Microsoft maybe a software giant today, but it started from a small great idea by innovative entrepreneurship. Microsoft would not have become a multinational corporation if it was not funded by different sources of investment that were available to fund ideas and start-ups. Had Bill Gates not been able to secure the finances required, the brilliant ideas of Microsoft might have disappeared from our civilisation and the technology revolution that was empowered by Microsoft might never have happened. This could be the case with the GCC as well, where many young entrepreneurs hold brilliant ideas, but are short of funds. As time passes, these ideas go down the drain. Financing ideas? It is something new for the GCC market. Banks and investors want to finance something that they can see, touch and feel. They call it something concrete. Yes, indeed, they are ready to finance concrete.
Most of the prominent businesses which have flourished in the GCC from meagre beginnings have done so with traditional funding sources such as family money, supported by some sort of government subsidies, foreign capital which comes from foreign investors or from capital invested from outside GCC. There are limited modern sources of funding for small and medium enterprises (SMEs). Most of the funds come from commercial banks in the form of loans with high interest rates and very few funds come from governments in the form of long-term and low interest rate loans. In the GCC, the concepts of venture capital and private equity as sources of funding are still new. Many traditional Arabic investors are not comfortable with the blind pool model of investing. Additionally, many family-owned businesses do not want to accept management intrusion, which would be placed upon them by accepting a private equity or venture capital investment. When a private equity firm takes a controlling stake, it is common to replace management that is not managing optimally. Thus, it can be imagined that it would not go over well if a private equity firm invested in a local/family business and wanted to replace the CEO who was the son of the father who started the business.
The limited availability of international investors to invest in local companies depends on the extent to which these companies line up with the interests of international investors. It is difficult to find multinational corporations that cut deals with small firms like the deals that were made in 2009 between Yahoo!, a US firm, and Maktoob.com, a Jordanian content portal. Yahoo! found its interest in this start-up firm that was innovative and growing.
The majority of funding is provided by commercial banks in the form of loans with a great deal of red tape that business owners have to cut through. Banks do not deal with small firms as strategic partners, but as borrowers. Thus, banks do not care about their situation and circumstances as long as they are paying their dues. If the borrower defaults, the banks are ready to end the relationship.
The GCC governments have created supporting institutions to help entrepreneurs and SMEs grow. Government initiatives such as Small and Medium Enterprises Authority in Saudi Arabia, Khalifa Funds in Abu Dhabi, Mohammad Bin Rashid Establishment for SMEs Development in Dubai, the Sanad programme in Oman have excellent missions to train and develop entrepreneurs and finance start-up. Since the services which these initiatives provide are still limited to a small number of start-ups, it is difficult to judge the role and effectiveness of these initiatives. Even if effective, these organisations do not possess the capital required to provide the financial assistance necessary for the number of small businesses in the region. Let alone the capital required for larger growth fuelled by innovation.
The entrepreneurs and SMEs owners must provide a credible case for their cause to acquire resources and funding. Entrepreneurs and SMEs owners must gain legitimacy to fit in the existing business culture. To fit in, they must be up to the expectation of the fund providers. First, on personal bases, they must show dedication towards their idea, gain trust from the stakeholders and demonstrate management and leadership qualities. Second, their business idea or venture must be feasible or innovative and must be presented in a convincing manner.
Although entrepreneurs and SMEs owners in the GCC have a lot of enthusiasm and dedication towards their causes, they typically require professional development as well as time to mature their business ideas and plans. The funding sources need to understand that the world is moving from material-based economy to idea-based economy. Failing to support this movement, means that they may be digging their own grave. Until both sides realise their potential, let me assert that every time we miss financing an idea it means a loss of potential growth for the economy or maybe a loss of a “Microsoft-like” revolution.
Dr Khalid M. Alkhazraji is a UAE academic and former undersecretary of labour. He is the chairman of Al Kawthar Investment. You can follow him on Twitter at www.twitter.com/Dr Alkhazraji. This article is the last of a six-part series.