4 Tough Questions to Ask Yourself Before Launching a Start-Up in Saudi Arabia

You don’t have a scalable business plan. The infrastructure you need for your start-up isn’t there. You think banks are actually going to give you money. You have not even thought about launching from outside of Saudi Arabia.

You are the average Saudi start-up newbie, and if you don’t change your game plan, your business will not stand a chance.

I know this because I used to be in the same situation. When I launched my first few companies, I did not even understand what a scalable business model was. I believed the fairytale that just working hard would make me rich.

Here is the truth: starting a company anywhere is difficult, but there are special problems you as a Saudi entrepreneur will need to deal with. To start out right, be sure you can honestly answer the next 4 questions before you go any further with your start-up:

1. Is your business plan scalable?
Most Saudi entrepreneurs tend to subconsciously select businesses that are not scalable. I was the same way, until I figured out the importance of scalability. I had been running self-started businesses since I was in high school, and I did not even hear the term scalability until I started sitting down with venture capital banks and investors a few years ago, long after I had already started several businesses. By then, I was already in too deep to change the business model of each company, or even exit.

It took me four years, from when I first launched a now-closed company in 2004 to when I finally started learning how to create real wealth in 2008, to see that my main service-based business would be very difficult to scale up. Today, I am taking that company, Innovative Business Solutions, and using it to launch new product and services lines that are scalable.

What does it mean to have a scalable business model? A scalable model lets your company grow without having to keep hiring more people, and keeps needed resources at the same rate as overall business growth. There is no such thing as an infinitely scalable business, of course, but some types of companies are much more scalable than others.

Ask yourself this: will your business keep growing if you stop hiring more team members? And will the resources you need to make money from your business stay low despite the rate at which your business grows?

If you cannot answer “yes” to both of those questions, your business model is not really scalable. But at least you are now one of the few Saudis who understands this.

So, why don’t most Saudi entrepreneurs understand scalability? No one teaches us. Most of the training programs and workshops offered to Saudi entrepreneurs do not cover scalability because they are designed for small businesses, not start-ups.

I have been trying to solve this problem by giving talks about scalability to entrepreneurs at least once per month and helping entrepreneurs who make appointments with me understand the idea of a scalable business model. This is important because, without a scalable business model, it will be very difficult for your company to grow no matter how hard you work.

Takeaway: Decide whether you want to launch a classic small business or a true start-up. If you want to launch a start-up, keep working on your business model until you have a plan for growing without always pouring in more resources and team members.

2. Do you have access to the infrastructure your start-up needs to be successful?
When I talk about infrastructure, I mean the everyday structures you need to have in place for your business to work. This can include high-speed Internet access, physical highways, or an online payment system.

Virtually all businesses need some kind of supporting infrastructure. For your business to have a chance in a certain location, you either need to have the right infrastructure in place or be ready to invest a lot of time and money into building it yourself.

For example, one start-up I’m launching right now, like many e-commerce projects, requires a reliable online payment gateway. Unfortunately, one of the biggest infrastructure obstacles in Saudi Arabia is that we do not have a way to make online payments in our currency with acceptable rates, and even setting up a way to receive electronic payments is much more difficult than it should be. If you want to hear me discuss this topic in-depth, check out the talk I gave at ArabNet Beirut about the challenges facing e-commerce in Saudi Arabia, including payment gateway difficulties.

I actually did an experiment to see how long it takes to set up a way to receive payments online. I was able to receive payments using a Personal PayPal account in 10 to 15 minutes. Setting up a Business PayPal account took two days. Next, I was able to set up a Google Checkout account in 35 minutes. But, it took me two months to set up a bank account and start receiving electronic payments through it in Saudi Arabia.

You can use payment gateways that are in Dubai, Jordan, the U.K., or the U.S., but that comes with multiple problems, such as a fixed transaction cost, transaction fees, exchange rate issues, and exchange rate fees, along with fees for transferring funds. With a local payment system, the only thing you have to deal with is the percentage charged on transactions.

My team and I have been working to set up an online payment gateway in Saudi Arabia, but it has been a very difficult and slow process. Part of the problem is that the regulatory and banking agencies in Saudi Arabia think that the market for this service is too small to be worth the headache, so they are not really interested in helping us make it happen.

There are also huge infrastructure gaps in terms of Saudi business law. For example, Saudi business laws dealing with shareholder equities were written in the mid-seventies and have not been updated since. These laws were created with construction and trading businesses in mind, not modern, service-based, transaction-oriented businesses. Saudi Arabia needs a commercial law update that fits the modern, intellectual business environment. For now, the only way to make the outdated legal infrastructure usable is to work with specialized lawyers, which are few in number and very expensive on a start-up budget.

Another example of outdated legal infrastructure can be found in Saudi intellectual property laws. Even though agencies and universities do help people to apply for patents, many Saudis file these patents just outside of Saudi Arabia, because this country’s patent system is outdated. The only recognized patents are for things like closed circuits and diagrams, not things that apply to day-to-day Internet businesses. In other countries, you can patent things like ideas, processes, designs, and quotes. These patents are taken seriously, as you can see by looking at cases like Apple and Samsung’s lawsuits against each other. But in Saudi Arabia, we still cannot patent business ideas, so my team and I have to apply for patents outside of Saudi Arabia.

