The recent political unrest in Middle East and North Africa (MENA) countries has underscored the importance of boosting the region’s economic stability.
Small and medium-sized companies have an important role to play in securing the region’s economic future, and as a result, interest in entrepreneurship has surged. A recent Booz & Company survey illustrated that the face of self-employment is changing, shifting away from small shops and other relatively unsophisticated businesses toward the development of innovative products and services with the intention of building new large businesses.
This is a positive trend consistent with dynamic industrialized economies and suggests that a long-term change in the region’s economy is afoot. There was a 100 percent year-on-year increase in business plan submittals to the MIT Arab Business Plan Competition in 2010-2011. Several banks and finance centers are establishing programs aimed at appealing to entrepreneurs and start-up businesses. Many organizations, such as YallaStartup, INJAZ, Arabnet and Endeavor have created mentorship programs and other one-stop centers for entrepreneurs. Venture capital firms and banks have established specialized funding arms for small businesses.
Charting the challenges
But these initial activities and signals of interest are only modest steps in what will need to be a much larger and more sustained effort.
Booz & Company conducted a survey of more than 300 individuals, most of whom consider themselves entrepreneurs, and a series of focus groups to determine what must be done to remove the institutional barriers to entrepreneurship in the Middle East. This showed that for a number of reasons, it is difficult for entrepreneurs to establish themselves, secure necessary seed capital and family support, negotiate complex and lengthy bureaucracy and regulatory systems and then develop the necessary infrastructure to build self-sustaining businesses of their own.
The survey took place in Saudi Arabia (where it was conducted in collaboration with the National Young Businessmen Committee, associated with the Chamber of Commerce), the UAE and Qatar.
The key issue raised regarded financing; of those surveyed, 42 percent said that family, friends and government sources provided primary debt financing and 60 percent said that those same sources provided primary equity financing. Yet beyond those sources, entrepreneurs face an uncertain and challenging process to secure the capital needed to buy equipment, establish a payroll and meet ongoing needs during the startup phase. In particular, there are funding gaps in sectors such as education, technology, tourism and hospitality, which get less investment than the energy-intensive sectors that dominate regional economies. In addition, although there is funding in place for small and large businesses, few have addressed the “missing middle” — those business with an enterprise value between $500,000 and $8 million. Even financial institutions that do offer funding need to do a better job of broadcasting that fact: approximately nine out of 10 entrepreneurs we polled were not aware of financial institutions that provide entrepreneurial and small and medium-sized enterprise (SME) financing.
Meanwhile, entrepreneurs face considerable cultural barriers: in the MENA region, there is greater prestige in working in large and established businesses than in experimenting with an entrepreneurial idea. This is especially so as the fear and stigma of failure is a pervasive problem for entrepreneurs, more so in the region than in Europe and the United States, where most successful entrepreneurs routinely cite their first failed efforts as critical opportunities for learning. For example, 78 percent of those surveyed said their teachers did not encourage them to pursue entrepreneurial businesses; a similar percentage reported the same treatment from mentors. Among the major challenges facing entrepreneurs, those surveyed said lack of prestige and lack of support from family members were the biggest, outpacing competition, time, financial demands and regulatory hurdles.
Complicating the startup process even more is the difficulty of gaining access to market opportunities. In the US and other markets, governments and large enterprises reach out to small businesses and even reserve slots on tender opportunities; by contrast, in the MENA region, tender requirements tend to call for certain qualifications, financial records and business networks, all of which make such opportunities a remote possibility for startups.
At the same time, entrepreneurs have limited access to education and training in business management, such as how to develop business plans. Formal mentoring programs are not available nearly enough, judging by the fact that close to 70 percent of those polled said they resorted to mentoring from family or friends, rather than from colleagues, investors, consultants or others. This was true for training as well. While entrepreneurs reported seeking training in skills such as marketing, management, finance and planning, they resorted to training from friends and family, or self-learning, in 40 percent of cases — far more than any formal online or technical institute or university, which collectively helped 26 percent of respondents.
The way ahead
Taking on these challenges will require a multifaceted approach. Although MENA nations can’t be expected to immediately overcome certain challenges — such as cultural resistance to risk-taking and failure — they can put into place several programs and efforts to develop an active entrepreneurial ecosystem. Booz & Company, leveraging workshops with key stakeholders, has identified several opportunities to increase entrepreneurship.
One such method is the creation of entrepreneurial service centers to help start-up founders write proper business plans, learn where and how to apply for financing, understand key business financial concepts such as bookkeeping standards and income statements and master more informal but equally valuable skills such as client recruitment and retention.
In addition, such service centers could provide beneficial data and statistics for companies seeking to develop greater market awareness, which would help them to further sharpen their business strategies.
Finally, one of the most valuable offerings of such one-stop centers is informal meetings; the ability to network with other entrepreneurs gives business founders a way to share experiences, learn from others’ mistakes and connect with interested financiers.
Entrepreneurs would also benefit from a more formal mentoring process, featuring communities of advisers led by those who have succeeded in the region already. Ideally, each mentor “pod” would consist of five to 10 young entrepreneurs and one experienced and successful entrepreneur. Each pod would focus on business plan development, financing assistance, introductions to key networks and a regular review of emerging challenges.
While the region’s banks may already be launching financing arms with a focus on entrepreneurs, policymakers could streamline the financing process by establishing a one-stop shop for those seeking loans and those offering them. These may include both private lenders and government sources. Importantly, these centers will help early-stage businesses properly apply for financing and track applications so they do not stall unnecessarily.
Regional entrepreneurs could also secure greater access to opportunities if large corporations and government-backed entities initiate programs to attract SMEs as potential suppliers. Such a program would call for these organizations to set aside a certain amount of tender contracts for entrepreneurs and small and mid-sized enterprises. This would greatly reduce the barrier to entry for such startups and elevate their visibility to key purchasers.
Taken together, these actions will provide a powerful tool to support and fund startup founders and will provide a valuable outlet for those entrepreneurial individuals who have been frustrated in the past. Importantly, such a coordinated effort would demonstrate to the rest of the industrialized world that MENA countries are ready to move to the next major stage of economic development — one that is led by innovative and small companies focused on building value throughout the economy and which are seeking to compete regionally, if not internationally.
Ahmed Youssef is a partner, Chady Zein a principal and Raymond Soueid a senior associate at Booz & Company
