Jane Khedair, Executive Director of the Institute of Entrepreneurship and Private Capital at LBS talks about how the startup landscape has evolved over the years and what she thinks could strengthen the startup and venture capital ecosystem further in the region
How has the startup ecosystem evolved since you joined the Institute of Entrepreneurship and Private Capital at London Business School?
The IEPC exists to bridge the gap between the LBS community and the global entrepreneurial and investment ecosystem by promoting novel ideas to facilitate real-world learning opportunities, with an end goal of driving sustainable economic growth.
During my time as Director of the IEPC since 2018, I have witnessed significant growth in the startup ecosystem in the MENA region, with increased investment, support, and innovation. By providing tax exemptions, funding opportunities, and streamlined regulations, countries like the UAE and KSA have been working to foster a favourable environment for the growth of startups. This region is also hungry for opportunities in the form of new goods and services and for growing businesses across many different sectors making it economically appealing.
How would you compare the startup ecosystem in the UK to the Middle East?
The start-up ecosystems in the UK and the Middle East have their own unique characteristics and strengths, although they are equally dynamic and evolving rapidly, with governments and stakeholders in both regions actively working to strengthen their start-up ecosystems and promote innovation.
Starting with funding, the UK has a well-developed investment culture, with access to significant funding from local and international investors. Tax incentives for those based in the UK have driven significant support for early-stage ventures over recent years. In contrast, the Middle East has been rapidly growing its start-up ecosystem and has seen an increase in venture capital funds and investment activities, with cities like Dubai and Riyadh emerging as important investment destinations.
The UK has a long-standing tradition of entrepreneurship and a culture that embraces risk-taking and innovation. London is known for its diverse and vibrant start-up scene, attracting talent from around the world. The Middle East, on the other hand, has witnessed a recent surge in entrepreneurial activity, driven by a growing youth population, government support, and initiatives to foster innovation and technology-driven start-ups.
As for each region’s regulatory environment, the UK has well-established legal frameworks and business-friendly policies. The presence of professional service providers and institutions that support start-ups further enhances the ease of doing business. In the Middle East, governments have been actively working to create favourable regulations and policies to encourage entrepreneurship and attract foreign investment. Initiatives such as free zones, start-up visas, and regulatory sandboxes have been introduced to facilitate start-up growth.
Against this backdrop the specific opportunities and challenges for startups in each region will ultimately vary depending on the industry, precise location, and their stage of development.
How does the failure of financial institutions such as Silicon Valley Bank impact the startup ecosystem?
If a prominent financial institution like Silicon Valley Bank (renowned for its tendency to support early-stage ventures) were to fail, it would not only make it more challenging for businesses to secure funding for their operations, growth, or new ventures but would seriously impact market confidence. Whereas we saw evidence of this earlier this year, the abundance of family money across the region to provide a safety net for those businesses has increasingly become apparent and private investment activity is gathering momentum in a welcome move to diffuse what could have otherwise put these start-ups in a very vulnerable position should the SVB situation be repeated in the future.
What’s your take on the venture capital ecosystem in the Middle East?
There is a lot of booming momentum in the Middle East’s venture capital ecosystem. The UAE accounted for nearly 50% of the total venture funding in the MENA region in the past few years – establishing a promising outlook.
This flourishing expansion is particularly seen in startups in the fintech industry, in big cities like Dubai and Riyadh. With an increasing demand for economic change and diversification, several venture capital firms look forward to accelerating their growth rapidly. Especially, post-Expo, the Middle East has seen a rise in venture capital funding and investments, and the formation of several SMEs in the UAE and followed by Saudi Arabia. The venture capital activity in the Middle East and North Africa region increased 46 percent to $1.8 billion in the first half of 2022, according to startup data-crunching firm MAGNiTT.
Overall, the venture capital ecosystem in the MENA region harbors an innovative and diverse audience, with favorable prospects for the integration of socio-economic and business-friendly policies.
What role can governments play in developing the startup and venture capital ecosystem in the Middle East region?
By taking a proactive role and implementing supportive policies and initiatives, governments can play a crucial role in developing a vibrant startup and venture capital ecosystem in MENA.
We have seen in the UK how a favourable regulatory environment is able to play a significant role in fuelling entrepreneurship activity. This could be replicated in the Middle East to streamline business registration processes, reduce bureaucratic red tape, and implement investor-friendly laws and regulations where, encouragingly, the government has already started to take positive strides by establishing special economic zones and innovation hubs with flexible regulations to attract start-ups and investors.
The next step could be the provision of financial support and incentives to potential stakeholders in the form of grants, subsidies, tax breaks, and investment matching programs.
