreneurs in their local market. “If you are a Saudi and you are not a government employee, you can get a commercial registration in like two minutes,” he says. “The complications will come after when you need visas, work permits and all these things because you then need to deal with different governmental entities. But, nevertheless, it is not that hard to set up a business in Saudi.

“What I experienced whenever I knocked on the doors of governmental entities and they saw a local Saudi, they sympathised with me and gave me business. So in Saudi Arabia we have that sense of helping locals. That type of engagement you will not find anywhere except in Saudi. So it is easy to do business, you just need to be persistent and get the right advice.”

Saudi women have also been persistent.

For the first time in the country’s history, women in Saudi Arabia cast their votes in municipal elections at the end of last year.

Various reports show that over 60 percent of all Saudi university graduates are women. Unfortunately, the reports also indicate that the majority of them are still unemployed. However, statistics from the Al-Sayedah Khadijah Bint Khuwailid Businesswomen’s Centre show that 63 percent of Saudi women have unregistered but successful businesses. They mainly rely on mobile phones and personal computers to do business.

“Saudi entrepreneurs are much more focused on the local Saudi market. In Saudi, the applications for Flat6Labs are all from Saudi Arabia. Very few people apply from outside to move to Saudi. However, there are advantages because I think that 40 percent of our founders there are women,” says Ahmed El Alfi, founder of Cairo-based venture capital firm Sawari Ventures and Flat6Labs, a regional start-up accelerator programme founded in Egypt. Flat6Labs Jeddah is the first start-up accelerator founded by Qotuf in Saudi Arabia.

“It is because Saudi women are very talented and probably do not have as many job opportunities in Saudi as women do in other countries. So Flat6Labs presents a great opportunity and attracts top talent.”

According to the Boston Consulting Group’s global 2015 BCG e-Intensity Index, a tool that measures the maturity of 85 internet economies based on enablement, engagement, and expenditure, Saudi Arabia has a vast internet potential. The country ranks 45th among 85 internet economies. However, that digital potential is still considered relatively untapped despite the country’s high GDP per capita.

“I think that there is a tension between the educated youth who want the country to move forward and the very conservative people both at the bottom and at the top of the pyramid,” says Fadel, explaining that the positive impact of young Saudis who study abroad and come back to the country is still largely underestimated.

“I think that through entrepreneurship you can find a constructive outcome to this tension, but to be able to have that you really need the government and all the entities and even high net worth individuals to invest in their youth.

“They need to invest in technology and entrepreneurship to really empower this very constructive Saudi generation that comes up with ideas.

“They come up with ideas and they are disrupting the way they are doing business, but they are not disruptors of the social values. I think that this is very important because it could be a soft revolution through entrepreneurship - a revolution of the values of hard work, openness, innovation, learning, education, science and technology, and so on.

“So this tension is really there even among women entrepreneurs. It does not mean that they are happy with their current context, but they are focusing more on building a business than on disrupting the values.

“I think it is a byproduct of entrepreneurship to disrupt the values. The main goal is really to create businesses and jobs and innovation, but as a byproduct of that the values will change.”

Fadel further points out to a problem presented in an IMF research report on venture capital investments as a percent of GDP in 2014 which showed that Saudi Arabia invested only 0.02 percent of its venture capital dollars - 0.03 percent in the UAE - into digital and technology sectors. In comparison, the US invested 0.30 percent of its venture capital in the same sectors in 2014.

Looking at the start-up ecosystems being developed in each of the regional countries, Fadel concludes by calling for more cooperation among them. “I think there needs to be much more coordination between the ecosystems so that the region at least from an entrepreneurship and digital perspective makes one as opposed to many,” she says.

“I think that any government in the region who would want to invest in entrepreneurship should think of it as one region.

“You see a lot of programmes to invest in Emiratis or Saudis, but it does not work this way because talent is the raw material of successful entrepreneurship and it can be Egyptian, Saudi, or Emirati.

”But you cannot put an identity on this talent.

“As they are present in the region I think that we should be agnostic to where these people are coming from because it is difficult enough to recruit good people so if you add a constraint that they need to be from here or there, it will not work.”