Why Start-Ups Don’t Get Funding in Saudi Arabia

While there is a lot of money in Saudi Arabia, most scalable start-ups still can’t get seed funding. The money is there, but not to benefit us, the true entrepreneurs.

On the other hand, if you have a micro-business, usually one that requires you to personally run it, many government and non-government organizations will provide the funding you need to get started. Likewise, if you have a medium-sized company in a traditional industry, like manufacturing, banks will lend you millions of riyals.

Despite this, few organizations or groups provide funding to start-ups. Out of these few, fewer still actually help start-ups succeed.

What’s going on here? Why don’t most organizations that offer funding to newer businesses offer it to start-ups? Why are many of the organizations that do offer this funding not really helping? When will this situation change? And what can entrepreneurs like you and I do about it?

I’m glad you asked. In this article, I’m going to provide a simplified explanation of what is really going on in language that entrepreneurs like you and I can relate to. For the sake of simplicity, I’m not going to write much in terms of technical or financial details—if you are interested in that kind of in-depth information, you are welcome to book an appointment with me. But please read this article first to make sure you understand the basics.

Let’s start with the first question: why are more investors interested in micro-businesses than start-ups?

Saudi organizations like funding micro-businesses because they see it as charity work.

Micro-businesses are different from start-ups because they are usually not scalable. These are small businesses with few employees, usually no more than 5, that require small amounts of seed funding, usually no more than 40,000 USD (about 150,000 SAR).

Now, what does scalable mean? Having a scalable business model means your company’s revenues can grow significantly faster than the cost of running your business. Examples of costs include covering day-to-day expenses, buying necessary supplies, and hiring more team members.

So, for example, providing services is usually not scalable, since you have to keep hiring more team members to grow, which means your company costs more money to run. On the other hand, a business model that revolves around selling apps is scalable, because after your team makes a batch of apps, the cost of selling them is low, and you don’t need to keep hiring people to make sure these apps reach customers. Of course, creating a set of new apps tends to be riskier than offering a reliable service that you already know people will buy.

Do you see why it’s natural for most efforts by government and non-government business initiatives to go toward helping non-scalable small businesses? Micro-businesses create self-employed workers who don’t need outside support, but also don’t require big risks from investors.

And all these micro-businesses need is micro-financing, grants, and loans up to 50,000 USD, so that’s what these organizations provide. They see helping micro-enterprises as social work or charity, not really business.

Meanwhile, banks like helping medium-sized companies in traditional areas because they are safe bets.

Medium-sized businesses are usually defined as those with a few hundred employees. In Saudi Arabia, most medium-sized businesses are in traditional fields, like construction or manufacturing.

Saudi banks provide financing of about 5 to 20 million USD (approximately 20 to 75 million SAR) each to these midsize companies. Banks see these companies as safe investments because they make loan requirements so tough that only established businesses in traditional areas can hope to meet them.

For example, let’s say you have a construction business and are seeking bank financing. You only have to do 3 things to receive it. First, you have to show audited financial statements from your company. You also have to provide assets, such as equipment, as collateral. That way, if you fail, the bank can at least sell your equipment. Finally, you have to agree to assign proceeds from your contracts to the bank. If you do this, you will get funding.

However, if you are trying to launch a start-up, you probably won’t be able to do any of these things. A new company doesn’t have any financial statements yet. And if your company is based on something like developing online content, you won’t have valuable assets, either. Your assets will just be made up of hard drives and other computer equipment, which probably won’t be valued at more than 50,000 USD. Likewise, if you are trying to launch a new social media website or app, you might not have contracts that the bank can take a cut from.

So, banks prefer traditional businesses because they are a safer investment than start-ups.

Very few groups are helping companies that need between $50,000 and $3.9 million.

Today, Saudi Arabia has hardly any institutions that finance companies needing between $50,000 and $3.9 million in investment. Thousands of entrepreneurs in Saudi Arabia, including me, have fallen through this gap and struggled to find funding.