At the heart of a thriving entrepreneurial ecosystem though should be a government’s agenda on education and skills development to nurture a culture of innovation and equip future entrepreneurs with the necessary skills and knowledge to launch and grow a business. By instilling tomorrow’s generation with the ‘entrepreneurial mindset’, arming them with a set of attitudes, beliefs, and behaviours that are conducive to identifying and pursuing entrepreneurial opportunities, creating innovative solutions, and navigating the uncertain and dynamic business environment, they will be better leaders of their own – and others’ – businesses in the future.
What are the potential risks associated with venture capital investment for a startup?
Venture capital investments, by their very nature, tend to be risky, as is starting a business. However, bringing in equity funding can be an invaluable tool to grow a business with careful planning and forethought. There are quite a few aspects that need to be considered before taking on venture capital investments, both for the investors as well as the startups.
These aspects can be like a double-edged sword. Bringing in external investment translates into a dilution of ownership where the founders will have to forego a portion of the ownership of the company and reduce the control they have over their own business.
Venture capitalists also take on an active role in the startups they invest in. With VC backing, you will get valuable insights, expertise, mentorship, and networking, but it can also result in a loss of autonomy and a reduction in decision making rights since venture capitalists typically have a say in certain decisions being made.
Financially, in some cases, there will also be stringent terms on what the monetary resources can be used for to protect the investors’ investments, potentially making it difficult to quickly respond to the changes in the market.
It is very important to understand all the risks startups face before taking in venture capital investments. But with careful due diligence, founders can seek investments from VC firms that are good for the business ensuring the business’ interests are properly protected.
What is the best way to raise funding for a startup?
This really depends on various factors such as the stage of your startup, industry, growth potential, and your network. Self-funding (‘bootstrapping’) by using personal savings, credit cards, or any other personal resources may limit your initial rate of growth although it does give you complete control and ownership of your business.
You can approach friends, family members, or close acquaintances who believe in your vision and are willing to invest in your startup although it’s important to treat these investments professionally and have clear agreements in place to avoid straining personal relationships. Instead, many founders prefer to take their ventures outside of their personal network by approaching angel Investors who make themselves known through angel networks and often provide more than just capital in the form of mentorship and providing access to industry connections in exchange for equity in your company. Some angels prefer to stick to crowdfunding platforms that allow you to raise funds from many individuals who contribute smaller amounts on a hands-off basis. Crowdfunding can be an effective way to validate your product or service and build a customer base.
As your business grows and you are looking for larger amounts of money to scale, venture capital firms are typically the next port of call, again taking equity in the company based on its valuation which is typically driven both by historic performance as well as future projections.
Businesses in some sectors – particularly those involving innovation – are able to access grants that offer funding to innovative startups although involve a competitive application process and ongoing reporting that often compromises the benefit of so called ‘free’ money.
Accelerators, incubators, and competitions are all great ways of not only raising money but also securing, mentorship, resources, networking opportunities and visibility.
How important is an Exit Strategy for a startup, and when is the best time for a startup to exit?
Starting up a new business involves high risks and can sometimes reap high rewards. But this outcome is not the rule of thumb. As with any idea, it is always a good idea to safeguard your business and protect your assets, ideally by ringfencing them if possible.
Having an exit strategy in the early stages of the business can also help dictate and influence aspects of the business such as revenue models, legal structure, investments etc. and will let founders optimize their returns in case the exit strategy comes into play.
There is no definite time frame for a startup to exit. Business owners will need to consider various factors and consequences and base their decision accordingly.
What entrepreneurial tricks have you discovered in your journey that you can share with our readers?
I don’t think there are any ‘tricks’ as such – more like ‘tips’…
Firstly, don’t underestimate how much time or money you will need to get your business off the ground. It will typically take twice as long as you thought to get any revenues and require 3 times the amount of money you anticipated.
Secondly, don’t leave it too late to raise money for your business – it’s never too early to start raising or at least having conversations. Don’t be precious about who you speak to. Unless you have a need to keep quiet to protect your IP before it gets filed, there’s usually very little that you need to protect. The success or failure of most businesses is down to execution by a stellar team not because of the business idea itself.
And finally, talking of team, make sure you bring in people who have the right skillset, background and network to really add value to your business. As is often quoted ”If you ever find a man who is better than you are – hire him. If necessary, pay him more than you would pay yourself.”
What message would you like to give to budding entrepreneurs in the Middle East who aspire to be part of this growing ecosystem?
I’ve witnessed remarkable growth and opportunities in MENA over recent years which is now an exciting and vibrant arena for hungry individuals to make a mark in the business world. Where possible and relevant, embrace innovation and leverage the digital revolution to future-proof your business by way of automation to allow for scale.
Build strong networks and foster a culture of collaboration to learn from others’ experiences and discover new opportunities. The entrepreneurial career path is a journey filled with ups and downs and can be a lonely place if you don’t have the right people around you to help you build resilience and perseverance that will be key to help you overcome obstacles and achieve long-term success. Make sure you never stop learning – the world is your oyster, and the pearls are there for the taking.