The differences between SMEs and start-ups

It’s often the case that the terms start-up and SME (small and medium enterprise) are used interchangeably, but they are not the same thing. There are some fundamental points that, when recognised, make the difference clear.

Steve Blank, a serial entrepreneur and Silicon Valley legend, states that “a start-up is a temporary organisation designed to search for a repeatable and scalable business model”, while an SME is owned and operated independently for profit.

There are also differences in terms of their intent, functions and mode of funding.

Start-up companies are relatively new to the market with the intent to explore a new idea or a product, usually leveraging technology. Successful ideas and products elevate the business of these start-ups and pave the way for their growth. There are also start-ups that fail to implement ideas and cease existence fairly quickly.

SMEs, on the other hand, establish operations involving known products and services mainly for local markets.

Start-ups work to grow and expand into various lines of business that might offer them the ability to scale up operations. Their functions change in structure and type over a period of time. SMEs retain the same organisational and operational structure over their lifetime.

Are start-ups taking away funding that SMEs would otherwise receive? The answer is probably antithetical to the popular perception, but emphatically no. This is because start-ups and SMEs have different sources of funding.

Although they might both begin in pretty much the same way with the founder’s/family’s own money and probably a small portion of bank debt, start-ups focus on obtaining funding from angel investors, venture capitalists and private equity firms that would be willing to take the risk and invest. Series of such funding from investors dilutes the founder’s equity in the company in the case of start-ups, while SMEs retain the original ownership structure.

Careem.com successfully clinched a Series C investment of US$60 million in November 2015, with the Abraaj Group as lead investor. The funding round represents one of the largest investments in the Mena region’s emerging technology sector. It also marks the third round of fundraising by Careem, with Abraaj joining other prominent investors including Al Tayyar, STC Ventures, Beco Capital, Impulse (a subsidiary of Kuwait Investment Authority), Lumia Capital and Wamda Capital.

Before its acquisition by Amazon, Souq.com had raised $425m since 2005, according to CrunchBase. The company was reported to be valued at $1 billion during the previous funding round in 2015, but the deal with Amazon put its worth at less than that based on media reports and closer to $650m.

The ecosystem of SMEs has been in existence for a long time. More than 90 per cent of the companies in Kuwait, Bahrain, the UAE, Saudi Arabia and Oman fall into the SME category. To glaze it with some more statistics that would highlight the importance of SMEs in the GCC, they employ 60 per cent of the Saudi labour force, 57 per cent of Bahrain’s and 72 per cent of the workforce in the UAE. The SME share of total manufacturing capacity was about 82.8 per cent in 2015.

Having operations mainly in traditional sectors such as transportation, logistics and industrials, SMEs have been a catalyst for economic growth in the GCC.

However, banks are reluctant to lend to SMEs because of the higher risk factor associated with them. Hence countries in the GCC have formulated programmes to fund these companies, as they are employment providers as well as facilitators of economic diversification policies. In countries like India, it has been found that the growth of e-commerce start-up sites such as Flipkart and Snapdeal has helped SMEs in sectors such as logistics and transport. Creation of entrepreneurial hubs can provide interconnected growth of both SMEs and start-ups, each supporting their businesses.

MR Raghu is managing director of Marmore Mena Intelligence, a research house focused on conducting Mena-specific business, economic and capital market research.

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