3 Hurdles to Startup Funding in the Middle East

Entrepreneurs in the Middle East
3 Hurdles to Startup Funding in the Middle East

Entrepreneurship has become increasingly common and encouraged in the Arab world in the past decade. Perhaps the best indicator of this evolution remains the increasing number of accelerators and incubators catering to Middle Eastern entrepreneurs. At the same time, entrepreneurs still face a number of hurdles, including talent acquisition, government regulation, and funding. Of these three challenges, funding is probably the most prohibitive factor for innovators in the region.

Entrepreneurs in the Middle East have nearly universally experienced issues in securing funding, a phenomenon that may seem unlikely considering the large number of millionaires living in the region, at least according to the Boston Consulting Group’s Maintaining Momentum in a Complex World: Global Wealth. According to this report, Qatar alone has a millionaire density of 14.3 percent, the highest rate in the world. A 2015 report by Forbes showed that the total wealth of Arab billionaires exceeded the operating budgets of 11 nearby nations combined. The funding issue is thus not one of a lack of funds, but instead one of a lack of access to those funds. This problem derives from several different components of conducting business in the Middle East:

  1. Disconnect Between the Corporate and Startup Worlds

Disconnect Between the Corporate and Startup Worlds
Disconnect Between the Corporate and Startup Worlds

The fact that most angel investors and venture capitalists in the Middle East have extensive experience in the corporate world is an unfortunate truth because they use that experience as a rule of thumb to predict the success of a startup. However, startups typically do not look and function in the same way as a larger, established corporate structure. This discrepancy becomes even more problematic in a setting of limited financial literacy and fear of innovation. As a result, entrepreneurs seem inherently set up for failure.

When stakeholders attend a pitching event or a startup competition and judge entrepreneurs based on typical corporate benchmarks, they are not likely to find anyone who impresses them. To address this issue, more opportunities for stakeholder education must be created. If venture capitalists and angel investors understand the differences between corporate and startup culture, they will be better prepared to predict startup potential and make sound investment decisions that drive innovation.

  1. A Culture of Skepticism

Entrepreneurs in the Middle East will face incredulous audiences at virtually every step of the startup process. Skepticism exists whether entrepreneurs are seeking funding or simply trying to encourage the social adoption of a new idea. The entrepreneurs who receive funding often achieve success by pointing to how their specific idea has already worked in another market. As a result, true innovation and ingenuity are stymied. Skeptical investors want to place their money on a safe bet. The question that needs to be asked, however, is what guarantees the success of an idea in the Middle East that was so successful elsewhere in the world? Success depends on cultural acceptance, and investors need to trust that Middle Eastern entrepreneurs understand the Middle Eastern marketplace and what people living in the region want.

The Middle Eastern startup sector will only grow when angel investors and venture capitalists suspend their skepticism and put faith in the innovators working in those markets. The copy-and-paste approach to entrepreneurship does not guarantee success, and it furthermore inhibits the development of ideas with incredible potential. For example, an investor may choose to fund a company based on the Uber model, but that investment is not a good one if there is no demand for ridesharing in the Middle East. Unfortunately, someone else who wants to address a real, local problem was probably passed over for the Uber copycat. The ideas with the greatest potential are those that address local or regional problems.

  1. Lack of Networking Opportunities

Lack of Networking Opportunities
Source: StockMonkeys.com / License

When entrepreneurs sign up for networking events or startup conferences in the Middle East, they must often pay exorbitant fees. Unfortunately, they frequently get very little, if any, face time with people who can actually fund their ideas in return for the high cost of the event. Investors are often the last to arrive and then the first to leave, and their limited time is generally monopolized by industry acquaintances. The lucky entrepreneur who meets someone who seems like an ideal investor or mentor may find that the person simply is not interested in further discussion. These sorts of industry events are meant to unite people and create opportunity, but they rarely do.

While tenacity may help in these situations, the burden largely falls to event planners who have the task of creating more productive spaces. Greater structure at these events could formalize the networking a little more to guarantee some degree of face time with investors in a related sector. Simple steps could create much more productive events, such as the creation of industry-based tables that allow investors and entrepreneurs with similar goals to meet each other naturally.

These three issues can seriously limit an entrepreneur’s ability to secure funding for a great idea. However, these issues do not make funding impossible. Entrepreneurs in the Middle East need to keep these issues in mind as they seek funding and encourage the general movement toward innovation through better event planning and greater education for stakeholders.