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Mon 27 May 2019 12:33 PM

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Unlocking value for Arab tech start-ups

Technology start-ups can unlock broad economic gains for the Middle East, but in order to do so, they require a supportive start-up ecosystem. Three factors must come together to enable the creation of such an environment

Unlocking value for Arab tech start-ups

Yesterday’s start-ups are today’s household names. Nowhere is this more visible than in the success of Careem. The ride-sharing app, launched in 2012, was acquired by global rival Uber for $3.1bn in March after just seven years in operation.

That single purchase was triple the $900m invested in 386 start-ups across the Middle East in 2018; itself a 31 percent increase in funding over 2017 and a new record.

Those figures clearly demonstrate the kind of value technology companies can generate – value that is now being created here in the Middle East, thanks to a perfect amalgam of factors being assembled by progressive government policies, venture capital funding, an educated and skilled workforce, a future-ready digital infrastructure and growing regional market demand.

Fledgling companies need a nest within which to grow and test their wings. The entrepreneurial ethos of Silicon Valley has engendered the growth of numerous household names, among them 49 Fortune 1000 companies. A similar ethos is becoming visible in Gulf economies such as the UAE and Bahrain, and wider afield in Lebanon and Egypt – not least because policymakers are keen to unlock the potential benefits of the fourth industrial revolution.

Government intervention

Creating a start-up ecosystem requires government intervention, an infusion of capital and social participation. Countries such as Bahrain, whose digital economy is expected to top $419m by 2021, have already been able to cut the red tape involved in starting a new business and move several essential government services online.

Already in fourth place in the UN’s global index for telecom infrastructure, the kingdom will extend that lead when it becomes one of the first places in the world to roll out 5G, an internet protocol 20 times faster than 4G. In addition, rates for visas and employment permits have been slashed, while infrastructure costs and utility rates remain among the lowest in the region.

Together, these factors position the kingdom as a potentially inexpensive test market for the Middle East, with the total cost of operating an ICT business 16 percent lower than the rest of the GCC. In fact, with its access to large adjacent markets and access to capital, as well as its world-class expertise in financial markets, leading emerging markets internet investor Rise Capital recently highlighted Bahrain’s potential as a tech hub for the Middle East, in the same vein as Singapore in Southeast Asia.

Access to funding is crucial if start-ups are to survive early challenges and scale up. Rather than hand out lifestyle subsidies, governments have begun to establish investment funds, often with the help of the private sector.

In Morocco, the $72.5m Innov Invest Fund, created with assistance from the World Bank, is part of the nation’s Caisse Centrale de Garantie (CCG) strategy and has disbursed $4.8m to 68 start-ups over the last two years. Lebanon’s Circular 331 has set aside $400m in start-ups with the aim of halting the Lebanese brain drain. In Bahrain, the $100m Al Waha Fund of Funds has already allocated 45 percentof its endowments.

Social inclusion

Start-up ecosystems must also foster social inclusion. On this front, the Arab world is witnessing a widescale transformation, although some countries are further ahead of others on the S curve. By one widely watched metric, Arab women are better educated than before, and more of them are entering the workforce, for example.

While Saudi Arabia’s recent reforms are a case in point, in the UAE, 43 percent of women in the workplace hold a bachelor’s degree as compared to 23 percent of men, while 70 percent of coders in Bahrain are female. On a separate note, with 100 percent internet penetration in countries such as Saudi Arabia, the UAE and Bahrain, the appetite for technology is strong; for the first time last year, technology was the start-up sector of choice for Arab youth in an annual survey conducted by the communications firm Asda’a Burson-Marstellar.

With a strong social appetite, broad availability of funding and a reliable, world-class digital infrastructure, more regional firms could soon follow in the wake of Careem’s seven-year success story. But it is the nation that best combines these building blocks into a supportive start-up ecosystem will be able to unlock the greatest value for its people – and by extension, for the Arab world.

Arabian Business digital magazine: read the latest edition online