Three years ago, this lack of infrastructure was very bad. Today, it is is bad. I think in another three years, the infrastructure situation will be much better. For now, while there are sometimes ways to work around missing infrastructure, your start-up will stand a much better chance if the infrastructure you need is already in place before you launch.

Takeaway: Before calling your business plan finished, make a list of all of the types of infrastructure your start-up will need to be successful. Research each item to figure out whether it is available to you in Saudi Arabia or not. If not, is it available in nearby countries and accessible to you? Or is there a way you can adapt your business plan to work with missing infrastructure while still remaining scalable?

3. Will you be able to finance your business without using traditional funding channels?
In Saudi Arabia, there are very few people or organizations offering funding to scalable start-up businesses. The truth is that banks that offer small business loans and government organizations that claim to help entrepreneurs are actually focused on keeping new companies small. They are very unlikely to offer you the kind of money you need to launch a scalable start-up.

But, if you want to try to get funding the way big businesses do, you will need to have an existing company with at least three years of financial records, large amounts of cash already in the bank, physical assets that have significant monetary value, and the extra money to create an escrow account to protect against chargebacks. Basically, you need to have a business and money in order launch a business and make money!

Today, the only way to get financing for scalable businesses is to go through venture capital funds or angel investors, which there are few of in Saudi Arabia. Fortunately, there is a light at the end of the tunnel: last year, I began seeing more of these coming into the market. Now, from time to time, there are pitching events that cater to start-ups, and I have seen letters of intent being signed with entrepreneurs.

While I think that we will see more local venture capital funds and angel investors stepping forward to fund scalable businesses in the next year, keep in mind that you will have to fight for their attention.

Takeaway: Instead of chasing small business loan providers, governmental organizations, or big banks that provide corporate funding, focus that energy on perfecting your business model and pitch. Once those are 100% ready, seek funding from venture capital funds and angel investors.

4. Is Saudi Arabia really the best country from which to launch your start-up?
As a Saudi, you probably think the easiest thing to do is to launch your start-up from Saudi Arabia. Or, if you are not from Saudi Arabia, but are like the ambitious Lebanese, Jordanian, and Egyptian businesspeople I see at events like ArabNet and MENA ICT, you might think it is a good idea to move into Saudi Arabia to launch your business.

I have bad news for you. We Saudis do have impressive purchasing power, a high rate of population growth, an excellent rate of adoption for technology, and one of the highest proportions of residents under 30, along with being the biggest consumers of YouTube content and the country with the highest rate of monthly growth on Twitter. But all of this makes Saudi Arabia a consumption market, not necessarily a good home base for a business.

One issue is that, as explained above, Saudi Arabia’s infrastructure is still developing. Another issue is that Saudis often do not buy locally anyway. Many Saudis would rather order a product online from a foreign seller than buy it from a local business owner. So, while offering your product to Saudis is a smart move, launching your business in Saudi Arabia is often not a smart move.

I always use the following example to explain this: Saudi Arabia is a good country to grow palm trees, but not a good country to grow strawberries, although we do consume a lot of strawberries. Just because this is a good country to sell strawberries does not mean it is a good country to grow them.

That is why my team and I have been looking into different options, such as starting a new business in or relocating an existing business to someplace like Dubai or Istanbul. It’s also why some of my Saudi friends have been shifting company operations from Riyadh to Jordan, while still keeping sales offices in Saudi Arabia. The initial investment for these companies still comes from homegrown Saudis, but since the infrastructure needed to support Internet businesses is not available, my friends have had to adapt.

So, what are your options if you do not want to launch from Saudi Arabia? One is to go through a free economic zone, such as Dubai Internet City. It is pretty easy to start a business there, although setting up a start-up in Dubai can be expensive at first. However, if you are serious about scaling up, it is likely that you will want to operate at the international level. If you want to serve the U.S. or European markets, you have to ask yourself whether Dubai is the right place to scale from.

In terms of good European sites for start-ups, Berlin took me by surprise during my recent visit to the city. It’s a good place for start-ups to host their development and operations due to the relatively low cost of operations and talented professionals. Of course, if you base your company out of Europe or the U.S., that comes with a whole other set of legal and financial challenges, such as a different taxation system. There is no easy answer, so you have to weigh your options.

Takeaway: Consider headquartering your start-up in Dubai Internet City, Jordan, Egypt, or even outside of the MENA region, depending on your plans for your business. You can still serve Saudi customers by maintaining a very strong local market presence in Saudi Arabia. If you decide you want your headquarters to be in Saudi Arabia, make sure you have sound business reasons for making this choice.

The main point that I want you to understand is that most of what determines whether your start-up will succeed or fail happens before you even launch. You cannot blindly rely on hard work to make your start-up successful and hope that everything will work itself out. The extra time you spend now designing a scalable business model, making sure you have access to needed infrastructure, finding alternative sources of funding, and carefully planning where you will set up your headquarters can save you years of headaches later. Big dreams require big plans.

Need help planning your future start-up?
Please book an appointment with me or send me your business plan through OsamaNatto.com/contact so I can help you launch your start-up right.

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