By Neil King
A quartet of finance and law experts discussed how the region’s entrepreneurs could blossom, focusing on the continuing issue of access to funding, and how to increase the amount of venture capital being invested
Governments across the Middle East and North Africa are keen for the private sector to expand as they seek to diversify their economies and create jobs for youthful and fast growing populations.
But can government action really aid the process?
Earlier this year, Dörte Höppner, chief executive of the European Private Equity and Venture Capital Association (EVCA); Lina El-Zein, director of the MENA Private Equity Association (MENA PEA); Dr Helmut Schuehsler, CEO and chairman of TVM Capital Healthcare Partners; and Ayman Khaleq, managing partner (Dubai) at Morgan, Lewis & Bockius LLP (Morgan Lewis), an international law firm, met to discuss how entrepreneurship is developing across the Middle East and North Africa (MENA).
Across the MENA region, the UAE and Qatar are considered among the most favourable markets for establishing and operating a company. In its Doing Business report, the World Bank ranked them as 23rd and 48th respectively among 189 countries worldwide for ease of doing business in 2014.
However, access to funds remains a critical issue for small and medium size enterprises (SMEs) throughout the MENA region, where nearly 63 percent are unable to access start-up capital, according to the International Finance Corporation.
A recent survey by the Union of Arab Banks found that only 8 percent of all lending goes to SMEs in the MENA region, compared to around 22 percent of bank lending in Western developed economies.
The UAE is now home to a number of accelerators and incubators which help small companies to grow, such as Afkar.me, andTurn8, as well as free zones such as Dubai Silicon Oasis, that encourages technology-based start-ups, providing equity funding of up to $80,000 along with mentorship and legal support. In Abu Dhabi, twofour54’s accelerator Ibtikar Creative Labs provides financing and support to young Arabs in the media and entertainment industry.
What is the entrepreneurial landscape in the MENA region, and how are start-ups being promoted?
Ayman Khaleq: There is some track record in encouraging start-ups in North Africa, particularly in Morocco, where the European Union Cooperation in the 1990s cantered on creating business links. As a result, a lot of engineering and business schools have been engaged in building an environment for small businesses to grow. Jordan and Lebanon have a very strong entrepreneurial tradition, and in Egypt small businesses have shown they can do well due to very favourable demographics.
In the GCC people have tended to gravitate towards government companies, however that is changing. Dubai is showing that the private sector can prosper in the GCC, and by being open to trade and cosmopolitan in nature, the Emirate is attracting entrepreneurs.
It is important to note, that Dubai complements what entrepreneurs in Jordan, Lebanon and Egypt do, since many of the businesses that started in such jurisdictions tend to either relocate or set up regional operations in the UAE generally or Dubai specifically, as it is easier to access capital, contacts and exit opportunities in the UAE.
Lina El-Zein: The VC industry in the MENA region is still in its nascent stages yet grasping international interest. We’re working on many programs to promote the growth of entrepreneurship because there are huge opportunities to be tapped and there’s a new breed of entrepreneurs who are coming up with brilliant ideas but require favourable ecosystems in order to put their ideas to execution.
Every year, we conduct research and have been observing that the VC investments are gaining momentum on the back of strong economic drivers in certain countries of the Middle East. In general the concentration of deal flows tends to veer towards Morocco, Tunisia, Lebanon, UAE, Egypt, Saudi Arabia, and Jordan.
Dörte Höppner: During my recent visit to Saudi Arabia I saw that there is high interest to establish an entrepreneurial ecosystem. The government is encouraging incubators, both publicly funded and private ones.
Building up an ecosystem for start-ups will of course take time. It is important for governments in the region to connect with organisations such as the MENA Private Equity Association to gather information and to exchange best practices. Associations can provide the platform for a mutually beneficial exchange.
What are the biggest challenges for start-ups in the MENA region?
Lina El-Zein: The region is currently witnessing a major shift in regulations and mind-set and access to capital is being democratised and the pool of regional mentors is expanding exponentially.
Having said that, a cluster of economic and social reforms including acceptance of failure, introduction of bankruptcy laws and a liberal employment policy are some of the key factors that would support the growth of the VC industry across the entire MENA region.
Ayman Khaleq: The GCC is an expensive place to live and be a start-up entrepreneur. There is a lack of successful legal initiatives in the region that provide start-ups, from the onset, with sound advice and guidance on legal, transactional, structural, operational, and regulatory and compliance issues – ultimately aimed at increasing the opportunity for value creation and getting the start-up ready for investment.