Banks don’t want to help us because we’re too small for them. It takes a lot of headaches to help us, and our failure rate is higher than the companies they already work with. Government and non-governmental organizations don’t want to help us because any one of us may end up as the next Steve Jobs or Mark Zuckerberg and start making the business world riskier for everyone. They prefer to focus on small businesses, creating self-employed people that don’t need their support, but also don’t challenge them.

Very few people in Saudi Arabia are actually willing to take the risks involved in creating the next big entrepreneurial superstar. They may say they are, but their actions don’t reflect it.

Now, a few programs aimed at this neglected segment are finally appearing—but not all of them are truly helping entrepreneurs.

In the past 5 years, new programs have stepped forward to provide seed funding, including Kafala, Wa’ed, and even some angel investment networks. But are they helping create an entrepreneurial ecosystem?

Let’s talk about each one:

The Kafala Program

Under the Kafala program, you can apply for a bank loan and the government will back it for you, guaranteeing it at 50%. My friends encouraged me to go into this program, but after spending months preparing all of the needed paperwork, I decided not to continue with Kafala. If you look at the details of this program, it’s not something that will help the typical entrepreneur.

First of all, you have to be in business for at least 3 years to qualify. You must show financial statements, proof of ongoing contracts and ongoing accounts receivable, and prove that you have substantial personal or business assets to back up your loan. On top of that, the rate of the loan is very expensive. Kafala says it is 9%, but when you add up all the fees and related expenses, the real rate is 12.5%!

Once I realized these things, I pulled out of the program. But, my friends went ahead and received financing from Kafala. They have since had issues with the program, with one friend actually closing down his company. So, while Kafala makes loans available, I don’t think their program is really helping entrepreneurs.

Wa’ed

Wa’ed is a venture capital fund that offers different financing options. You can either get a no-interest loan, which comes with small administrative fees of just a few percentages, or have Wa’ed fund you as an equity partner.

Personally, when I went into the Wa’ed program, I found it very tedious. At that time, you had to go through enough training to basically make you an MBA graduate without the degree. Many entrepreneurs just don’t have time to fill in that much paperwork and attend that much training.

Since then, Wa’ed has gone through a transition, including restructuring their funding process. I don’t think they have made their program easier yet, but they are continuously evolving, and I see a bright future ahead of them.

So, if you have the time, I actually highly recommend this program. It’s one of the best training programs I have seen, and it’s run by very competent people. If you are getting ready to make a big investment move, participating in the Wa’ed program is a safe way to practice first.

SIRB

The newest development is an angel investment network called SIRB, established under BADIR, a technology incubator program launched by King Abdulaziz City for Science and Technology (KACST). Five companies participated in their first pitching event, and 4 of these received a letter of interest from angel investors.

This past March, SIRB also launched a program called Sirb Award, a new type of competition offering about 66,000 USD (about 250,000 SAR) in start-up funding as a prize for the winner. The contestants are filtered through different rounds of the competition, with the second round requiring each entrepreneur to participate in detailed workshops to develop their business model.

Since then, SIRB has completed a full award cycle in a flashy event attended by the who’s who of Jeddah. Seven finalists made their presentations, and the winners received funding. We have yet to see, however, how SIRB will move from an organizer of award and pitching events to a real player in Saudi Arabia’s business ecosystem.

Oqal

Oqal is an unlicensed, private network of angel investors who first started coming together as friends about once a week to meet with entrepreneurs seeking seed funding. At first, this group mostly made small investments in technology projects. Lately, Oqal has been growing, and has begun meeting with more and more entrepreneurs on a frequent basis.

Unfortunately, Oqal has begun losing its strong name and positioning along the way. The chapters established in new cities have not maintained the same quality of members as in the original Oqal network. I have seen Oqal members who are far from investment and entrepreneurship, and I personally know that some of them do not have the kind of money for these investments. Maybe they see Oqal membership as a prestigious social status symbol, but that’s not what it is meant to be.

I hope that Oqal will go back to their original plan and focus on serious members so it can maintain its brand image and strong positioning for a long time.

How did the situation get this way, and why isn’t anything changing?

