Breaking barriers to scale for Arab entrepreneurs
The world needs to create 600 million jobs in the coming six years, what about the Arab region?
The world needs to create 600 million jobs in the coming six years. With high numbers of young people experiencing long term unemployment, it is evident, as Jim Clifton of Gallup puts it, that the “coming jobs war” is for a good job. Perhaps not surprising are the staggering numbers coming out of the Middle East & North Africa (MENA): 56 percent of people are out of the workforce and 28 percent are underemployed—both percentages are among the highest in the world.
Creating meaningful jobs is one of the most daunting challenges the Arab region faces today. Entrepreneurs can provide powerful solutions for it. They are drivers of economic growth, innovation and competitiveness. Specifically, it is scalable startups that hold the keys to job creation. By analyzing the early stage growth paths of 380,000 companies across 10 European and Asian countries, the World Economic Forum (WEF) in collaboration with Stanford University and Endeavor Global have identified that the fastest growing 5 percent of the total companies reviewed have generated 72 percent of total revenue and 67 percent of the total employment recorded. However, although scalability is clearly critical for job creation, founders still encounter many barriers when starting and growing their businesses. Unless all ecosystem stakeholders come together to understand the roots of these barriers and craft innovative solutions to overcome them, startups in MENA will continue to struggle and so will our economies and societies.
Creating meaningful jobs is one of the most daunting challenges the Arab region faces todayFadi Ghandour
Focused on publishing research and insights on regional entrepreneurial activity, the Wamda Research Lab (WRL) aims to inform policy makers, investors and other stakeholders on the critical challenges and gaps in this space through data driven analyses. In its first study, “The Next Step: Breaking Barriers to Scale for MENA Entrepreneurs’’ WRL surveyed over 900 entrepreneurs and entrepreneurship experts, identifying the hurdles founders face in developing their businesses.
Our research shows signs of growth in the region: around 70 percent of surveyed companies that have three-year employment CAGR have added jobs, with 50 percent of these businesses demonstrating employee growth of at least 20 percent. These enterprises are agents of job creation in the region, but highlighted here below are the top four barriers that are hindering their development:
1. Finding talent and building teams
The region’s outdated education systems continue to graduate generations of unemployable youth who lack competitive 21st century skills. According to a survey carried out by the IFC’s Education for Employment (E4E) initiative, private employers said that only one-third of new-graduates in MENA are ready for the workplace when hired. On the other hand, only a third of surveyed Arab youth believe their education prepared them adequately for the job market. WRL findings indicate that 63 percent of entrepreneurs and around 60 percent of experts consider finding talent and building teams as major obstacles to scale.
But the skills mismatch is only one shade of the spectrum. Entrepreneurs in our survey realize that, even if talent is available, most job seekers still prefer to work for corporations. Entrepreneurship education and thinking are still nascent in MENA. According to a study conducted by WEF, fewer than 10 percent of the universities in the region offer entrepreneurial courses and only 17 universities have entrepreneurship centers. Therefore, public-private partnerships that institutionalize knowledge transfer and skills development are a must. Companies should take an active role in curriculum design to incorporate entrepreneurship thinking. Businesses can also partner with universities to commercialize R&D, provide startup internship and job-shadowing opportunities as well as help publish research and case studies that showcase regional entrepreneurial success stories.
2. Access to finance
WRL research reveals that around 78 percent of entrepreneurs have used their personal savings at least partially to finance their ventures, and almost half of them resorted to family and friends for support. On the other hand, only 24 percent of companies have received angel funding and a smaller percentage is venture capital funded. Of the businesses that received funding between 2009-2012, only 21 percent raised more than $500,000.
With 36 percent of entrepreneurs mentioning the dearth of venture investments as a major barrier to scalability, it is obvious that more startup financing is needed, and growth investments larger than $500,000 are a pressing priority.
The ecosystem is slowly changing, however. More and more venture investments are happening in the region compared to early 2007, with a significant share targeting the ICT sector. The venture capital market is young, but it is growing with funds such as Oasis500, MENA Venture Investments, DASH Ventures, BECO Capital, Sawari Ventures and Middle East Venture Partners (MEVP) to name a few. In parallel, countries like Lebanon have come up with innovative financing programs for small and medium enterprises (SMEs). The Central Bank of Lebanon has recently allocated $400 million to guarantee up to 75 percent of Lebanese banks’ equity investments in SMEs, incubators, accelerators and funds.
3. Access to new markets
While the Internet has provided alternative ways for small businesses to expand and enter new territories, our region’s fragmented markets still allow little mobility of talent, goods and capital and offer limited prospects for startups to thrive. Deepening presence in the GCC market is a top priority for company founders, yet restrictions on foreign ownership and costs of setting up are all hurdles to expansion. According to our study, 47 percent of entrepreneurs and 50 percent of experts cited finding partners to facilitate expansion as a top challenge. Moreover, 39 percent mentioned the high costs of setting up as another impediment.
The share of intra-Arab trade in total merchandise trade still hovers at around 10 percent, as most countries still maintain protectionist policies that tend to stifle regional commerce. Private companies should lobby for the elimination of protectionist policies and the establishment of custom unions and free-trade agreements by building effective private-public partnerships and constructively employing trade data to craft better solutions.
4. Difficulty marketing products and services
WRL study reveals that 41 percent of entrepreneurs consider marketing products and services as the biggest obstacle to generating revenue, and 28 percent mention finding customers.
Startups need early adopters to prove their concepts and grow, and there is no better way to support them than becoming their client. Business leaders can provide support by setting up procurement policies that encourage their organizations to engage and work with entrepreneurs. In return, this would help introduce innovative practices to the value chains of established companies, expand their market shares and spin new products and services. Governments can also play an active role. A recently approved law in UAE requires federal authorities and ministries to allocate at least 10 percent of their procurement budgets for SMEs.
The fact remains that the region’s outdated education systems, fragmented markets and weak entrepreneurship support mechanisms are stifling the growth of startups and innovation. Job creation needs to be at the core of every stakeholder program, be it a policy, national strategy, private-sector initiative or social activity. It is time we pool our knowledge, resources, capital and networks to turn entrepreneurship into a development tool for our societies and economies.
This article was first published in LinkedIn Influencers.
Fadi Ghandour is the Founder and Vice Chairman of Aramex, one of the leading global logistics and transportation companies. He is currently Executive Chairman of Wamda Capital, a new Venture Capital fund focusing on technology investments in the Arab World. Fadi is also the Managing Partner of MENA Venture Investments, a seed capital investment company investing in early stage tech companies. He is a Member of the Board of Abraaj Capital and Endeavor Global, Member of the Advisory Council of the MIT Media Lab and Member of the Board of Trustees at the American University of Beirut (AUB). Passionate about social entrepreneurship, Fadi is the Founder and Chairman of Ruwwad for Development, a private-sector led community empowerment initiative that helps disadvantaged communities across the region overcome marginalization through activism, civic engagement, education and financial inclusion with support from the Ruwwad Micro Venture Fund, an equity-based fund providing seed capital and support for microbusinesses and micro-entrepreneurs.
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