We all love a success story, be it in sports, music, science, or in business. Nothing captures the imagination more than the story of the dark horse that rises to prominence. For me, I have always been inspired by the stories of the business start-ups that become behemoths. The bold entrepreneurs who start from zero and go on to transform entire industries with their innovations. These are the ones that captivate generations and in doing so leave their mark on our society.
Arguably the most exciting time in these entrepreneurial journeys is the transition from start-up to scale-up. It’s at that moment when all the stars seem to align: the innovative idea, the right amount of patience, hospitable market conditions, and perhaps most importantly – adequate funding.
During this decisive phase, the need for capital will almost certainly intensify. The leaders of promising start-ups suddenly realise that the funding they require to scale is more critical than the funding they needed when they started their business. Maybe they need this vital capital injection to purchase assets, to manage increasing orders, or to capture as much of the market in as little time as possible.
However, start-ups being unable to easily access the investment capital they need is an enduring global challenge. Today, many ventures fail because they run out of cash, even though we are told the market is flush with capital. Crunchbase, a US-based prospecting platform for investors, confirmed that start-ups closed out 2020 in a much stronger position than when they started the year, with global venture funding up 4 per cent year-on-year to $300 billion.
Despite the rise in venture funding, start-up capital is unevenly divided across sectors. Internationally, start-up funding tends to be concentrated in certain top-of-mind technology sectors such as FinTech, HealthTech and EdTech; it stands to reason, given the unlimited potential of these sectors to generate ideas, solutions and innovation with positive impact. On the other hand, start-ups in less consumer-focused sectors – such as industrial technology, logistics and agricultural technology – may find it more difficult to capture attention despite the benefits they bring to society.
On top of that, according to the audit and financial advisory Deloitte, the chances of a new enterprise to ascend as a scale-up is around 0.5 per cent, which means that only one out of 200 surviving new enterprises will become a scale-up.
Start-ups must assess all options to scale if they are to have a chance of success. They have a host of choices when it comes to raising capital and must cultivate an open-minded approach to how they source funding.
Angel investors, for example, are a highly effective source especially in the pre-seed or seed stages. These are typically high-net-worth individuals (HNWIs) who provide early support for start-ups in the form of equity funding, but they can also provide guidance and connections. A similar source is family offices which are private wealth management firms that invest on behalf of HNWIs or their families.
Venture capital is another credible route for start-ups. Venture capitalists or VCs may be HNWIs or companies that provide start-up funding for a percentage of equity. Once they invest, VCs tend to become actively involved in the start-up and can play a pivotal role in the post-investment phase by facilitating corporate growth.
In my view, start-ups should also be aware of what types of government funding or support are available. If your innovative idea contributes to a priority sector or will produce residual benefits for broader society, then there could be practical support available. This support can involve funding but might also extend to incentives such as mentorship or access to markets.
Additionally, incubators or accelerators provide an avenue for start-ups to access critical support, in the form of networking, mentorship, resources, as well as being a gateway to other investors. Some of these programmes, particularly those run by for-profit accelerators, may also offer seed investment for an equity stake in the start-up.
By being aware of what potential options are out there and being committed to source these options, start-ups have a chance to scale successfully. We have observed this first-hand across the UAE. In 2020, start-ups in the Middle East and North Africa secured record funding of more than $1bn, the first time Mena start-ups surpassed the $1bn barrier, according to MAGNiTT’s 2021 Emerging Venture Markets report. The UAE ranked first among innovation hubs, accounting for the lion’s share of total funding and the highest number of deals in Mena.
Overall, this strong performance reflects the UAE’s stance on start-ups and also the enabling ecosystem that we have created. In Abu Dhabi we have made it our mission to support innovation-focused companies by offering pathways to capital, market opportunities and talent. We have also designed an enabling business environment that includes building robust capital markets that provide financing, alternative expansion plans and exit options for start-ups.
Here in Abu Dhabi the leaders of promising start-ups can find several options to scale. It’s up to them to seek them out.