One of the most important steps to make entrepreneurship more accessible throughout the Middle East is expanding opportunities for funding. Entrepreneurship has been shown to generate major positive change in regions facing economic challenges. In the Middle East, entrepreneurship holds the same promise, but the investment ecosystem needed to support entrepreneurs remains nascent. Much effort has gone into nourishing the startup ecosystem with the foundation of several impressive accelerators and incubators throughout the region. However, the funding ecosystem that is necessary to support entrepreneurship has not received the same amount of attention.
The economic situation in the Middle East has created a lot of pressure on governments. According to the World Bank, the region must create 100 million jobs by 2020 to provide opportunities for people under age 25 population, which accounts for 60 percent of the Middle East’s population. A drop in oil prices has put restrictions on governmental budgets. Many individuals have turned to small business as the answer and, while this option holds a lot of promise, it also requires startup capital. The push for entrepreneurship has increased the availability of business education and mentorship, but the vital funding ecosystem remains underdeveloped.
Key Steps for Developing a Funding Ecosystem
Most startups in the Middle East struggle to find funding at the seed stage. Ideally, the investment ecosystem will address this need as it expands. Many of the funding opportunities that currently exist are targeted toward mid- or late-stage startups, largely because these companies are a safer bet, and the reported numbers are more impressive. However, the future of entrepreneurship in the Middle East will be challenging without access to seed funding. The following options may be an ideal place to start in the creation of a funding ecosystem to support startups:
- Accelerator Programs: The Middle East has already gotten a head start on developing a healthy number of accelerators. Unfortunately, many of these organizations charge for participation, which limits the number of innovators who can participate. Better systems ask for small equity stakes so that the success of the business is tied to the continued life of the accelerator. Startups going into accelerators have the opportunity to refine ideas and products as they seek out follow-on funding.
- Angel Networks: In Silicon Valley, a major source of follow-on funding is from Angel Networks, which offer relatively small investments in early companies that show signs of traction. This funding gives startups the opportunity to bring their ideas and products to the market. Angel investors typically also take a small equity stake in companies so that their profits can expand the fund and allow for even more investments.
- Series A Funds: A Series A fund offers more hands-on guidance for startups. Often, people at these funds become members of a startup’s board and play an active role in the operations of the company. Series A investments typically range from between $2 million and $5 million, and they are the first major investment in a company.
- Growth Funds: At this point, traditional private equity funds can step in to invest even larger amounts of money in the company to drive valuation. While the idea of growth funds is relatively new in the Middle East, this stage of funding is what is currently most available. The key for the future is shifting the perception of when it is appropriate to make this sort of investment in a growing company.
- Exit Paths: Perhaps the most overlooked part of any funding ecosystem, exit paths are also the most fundamental. Exit paths are the point at which investors get their money back and gain the ability to reinvest in other nascent companies. In other areas of the world, mergers and acquisitions are the most common exit path, but larger Middle Eastern firms have not yet adopted this practice. However, some companies have had success with international acquisitions.
Signs Point to a Brighter Funding Future
In recent years, several organizations have pointed toward a brighter funding future for Middle Eastern startups. In 2010, one of the region’s first angel investment organizations, Tenmou, was founded in Bahrain. When Tenmou began operations, the idea of angel investment for local startups was virtually unheard of in the Middle East. The founder of Tenmou studied angel groups in other areas of the world in order to create a hybrid approach that adopted best practices for the unique cultural demands of the region. The organization combines funding opportunities with mentorship and a valuable network of entrepreneurs and investors. Tenmou investors were given ownership over their decisions so that they could develop deep connections with the startups and ensure that they are on the path to follow-on investments. The World Bank and other institutions have looked at Tenmou as a case study for ideal angel investment in emerging markets.
In December 2015, two important events took place that pointed toward growing concerns regarding funding for startups in the Middle East. The Premoney conference brought together many Middle Eastern investors who work through accelerators, angel networks, and venture capital funds to discuss the future of the region’s funding ecosystem. Many investor leaders also participated in a tour event that included stops in Abu Dhabi, Dubai, Bahrain, Amman, and Cairo to investigate the unique situations in each of these cities and build a stronger network of investors throughout the Middle East.