Capital punishment ends for entrepreneurs

The UAE Government's big step in waiving minimum capital requirements for new businesses has removed the shackles for many fledgling start-ups.

Sabri Pozam is eager to start his internet-based business now that he no longer needs Dh150,000 in capital to procure a licence.

"Jungle Models is still a concept, but that concept is now much closer to reality," says Sabri Pozam, 29, a Dubai-based entrepreneur. "Now that the UAE no longer requires a Dh150,000 capital requirement to start a business, we are looking at a much more comfortable starting point." On August 10, 2009, the UAE government announced that it was taking another step towards easing the cost of staring a business in the country. Previously, entrepreneurs were required to have Dh150,000 in the bank in order to move forward with a new company application, a law that dates back to 1984. This restriction has now been removed.

"We believe that the new decree will definitely help enhance the UAE's appeal to investments and will provide the private sector with the right impetus it needs in these challenging times," said Hamad Buamim, the director general of the Dubai Chamber of Commerce and Industry. The government's ruling will have the biggest effects on those interested in opening small businesses in the country, a move lauded by Mr Pozam. The lifeblood of almost every economy around the world, smaller enterprises are now in the spotlight as the health of the economy remains uncertain.

Governments are eager to encourage new investment, especially in light of recent reports that the business environment is on the cusp of recovery. Just last month a Nielsen survey of UAE consumers revealed that nearly 50 per cent of respondents believe that the economy will recover from the current downturn in the next 12 months. Mr Pozam, who is now in the early stages of developing a web-based company called Jungle Models, studied hospitality in Switzerland and Canada, where he received his bachelor's degree. Growing up in a family involved in hospitality, he developed a knack for the field.

"I made the move to Dubai about 5 years ago because the hospitality industry was booming. Since then, I've worked with Starwood Group and Jumeirah Group," says Mr Pozam. "Then, for the past two and a half years, I was working as a 'mystery shopper.'" As a mystery shopper, Mr Pozam tested the amenities of a variety of hotels in the region and rated them based on the quality of attention he received from staff. While he enjoyed this work, Mr Pozam began to explore his entrepreneurial spirit.

"In the UAE, there are many modelling websites that link customers to each of their agencies' [fashion and runway] models. As the number of agencies grows, it is becoming difficult for clients to find the right models for their needs without spending all of their time browsing every single site." To fill the niche, Mr Pozam hopes his site will serve as a one-stop shop, linking clients such as modeling agencies and magazines to fashion models. Compiling information about the many agencies and models in the market, his clients should be able to find the right individuals for the job more easily.

Typical of a small start-up site, Mr Pozam isn't working with a huge budget check. "Since we are creating an internet-based company, we don't necessarily have to be located in the UAE. When researching our business plan, we began to look at two locations for our headquarters: Dubai and London." Upon discovering the Dh150,000 capital requirement in the UAE, Mr Pozam leaned towards London, where he believed he could be more profitable, even after UK taxes.

"We were going to have to find an investor for the Dh150,000 requirement, who would then expect a portion of our profits in return. The whole idea of starting in Dubai was put into question," he says. "With the requirement removed, the decision was made for us: we are definitely starting in Dubai," he continues. "Since we didn't have to find an investor to put up the initial Dh150,000, it was then cheaper to work in Dubai than in the UK."

Steve Mayne, the sales and operations director at Dubai-based Sentinel Business Centres, is certain the removal of this restriction will help persuade not only small business but even some medium-sized multinationals to enter into the market. Mr Mayne's organisation helps to alleviate this front-loaded financial burden by spreading out operating expenses over time through services such as leasing office space on a monthly basis instead of yearly, thus reducing the capital required to establish a company.

"To receive a license to operate in Abu Dhabi, you had to have Dh300,000 in the bank. In Dubai, that number was 150,000. Once you had your license, though, you had access to these funds and they can be used within your business," he explains. "However, many companies saw this requirement as an additional expense and added it to their estimate for the cost of opening an office in the UAE. " While Mr Pozam may now have his sights set on setting up in Dubai, he is not fully satisfied with the ease of doing business in the emirate. As Mr Mayne reveals, "The removal of the capital requirement restriction was a good start, but now we are facing an onslaught of other start-up costs. The fee for a sponsor can range from anywhere between Dh10,000 and Dh200,000 depending on what you are looking for. After this, you'll need to pay a fee to the economic department and set-up fees that vary depending on the type of company you are opening,"

"At the end of it all, on average, one can expect to spend anywhere between Dh40,000 and Dh250,000 to get started - and that doesn't include office space," he continues. "We see many people come to us to take care of all of the paperwork and upfront costs because they find that they waste too much time running around evaluating offices, suppliers, sponsorship and set-up options rather than focusing on their business." Mr Mayne says.

Other governments in the region have also made efforts to eradicate prohibitive barriers to entry for businesses. In Kuwait, for example, officials announced this summer that they are considering cancelling the "kafil", or sponsorship, system. Under kafil, foreign companies must partner with a local sponsor to operate in the country, much like the system in the UAE. In additon, Kuwait has recently made moves to allow foreigners to sponsor themselves for a work visa, but these would apply only under specific conditions and wouldn't affect the vast majority of foreign workers.

The incredibly high cost of office space in the UAE poses yet another challenge to entrepreneurs. "Even in Knowledge Village, it will cost at least Dh80,000 per year for a cubicle in a large room with about 100 other cubicles," says Mr Pozam. "Leasing desk space is required, so everybody has to spend this money. Most people don't even need it though, especially if you are running a very small business, like a website. In fact, only about 10 to 15 per cent of the approximately 100 cubicles in Knowledge Village Building #7 are ever being used. The rest of them just have the name of the company hanging on them." he says. "This is a completely unnecessary cost of doing business for many people. Then, once you have an office, you get charged for every little thing. A Non-Objection Letter, for example, costs Dh1,000. This is simply for a piece of paper with some ink on it."

However, Mr Pozam does not want to underplay his approval of the recent ruling. "The removal of a capital requirement is a strong move in the right direction." Mr Mayne also points out that a re-evaluation of the local sponsorship requirement may be on the horizon. Earlier this month it was reported that new legislation that would eliminate the sponsorship requirement for businesses owned by non-nationals would be submitted to the UAE Government within the next two months.

"Industry is one of the sectors we are trying to attract to the UAE and we want it to be a major contributor to our GDP," said Sultan bin Saeed al Mansouri , the Minister of the Economy for the UAE, of the announcement."