With the limited number of MENA law firms experienced in advising start-ups, international law firms have been pushed to provide more readily available services, but many are yet to implement alternative fee arrangements or pro bono initiatives; Morgan Lewis has established a pro bono legal clinic to assist regional start-ups.
In addition, there is a lack of education and knowledge sharing. For instance we don’t see enough translation of global works into Arabic which has had a direct impact on education across all levels, and I’m sure it is related to the relatively low level of patents coming out of the Arab world.
And lastly, academic institutions have a long way to go, however the infrastructure is finally in place – the challenge now is to attract top quality professors and, rather importantly, adjunct and visiting professors from the industry, whether based in the region or abroad.
Dr Helmut Schuehsler: There’s a bit of a chicken-and-egg problem in that much of the economy in the MENA region is either commodities or related services, such as banking, finance, and F&B, so the possibilities for start-ups are narrower.
We see very few technology related start-ups, like we have in Europe and North America. And there are not very many technical universities, which in places such as Singapore have become important for spin-out companies.
In the Gulf, demographics are also an issue. Governments may throw money to create private sector opportunities in certain sectors, but the people who come in tend to just stay for five years and then leave. It’s important to engage the region’s native populations in these initiatives.
What can be learnt from the European experience?
Dörte Höppner: Investing capital to encourage start-ups and SMEs often does not work by itself. It is not sufficient to invest a lot of money to build a new start-up hub, if the place is otherwise not attractive to young entrepreneurs to live in.
Globally, you tend to find that ‘cool’ cities become venture capital hubs – they need to have a strong educational infrastructure, and be not too expensive. This will attract the best people.
In Europe, Berlin is a good example for such a new hub, and I have a feeling that Dubai is setting a good example for this in the MENA region.
Dr Helmut Schuehsler: Something worth looking at for governments in this region is the TBG (Technologie-Beteiligungs-Gesellschaft) programme put in place by the German government in the 1990s.
The basic premise was that if you could attract capital from professional venture capital funds, the government would match the amount in a very favourable loan. So for example, a young company could receive $3 million in equity and $3 million as a TBG loan, and expand dramatically.
This created tremendous demand and hundreds of start-ups prospered. It was a fantastic success for three or four years, but the programme collapsed in the end because of the bursting of the tech bubble.
One of the issues they had was that TBG relaxed its equity criteria, and companies started taking investment from friends, family – anyone. When the equity component was restricted to professional venture capital funds, there was a natural process of due diligence and risk mitigation for the TBG.
In the MENA region, 10 years ago, no-one really knew what venture capitalism was, but now we are seeing much more activity and maturity, and it is very encouraging. With the right advisors, investors, accountants, and business associates, centres of excellence are starting to be produced, just like it was in the valley.
About the panel
Dörte Höppner, chief executive of the European Private Equity and Venture Capital Association (EVCA), represents the industry at the highest levels of business and government and is a regular commentator in the international media on all aspects of the private equity industry. In 2012, Financial News named her the most influential person in European Private Equity and as one of the 100 most influential figures in European Financial Markets. In 20I3 and 2014, she was listed as one of the 100 most influential people in finance in Europe.
Lina El-Zein, director of the MENA Private Equity Association drives engagements with regional regulators in order to advocate on behalf of the private equity and venture capital industries to lift regulatory roadblocks and controls affecting PE and VC practitioners in certain jurisdictions leveraging on the expertise of legal advisors. She works very closely with regional private equity and venture capitalists, angel investors, incubators and accelerators, advisors, consultants, government and semi government entities and other industry associations, and has been instrumental in rallying efforts of many key stakeholders for the development of the PE and VC industries and a budding entrepreneurial ecosystem.
Dr Helmut Schuehsler, CEO and chairman of TVM Capital Healthcare Partners and member of the Steering Committee of the MENA Private Equity Association (MENA PEA) has overseen more than 85 investments worth $1 billion in his time at TVM Capital, and more than 40 initial public offerings from this portfolio. In 2007 and 2008, Dr Schuehsler served as Chairman of the European Private Equity and Venture Capital Association (EVCA) in Brussels, Belgium.
Ayman Khaleq, managing partner (Dubai) at Morgan, Lewis & Bockius LLP specialises in fund structuring and formation, as well as structured finance and debt capital markets transactions. He was recently selected by the International Monetary Fund as an expert in the field of debt capital markets and has been listed as a leading regional and Islamic finance, debt capital markets and fund structuring lawyer by top industry and legal publications such as Chambers Global, Euromoney and Islamic Finance News.