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The regional tussle for startups: Is Dubai at risk of being overtaken? [part two]

Wamda

As outlined in the first part of this feature, startups have become a fundamental pillar of the economy, a means not only for innovation, but job creation too. For more than a decade, Dubai has surpassed other cities in the Middle East and North Africa (Mena) as the regional hub for startups, a powerhouse of talent, capital and both physical and digital infrastructure.  

Recently the emirate issued new licences and visas, aiming to attract more talent from freelancers to doctors and retirees alongside the UAE's 10-year golden visa for entrepreneurs.

“People are building startup ecosystems in the world, it is about ease of doing business, the quality of life, accessibility, access to talent, the laws and regulations that allow people to have multiple jobs. Dubai will always be a pioneer in this,” says Abdulaziz Aljaziri, deputy CEO of the Dubai Future Foundation (DFF).

Indeed Dubai and the UAE in general, has long been a pioneer in the region for ease of doing business, ranking top in the Middle East and 16th globally in the World Bank’s Ease of Doing Business report 2020. The country recently scrapped its foreign ownership laws, which is likely to open up new sectors for onshore companies and attract more international companies and talent to the country.

"Onshore startups had to assume the burden of paying sponsorship fees to the local sponsor, ranging from Dh20,000 to 50,000 per year, which are significant sums for most startups," says Michael Kortbawi, partner at law firm BSA Ahmad Bin Hezeem & Associates. "Although 100 per cent foreign ownership was and remains permitted in freezones, most freezones impose restrictions on permitted activities and require the business to lease an office space within the freezone, which is generally limited in supply and expensive. With these changes, entrepreneurs will get the best of both worlds, with full ownership capability, no corporate governance issues arising from the presence of a local sponsor, fewer limitations on business activities, as well as increased options and cheaper rent for office spaces."

The UAE’s dedication to entrepreneurship also became clear with the creation of the Ministry for Entrepreneurship and SMEs in July this year, something that Aljaziri believes will help drive forward the startup agenda.

But over the past couple years, Saudi Arabia and Bahrain have been especially bullish in creating a friendly business environment. Saudi Arabia jumped 30 spaces in the rankings in one year, highlighting the rapid pace of change. The UAE, and particularly Dubai now face stiff competition from other cities and countries in the region keen to develop a comfortable environment for startups, and increasingly, it seems that Dubai is at risk of being overshadowed by emerging ecosystems with more money and more economic heft behind them.

High Costs

One big criticism that startups have with Dubai is the cost of both living and doing business. The emirate is one of the most expensive places in the world to start a business. To set up a company in the UAE requires a minimum fee of Dh27,340 ($7444), but according Aljaziri, it is a trade off that is worth making.

“If you have cheap rent, cheap visas and licences, then you don’t have the quality of life, you won’t have everything,” he says.

Other hubs will likely disagree and examples across the world highlight low cost of doing business does not equate to low quality of life.

“To drive growth, you need to seriously cut the costs and administrative burden associated with launching a startup in the region,” says Patrick Rogers, co-founder and CEO of Dubai-based legaltech startup Clara. “Governments should not be making direct investments into startups, they should be focusing on how they can create a more fertile environment to encourage business formation – particularly for tech companies who have no chance of being profitable for their first few years.”

What happens then is that many founders operate in a grey zone until they get traction and do not “plunge directly into their operation” as they would in other countries according to Rogers.

“Governments not only lose out on additional people not being hired as a result of these unwarranted costs and administrative burdens, but it also makes startup success less likely as formally launching a startup is so much riskier in the minds of would-be founders than it would be in other places,” he says.

Abu Dhabi

Recognising the sheer cost of operating in the UAE, Abu Dhabi’s Hub71 created an incentive programme offering subsidies of up to $800,000, equity-free, to cover the initial costs of setting up. Seed stage startups receive free housing, free health insurance and free office space in Abu Dhabi for two years. Series A companies receive 50 per cent off housing, insurance and office rent for three years.

“[Hub71] is a very well thought through approach, but that speaks to how expensive it is to do business here for your average tech company. A policy that saw early stage tech companies (who are potentially massive employers) relieved of many of the standard costs involved with launching a tech startup would certainly support far higher business creation numbers and act as a magnet for regional talent,” says Rogers.

Since its launch in 2019, Hub71 now counts 75 startups in its ecosystem and is aiming to have 200 startups by the end of 2020.

“I think you will definitely see cities getting more visible and prevalent in the startup space, and that relates to the resilience of the city and its economy, and the continued focus on strong startups foundation for the companies,” says Nader Museitif, senior vice president at Hub71. “Abu Dhabi has always been a stable place with one of the biggest economies in the region, and it has been quite serious about diversifying and stimulating strong tech and innovations sectors. When you have that vision and it is quite solid and resilient even during Covid-19, that is a very good sign and has been a very good, attractive element for the startups.”

But it’s not just the cost of setting up that attracts criticism in the UAE and wider Middle Eat region, increasingly it is its regulatory environment that treats startups and large enterprises in the same vein. In places like Europe and the US, startups are taxed differently, licensed differently and are often provided with incentives to create jobs and to innovate with a plethora of grants and loans, but few such incentives exist across the region.

“There could well be more creative ways for governments to generate revenues from corporates than relying on the traditional formula that is applied across the board regardless of the type of business you are,” says Rogers.

