Entrepreneurship might have been 'romanticised' but perhaps the region needs a new generation of investors
“Everybody wants to become a cupcake entrepreneur at some point,” Emirates NBD executive vice president Tariq Bin Hendi said at the Arabian Business StartUp Academy. His statement was welcomed with roaring laughter from the audience of startup and SME founders, their reactions a fitting testament to his main point: People have romanticised entrepreneurship.
Inexperienced youth who have been financially “guarded and shielded their entire lives,” Bin Hendi said, are basing business ideas on fads as opposed to a legitimate products or services.
Fahim Al Qasimi, partner at UAE-based corporate advisory and investment ﬁrm AQ&P, was harsher in his statements. “Go get a job,” he said at the academy, referring to amateur entrepreneurs who lack the experience to set up a business but do so regardless while using investor capital.
In an opinion piece to Arabian Business, Al Qasimi – an entrepreneur himself – said many startups will cease to exist in 2019, stating that claims of being the ‘next big thing’ will be dispelled.Failed startups will be the norm, and a handful of successful exits the exception, Al Qasimi said.
Indeed, the MENA region has seen plenty of failed startups. In a 2018 report by London-based data analytics firm Autopsy, in collaboration with Wamda, which analysed 60 failed startups in the region, the most common reason for failure for the small businesses was no market need (27.3 percent). It was followed by outcompeted and poor team (both 13.6 percent) and poor marketing, legal challenges and a lack of local market awareness (each 9.1 percent). Both banks and investors have claimed to be at the front seat of every initiative supporting SMEs, despite the region having a 300 percent funding gap, with only one in five SMEs in the region having access to a loan or line of credit. The SME credit gap in excess of $260bn led the Arab Monetary Fund (AMF) in 2017 to urge banks to help fill the gap.
The region is missing educational elements such as world-class research universities and programmes which are crucial to developing the right skills and entrepreneurial mentality
While Bin Hendi blamed external regulatory elements for the lack of bank support, stating that many regulations are not bank imposed, Al Qasimi justified investor hesitance by highlighting startup failure rates, citing high valuations, lack of exit options and clear routes to profitability as reasons.
Najla Al Midfa, a board member at United Arab Bank and CEO of Sharjah Entrepreneurship Centre (Sheraa), told Arabian Business last year that she has seen banks “burnt” by SMEs in the region, but urged both parties to find a “middle ground” to funding. To be fair to both banks and investors, 2018 saw a record number of 366 startup deals take place across MENA, amounting to $893m of total investment, according to Magnitt, and a record 31 percent rise in total funding in regional startups from 2017 (excluding a $200m fundraise by ride-hailing app Careem).
But the fact of the matter is that the region’s SME credit gap remains in excess of $260bn. As Wamda Capital managing partner Khalid Talhouni said at the academy, a hype around entrepreneurship does not explain why the region is trailing the rest of the world, with the fraction of VC investment in the region as a percentage of GDP among the lowest in the world. “There are great businesses which should get access to debt but can’t because they’re under five years old or can’t give a personal guarantee,” he said.
Should legitimate business ideas suffer because of a wave of fads? Or should we, as Al Midfa pointed out, “create the next generation of investors” who understand how to invest in startups? After all, just as it takes a skilled entrepreneur to establish a successful business, so it takes a skilled investor to recognise the fads from the exceptions. And there will always be fads.
This is not to say that entrepreneurs should not be held accountable for unsustainable businesses, but one cannot deny that the region is missing educational elements such as world-class research universities and programmes which are crucial to developing the right skills and entrepreneurial mentality. The solution? Perhaps it is the relationship between investors, banks and SMEs that needs a little more romanticising.