UAE start-ups still need help on funds

While start-ups are benefiting from a more positive economic environment in Dubai, accessing finance to grow their businesses remains an obstacle.

Yousef Hamza, the director at Envestors Mena, which helps companies to raise money from private investors. Charles Crowll for The National
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While start-ups are benefiting from a more positive economic environment in Dubai, getting financing to grow their businesses remains an obstacle.

Economic growth and business sentiment are high according to three reports out this month. And earlier this year, the World Bank's Ease of Doing Business report ranked the UAE 26th among 183 countries, making it the forerunner in the Arab world.

These were also strong indicators for the small and medium enterprises (SME) sector that benefits most from a sound economic environment, said Neil Petch, the chairman of Virtuzone, a Dubai-based business that helps companies to set up.

Virtuzone posted a record 20 per cent increase in sales, profitability and new customers in the second quarter. And while tourism, hospitality and trade remain growth sectors, Virtuzone noted that 80 per cent of the micro-firms that started in the past three to six months were creative and marketing services companies.

A more robust economy, however, has not resulted, as yet, in more funds for the country's start-ups and entrepreneurs.

It had been hoped that with faltering regional stock and real estate markets in the aftermath of the 2008 financial crisis, more cash would find its way to small businesses. That, on the whole, has not been the case.

"The reality was that people got hit so hard a lot of cash left the banks," says Yousef Hamza, the director at Envestors Mena, which helps companies to raise money from private investors. "There was a massive dry period which killed off entrepreneurship until last year."

Kamal Hassan, the founder of i360, Dubai's only commercial start-up accelerator, agrees. He says the current pace of investment is "steady" but there has been "no increase."

However, Mr Hassan, is optimistic about attracting new investors to the region; i360 is managing DP World's Turn8 initiative to foster entrepreneurship in the UAE and Mr Hassan this week announced the first teams taking part in the project.

He is confident that he will soon be able to name investors who will closely monitor the teams' progress during the four-month scheme in anticipation of offering them the next round of funding after they have graduated from the programme.

"A lot of people are interested in looking at us," Mr Hassan said. "We are talking to individual angels and institutional venture capital firms."

This is crucial because even though a number of local banks have recently announced their intention of scaling up their SME lending, it remains difficult for start-ups to access their funding.

Banks are not geared up to servicing smaller firms, Mr Hamza said. "The [UAE] banking industry is relatively new. They are trying. In the US, it is much more regulated, it has government backing so I would say it will be five to 10 years before [improvements] hit micro and small [businesses] in a very noticeable way."

One of the biggest obstacles for start-ups is that they need to have three years of audited accounts to be eligible for bank funding.

"Financing is still a huge barrier for SMEs," said Mr Petch. "For some it is challenging to acquire the funds to get up and running; for others who are already established, it can be devastating as they can't move as quickly as required on their growth path without capital. Unlocking funding is a very slow process."

A new SME law, endorsed by the Federal National Council and scheduled to become law before the end of the year, is likely to aid start-ups in other ways: by requiring federal authorities and ministries to set aside at least 10 per cent of their procurement budgets for small businesses and lowering licence fees on SMEs.

Despite the funding issue, however, there is agreement that entrepreneurship is slowly taking off.

"We need more ideas from the UAE," said Mr Hassan, acknowledging that the start-up sector in the Emirates is largely expatriate-driven. "But the quality of ideas compared to what we saw a year ago is way much higher and that is very helpful."

And while there are an increasing number of individual initiatives - including competitions, accelerators and incubators - a coherent entrepreneurial eco-system is still evolving.