One area where Abu Dhabi has an edge is in the financial regulatory environment – the Abu Dhabi General Market (ADGM) has adopted some of the most progressive regulations for venture capital (VC) investments in the region.

“From a holding company perspective, nothing in the region comes close to the ADGM SPV when you’re talking about VC investments,” says Rogers, which could help break away from the trend of establishing holding companies abroad, typically in the British Virgin Islands or the Cayman Islands. “Nearly every single exit of consequence has involved the exit of an offshore entity, whether Careem or Souq, in every case, the shareholders were selling the shares or assets of an offshore company.”  

But Hub71's incentive programme is not sustainable, nor is it enough (even with ADMG) to overtake Dubai’s spot as the region’s startup capital. The only place that currently has a real chance at doing so is Saudi Arabia.  

Saudi Arabia

With the Middle East's biggest economy and large youth population, the Saudi market is the most lucrative for many startups. Entering Saudi and operating in the country has until recently been difficult, but efforts from the Saudi Arabian General Investment Authority (SAGIA) and the General Authority for Small and Medium Enterprises (Monshaat) have eased these challenges and have cut the red tape required to establish a base in the country. It costs $1266 to set up a company in Saudi Arabia and the cost of living is substantially lower in Riyadh compared to Dubai. The average monthly salary in Dubai stands at $3000, in Riyadh it is $1780, while the average monthly living costs without rent for a single person in Dubai is $952, in Riyadh it is $734.

Moreover, the dramatic societal and economic changes that Saudi Arabia has undergone over the past few years is a remarkable testament to the country’s willingness to embrace the future and the disruption that comes with it.

“The first wave of entrepreneurship, from 2009-2013, we were just teaching people what entrepreneurship is and how to create technical businesses. From 2012-2018 we had a lot of new tech businesses starting in Saudi, in the past two years there has been a lot of focus on VCs and closing the financial gaps. The next focus is on unicorns, creating and supporting them,” says Sarah AlMubarak, director of innovation platforms at the Business Incubators and Accelerators Company (BIAC).

It’s a playbook developed by Dubai, embraced by Saudi and accelerated at a level unseen in the region. The government has introduced extensive plans and projects to incentivise the establishment of a startup hub, from launching a fund of funds, simplifying and digitisng licences and opening up its telecoms market. There are more than a dozen VCs that have emerged in the country this year with more in the pipeline according to BIAC. Even in lockdown, as government stimulus packages across the region focused on injecting capital to the banks, Saudi Arabia launched programmes aimed directly at startup and SME survival.

Home cleaning services platform Matic, which has operations in both the UAE and Saudi Arabia felt the difference in approach from both governments during lockdown. The SANED programme offered private sector companies up to 60 per cent of Saudi employee wages, which proved a lifeline for many startups employing Saudi nationals.

“In Saudi, the government approached us to help us and cut down the losses, the SANED programme bore that burden, we applied for it and luckily for us our entire Saudi operation is made up of Saudi nationals. In the UAE, there was no support like this,” says Mohamed Samad, co-founder and CEO of Matic.

From the conversations we have had with entrepreneurs, it seems there are more people in the Saudi government who are willing to listen to startups. One consultant who is familiar with the regulatory landscape in the region and asked not to be named, described Saudi Arabia as “the Wild West”.

“There are little regulations in place that prevent startups in Saudi and so when someone launches a new product or service, the regulators are more willing to listen and develop regulations around new technology,” they said. “In the UAE, a regulator like the RTA [Road and Transport Authority] makes money from issuing fines, that is their business model, issuing fines or a revenue share scheme, this makes life difficult for startups and prevents innovation.”

Beyond encouraging global companies and VCs to establish a base in the country, Saudi’s heavy investment in its higher education sector is also helping to create more of an organic ecosystem. Research institutions like the King Abdullah University of Science and Technology (KAUST) and King Fahd University of Petroleum and Minerals (KFUPM) are contributing to the culture of innovation and have helped Saudi Arabia register more intellectual property and patents than any other country in the region. In the same way that Stanford University serves as the innovation nucleus for Silicon Valley, these universities – and especially KAUST, which has graduated 78 startups through its TAQADAM accelerator programme including several deep tech startups like Red Sea Farms and GlucoJet – have the potential to do the same for Saudi Arabia.

But the country still lags behind Dubai as a hub, processes tend to be more laborious and time-consuming, Riyadh and Jeddah both lack the quality of life and crucially, access to talent.

“We have the biggest market in the region, we have the best access to capital, the thing that needs to be fixed is talent,” said Mohammed Aldhalaan, from Noon Academy while speaking on a panel at Step Saudi. “I can tie it easily back to the culture – how likely they are to join a startup, how they are perceived by their peers and families.”

As mentioned in the first part of this feature, remote working could help mitigate some the challenges of accessing talent, but changing culture will take longer.

“From an operating company level, it always comes back to access to talent, lifestyle, and amenities. Dubai has the most liberal environment in the region, but Riyadh and Abu Dhabi are gaining momentum. With any economy trying to thrive in the knowledge economy, you have to attract those top brains and have those liberalised policies and laws in place in addition to great schools and hospitals and internet speed and Dubai has historically had all of that,” says Rogers. “Dubai had such a massive head start in this game, it’s not been overtaken, but the strategies being pursued by the Saudi government and the Abu Dhabi government in particular certainly seem to be narrowing the gap in the minds of the entrepreneurial class.”

 

November 29th 2020, 11:24 pm
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