While new organizations aimed at entrepreneurs are appearing, most angel investing is still done by the big old families controlling the commercial wealth in Saudi Arabia, and these families are very conservative. This means they will only invest in what they know, which is mainly real estate. An unpublished survey showed that 93% of investors preferred not to make investments outside of this area. That leaves only 7% willing to invest in IT, medicine, and every other field. When an entrepreneur presents them with a nice new business idea and model outside of their traditional areas, they generally say no to it.

I know because I was that entrepreneur, pitching to the biggest investors in Saudi Arabia. Big investors love me and they love my business plans. They even invite me into their homes—I have literary discussed investment plans on their kitchen tables!

But when it comes time to put down 5 to 10 million riyals, they always say they better stick with what they know best: real estate. I sat with one of these angel investors recently and he said, “look, I am not going to put my money in a company until I’m guaranteed that I will get it back.” This cautious way of thinking only leads to traditional investments.

In other countries, businesspeople invest in new companies as a way of testing ideas and seeing what works in the market. The goal is hitting the big time. In Saudi Arabia, businesspeople won’t invest unless they see a proven business model and customers already in the pipeline. The goal is staying safe. But when no one takes risks, nothing changes.

I found funding in spite of this environment, but I had to take my own route.

After realizing the traditional path was closed off to me, I used “the three Fs” to get funding: family, friends, and fools. That’s how I put together enough money to fund the businesses I first created.

I have also gotten funding and even interest-free loans from customers. I was able to finance the business that my team and I are starting now through a combination of our own funds and advance payments from customers. We started pre-selling 6 or 7 months before launch, and through the goodwill of our trusting customers, we were able to finance a significant part of the operation. For other projects, I have actually gone to customers who I was on good terms with and asked them for financing. They were nice enough to loan me money interest-free.

Now, for that same business, I approached 7 or 8 different financial institutions for funding, including Kafala and Wa’ed, but I couldn’t make any progress with them. And that’s with money in the bank, customers in the pipeline, and the business ready to go. The fact that my new company sells mobile applications is scary to cautious investors, who aren’t used to betting on a product they can’t see or touch.

In short, I had to find different paths to financing. The money is there, but the people sitting on it are not aware of new market dynamics, knowledge-based economies, or intellectual property businesses that don’t need physical assets.

Saudi Arabia will eventually embrace riskier investments—but someone has to get the ball rolling.

Changes are coming, but gradually. Two years ago, no one would have thought that there would be two angel investment networks in Saudi Arabia. Today, we have one in Riyadh and one in Jeddah. The one is Riyadh has already made a few investments. The one in Jeddah hasn’t yet, at least at the time this article was published, but they are seeing entrepreneurs and attending pitching events.

Since part of my mission is to build an entrepreneurial ecosystem in Saudi Arabia, I will make sure that I work with programs like these, or at least make recommendations on how to provide something that we really need in this economy.

I think that once the ball gets rolling on innovative investing in Saudi Arabia, it will progress very quickly. Saudis like to copy each other, so all it will really take is for one big, traditional businessman to invest outside of traditional industries. Others will follow.

What can we, the entrepreneurs, do until then?

Until the rich investors catch up to us, we entrepreneurs must keep busy creating the knowledge economy that will support future innovation. Every small success in this creative economy, from launching a profitable mobile app to starting a popular Arabic blog, brings us one step closer to showing everyone that we really are shaping the future. Every small success encourages the creation of new entrepreneurs.

Eventually, these small successes will become big successes, bringing one of the big Saudi businessmen to offer us funding. And one is all we need.

If you need help launching your start-up, book an appointment with me.

My team and I have worked hard to create new start-ups, launching one new business every 18 months on average—and that average is now being reduced to just over 1 year. I have also been meeting about 2 to 3 young entrepreneurs per week, offering guidance to help them succeed.

Please submit your idea or plan through one of the forms on OsamaNatto.com/contact today so we can get started as soon as possible.

Advertisements
Tagged , , , , , , , , , , , , , ,

One thought on “Why Start-Ups Don’t Get Funding in Saudi Arabia

  1. Syed Hussain says:

    That link at the end is not functional, please find me a contact to this person as i am desperately looking for an investor for my start up idea.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: