Category Archives: Entrepreneurship

The Ivy League, Silicon Valley, and Saudi Arabia: Why Rejecting Western Ideology is Good for Entrepreneurship (with Athar Mian)

The Ivy League, Silicon Valley, and Saudi Arabia

Photo courtesy of Bexx Brown-Spinelli.

Global strategist Athar Mian has posted another perceptive response to one of my latest articles, Drop Out to Start Up? The Debate and What I Really Think, in which he examines non-Western entrepreneurship.

From his international entrepreneurial ventures to his high-level technology venture advising, Athar’s uncommon viewpoints come from his uncommon experiences. His opinions do not necessarily reflect my own.

I have added a title and links to his response for ease of reading. The text is otherwise unchanged.

Drop Out to Start Up? The Debate and What I Really Think

As I said in An International Strategist’s Perspective on Dreaming Big, my recent articles have lead to insightful online discussions, including a debate that took place on my Facebook profile.

The article How Getting Rejected From Every University in Saudi Arabia Helped Me Launch a 5-Million Dollar Business sparked some controversy, especially because I wrote “Today, I encourage Saudis to drop out of school, abandon their family businesses, and quit their jobs if it helps them get serious about entrepreneurship.”

Many people weighed in on whether it is right to encourage students to drop out of school. In this article, I will share just a few of their comments, then explain what I really think about this controversial topic. For ease of reading, I have combined different sets of comments when written by the same person, as well as added links. Otherwise, the comments are unedited.

A Dream Alone is Not Enough

Khalid Suleimani, President of the SIRB angel investment network, disagreed with the idea of encouraging entrepreneurial students to drop out:

Even though I’m one of those who dropped out of the Ph.d program to start a business, I think you need to clarify that a dream is not enough.

Being equipped with the right tools, capital, and a proper study of the market is an absolute requirement. Taking a test to c if u can endure the pressure of business should also be recommended. Some people get into this for all the wrong reasons, loosing time and money they can’t afford.

I talk about this dropout myth in my book. Few became rich after dropping out, but the majority had a good education (YouTube, yahoo, and instegram) . Some only dropped out after securing/foreseeing a huge deal. Like the google founders, and bill gates.

Osama, I would not encourage someone seeking heigher education to dropout if he/she has the enrtrprenuership bug. Education might broaden his horizons to create a disruptive solution to change the world. Google founders algorithm was part of their Phd work. They only dropped out to commercialize it. Had they not went to Stanford, they would never had thought of it.

If u don’t have the bug, it don’t matter. Depends if your next job requires it or not.

Khalid is definitely right in saying that a dream alone is not enough. The idea that all it takes to become rich is “a dream and hard work” is a fairytale, as I discuss in 4 Tough Questions to Ask Yourself Before Launching a Start-Up in Saudi Arabia. A dream is just the beginning, but we all have to begin somewhere.

The person who left the next comment also expressed herself clearly on this matter.

The Dangers of Fetishizing Drop-outs

Nermine Hassan, Consultant at Elixir Management, took a strong stance against encouraging entrepreneurial students to drop out:

In my opinion, encouraging Saudis to drop out of school is very damaging to their futures and may lead to grave consequences. Ideally there should be no trade off between entrepreneurship and education and ideally education, knowledge and self development should be a tool of empowerement and knowledge towards more successful entrepreneurship. I think your real argument and underlying statements here should be: 1. to “up” the Saudi educational system to reflect the current needs of the job market / entrep opportunitites in the kingdom; 2. the israr / perserverance one must have (as you did) in the case that he was rejected from schools and jobs he was striving for and to keep trying. 3. Encouraging angel investors to give youth a try, and easin up legalitiles needed for startups as setting up an enviroment for entrep is critical in the first place.

Those who fetishize the dropout are perpetuating a very particular logical fallacy: The path of leaving school is what leads to success, and not the extraordinary abilities of those who chose it. “It’s insane—you drop out and you become successful?” says David Rose, CEO of early stage angel investing platform Gust. “I would posit the people who drop out and become successful do so in spite of it, and not because of it.”

Again, Nermine is right in advocating for an educational system more aligned with the needs of the business world, as discussed in the article Grading the Saudi Entrepreneurial Ecosystem: A Report Card by ICT Veteran Barig Siraj. Likewise, an entrepreneurship-friendly business environment and entrepreneurs with perseverance are important features of the ecosystem we need.

However, both of these responses seem based on the idea that I am encouraging most or even all entrepreneurial students to drop out.

The next comment shows a different interpretation of my article.

Enjoying Freedom to Fail

Moizuddin G. Muqri, Strategist for Business, Marketing & Social Media at House of Specialties Group, considered this to be my message:

Freedom to Fail is what you preach and you are right. Thank you for this article. Having gone through failures of my own in the last 5 years, I finally came to realize how much of those failures were a blessing for me. In fact the problem you highlight is more or less present in all of Arab & Non Arab Muslim societies. Everyone wants to play it safe, whether he/she’s a student opting for a career path or an established business owner or business familia. You are encouraging Saudis to believe in themselves & not be dependent on the goverment or the private sector which is in the control of few. God bless ya buddy. You are not encouraging people to drop out, you are encouraging them to not to fear possible failures for initiatives that will make them independent & real contributors to society, economy & nation

This last comment reflects my mindset in How Getting Rejected From Every University in Saudi Arabia Helped Me Launch a 5-Million Dollar Business. After all, that article is the story of how I wanted to go to school so much that I kept applying until I had been rejected from every university in Saudi Arabia, then kept trying after that.

I clearly don’t think getting a college education is a big waste of time for everyone. But it is also not a magical experience that is wonderful for all young Saudis and must never be given up or even criticized.

A college education is an investment. Like all investments, it is right for some people and not others. This is true for entrepreneurs as well.

My View: Dropping Out as a Business Decision

The idea of dropping out of school as a business decision, like quitting a job or choosing a co-founder, is offensive to some people. But everything in an entrepreneur’s life becomes a business decision eventually.

The idea that dropping out to start a business should be encouraged or discouraged takes away from how complicated this decision can be and how different the lives of entrepreneurs are.

I hope the following case studies will show why this is true.

Case Study #1: Kassem Bagher

Kassem Bagher is one of the co-founders of ShopMate, a mobile platform that connects customers to the types of products they are already interested in. He dropped out of KAUST in 2012 to launch ShopMate, and I think he made the right choice.

After first joining the recently-formed ShopMate team as an iPhone developer, Kassem felt himself swept up in the idea of this innovative new app. He believed so strongly in ShopMate that he soon poured his entrepreneurial dreams into the budding project. With his course load cutting into the time available to work on making the app successful, Kassem soon dropped out to devote all of his time to its development.

Alongside him was his friend and fellow ShopMate programmer Abdullah Asiri, the serious KAUST student who had come up with the app as a weekend project and ended up dropping out in pursuit of an entrepreneurial future he had never seriously considered before.

I know because I incubated ShopMate. Kassem, Abdullah, my team members, and I started out working together in Office 51 of the Al-Bassam Business Center in Jeddah. Eventually, our project evolved into App51, a company that designs and markets lifestyle-based mobile applications.

We worked together for almost two years. Now that investment for App51 is well underway, Kassem and Abdullah have partnered with our own founders to launch Waqood Tech, an IT company focused on providing mobile application, Web development, user interface, user experience, and branding solutions to other app developers.

So, looking at attending KAUST as an investment, Kassem weighed it against the investment of launching his first start-up and picked the second. Considering that, in his case, staying in school was taking time away from his goal of launching his own business, he stayed true to his dreams by dropping out.

Case Study #2: Rinaldi Medali Rachman

Rinaldi Medali Rachman is a member of the entrepreneurial team known as ROFix (Reverse Osmosis Fouling Index). ROFix has created an innovative device that predicts when membrane fouling will occur at a water desalination plant and what type of fouling will occur.

KAUST has provided Rinaldi and the ROFix team significant amounts of seed funding. Rinaldi’s team includes one of the Principal Research Scientists at KAUST, Dr. Noreddine Ghaffour, who has over 20 years of experience in R&D and aquatic management. Rinaldi also has access to KAUST’s Sea Water Reverse Osmosis Potable Water Treatment Plant, where his team will be able to test their prototype.

When I first posted the article titled How KAUST’s Latest Seed Fund Winners Are Shaping the Future of Saudi Arabia, which started the series on research-focused KAUST entrepreneurs like Rinaldi, one of the first comments posted was “I thought you said universities are waste of time”.

I responded “Yes they are if you are an entrepreneur with a ready product and a ready market. If you are a researcher, then a research center or a university is the best place for you. BTW KAUST is more of a science and technology park and less of a University”.

Honestly, why would I want Rinaldi to drop out of his Ph.D. program? The prototype he and his team created will need to be refined before it’s ready for the market, and KAUST seems to be giving him the money, mentorship, and testing grounds he needs. He is being true to his dreams by staying in school.

Swimming Against the Tide

Above we have case studies focused on two young, male KAUST students, one who found staying in school the best investment, and one who found dropping out the best investment.

I don’t think Rinaldi, the current Ph.D. student, needed much encouragement to stay in school. Our culture assumes that smart, hard-working young men like him will stay in school once they have begun a degree program.

I do think Kassem, the drop-out, needed encouragement to choose a start-up over school, as did Abdullah. For many people, it takes encouragement to go against ideas that society has reinforced for us, like the idea that all smart, hard-working young men should get a higher education.

That is one reason you hear me encourage some young entrepreneurs to drop out of school, but not the opposite. The entrepreneurs who are best off in school are already showered in encouragement. Instead, the entrepreneurs for whom dropping out might be the better business investment are often told by their family and friends that they will ruin their lives if they leave school. They need to hear the other side of the story.

Staying True to Your Dreams

What I want, like Moizuddin said, is for entrepreneurs to be true to themselves and believe in themselves, whether that means dropping out or staying in school. I want them to make a smart business decision as to whether finishing their education or leaving school will bring them closer to their dreams.

I don’t want anyone to go to college only to get a degree or impress their family, just like I don’t want anyone to start a business only to be known as an entrepreneur or impress their friends. Either of those paths would be a waste of time.

The best path for entrepreneurial young people is that which will offer value to our society and bring each one closer to his or her dreams. That path leads toward universities for some and away from universities for others, but in the end, both paths lead to a better world for them, and for us.

An International Strategist’s Perspective on Dreaming Big

How Getting Rejected From Every University in Saudi Arabia Helped Me Launch a 5-Million Dollar Business

Photo courtesy of the USDA.

Photo courtesy of the USDA.

In the nineties, I was rejected from every university in Saudi Arabia. It was one of the best things that ever happened to me. That experience taught me that failure does not mean what most people, maybe even you, think it means.

Today, I encourage Saudis to drop out of school, abandon their family businesses, and quit their jobs if it helps them get serious about entrepreneurship. I do this knowing very well that there is a serious chance their new start-ups or ventures will fail, and that this failure is exactly what could make them successful.

If you want to learn my definition of failure, and find out how getting rejected from every university in Saudi Arabia helped me get to where I am today, please keep reading this article.

The First Root of Failure: The Failure to Dream

To better understand failure, look at the problems we are having with our economy. The real issue is not just a shortage of jobs or limited circulation of cash. What is really holding our economy back is the fear of failure. People are very scared of being judged as unsuccessful.

Because of the fear of failure, we Saudis stopped dreaming. When we stopped dreaming, we stopped innovating. And when we stopped innovating, our economy dried up. We traded hope for safety. Because we gave away our power, the same millionaire families, now billionaires, have controlled our economy since the 70s.

But the future of our economy depends on our ability to innovate. Once we get enough people dreaming again, their dreams will grow into new businesses, these new businesses will create new jobs, and we will build the entrepreneurial environment this country needs.

The first cause of failure we Saudis need to overcome is the failure to dream.

The Second Root of Failure: The Failure to Begin

Many people never start working toward their dreams because they think these dreams are impossible. These are the people who say there will never be a billion-dollar Saudi start-up. But before you join them in calling big dreams impossible, let me remind you of the story of Mohammed Bin Laden.

Mohammed bin Laden was born in 1908 on the coast of south Yemen. He grew up poor, uneducated, and illiterate. His father died when he was a child. When Mohammed bin Laden first came to Jeddah, he worked as a porter. Then, in the 1930s, when he was in his twenties, he started his own construction company. He earned his success by bidding low on contracts and working reliably. You know the rest of the story. His company helped build the Kingdom as it stands today.

So, what if you woke up tomorrow in the same situation Mohammed bin Laden was in when he came here? If you woke up without your house, without your money, without your university degree, and without your family, would your risk of failure really be higher than it is now?

If you understand what failure truly is, you will see that it does not matter. Beginning to work toward what you love, no matter what your situation, can only bring you closer to success.

So, the second cause of failure we Saudis need to overcome is the failure to begin working toward “impossible” dreams.

The Third Root of Failure: The Failure to Make Mistakes

It is resistance to change that is holding our economy and our future entrepreneurs back. Changing means taking risks, and taking risks means making mistakes. I know how painful that can be, but I also know much it helped me.

I moved closer to success in 1994, when every university in Saudi Arabia, and even many in other countries, rejected me. The reason I moved closer to success is that I changed my strategy. I began to frame my rejection letters, not because I was proud of my situation, but because something had to keep me motivated. In 1996, I wrote a letter to the rector of King Fahd University of Petroleum and Minerals pleading to be allowed to go to classes, not even as a full-time student, but just as a learner. Although I had done nothing to earn it, he responded by giving me a full scholarship.

I moved closer to success in 2004, when I launched my own start-up with only 30,000 riyals in the bank, naive and ready to change my life. And I moved closer to success in 2011, when I attended the G20 Young Entrepreneurs Summit, ready to change my thinking by learning more about entrepreneurship from a global prospective.

There is nothing special about me that you, the future entrepreneur reading this right now, do not have. I have a willingness to fail and keep trying, but you can choose to adopt this attitude, too.

You can decide to start early and make as many useful mistakes as you can. The younger you are, the more you will learn from your mistakes. As you get older, your life will weigh heavier around you, and your mistakes will hurt more. Soon, you will be 40 or 50, and although it is never too late to start, you will find yourself thinking that it is too late for you to change. But the truth is that as long as you keep making mistakes, you will keep moving closer to success.

The third cause of failure we Saudis need to overcome is the failure to make mistakes.

The Core: What Failure Truly Means

Despite what society may tell you, failure is not falling into poverty, dropping out of school, angering your family, or even shutting down your business. These old ideas of failure are what is holding our economy back. To change our economy, we need innovation. To start innovating, we need to go back to dreaming.

So, what is failure?

Failure is refusing to change.

The rich businessman who is sitting in his office, doing work he does not love because he is afraid to change his life, he is the failure. The student attending class after class, studying something she does not like; the young man working in his family business without room for innovation; and the employee sitting down again to do the same routine job are failing themselves.

The young innovator who is broke, but always learning more about what he loves, is succeeding. Because as long as he keeps working to improve himself and change the economy for the better, he cannot fail. As soon as he starts working toward his dream, he is succeeding.

So, whatever your entrepreneurial dream is, start working toward it today. Because as long as you keep learning from your mistakes and improving yourself, you will never fail.

Readers: what is your entrepreneurial dream? Post in the comments section below and share it with the world.

Saudi Entrepreneurs: Dream Big or Die Small

Dream Big or Die Small

Photograph courtesy of Bob Bob.

When you come into my office, I ask you how you are going to make a billion dollars. You don’t like the question. You tell me you want to start small with your business and see how things go. Someday, you say, you will be selling in New York and Tokyo, but for now, you just want to get the ball rolling in Saudi Arabia.

But your small thinking keeps you small.

To succeed as an entrepreneur, you need a dream big enough to carry you above the day-to-day grind of running a business. If you think small, your energy will get sucked into everyday operations, and you will be too tired to think about scalability. When you finally find time to think about scaling up, you will be in too deep to update your business model, and you will not have the resources set aside to do so.

If you really want your business to make it to New York or Tokyo, let me share how you can start preparing for it right now.

The Secret to Becoming the Next Mark Zuckerberg

The key to growing beyond an ordinary small business and creating the next Facebook or Apple is to have a scalable business model. With a scalable business model, each extra dollar is cheaper to earn than the last, and growth does not rely on hiring more employees. There is no such thing as an infinitely scalable business model, but some business models allow for much more growth than others.

With my involvement in Destination Jeddah’s Enlighten and Mentor program, the Makkah Business Accelerator Program, and similar initiatives, I have seen more and more entrepreneurs entering the Saudi market every day, but most of you do not have a scalable business model. Not all of the programs and training centers that are supposed to be supporting you are teaching you this very important concept.

As one of the moderators of Startup Weekend last year, I decided I would just focus on scalability when speaking to the entrepreneurial teams. Not one of them had a scalable business model. When I talked to them and showed them how to scale up through licensing and other strategies, they told me they just wanted to start small and then grow. (By the way, at the time of writing, I haven’t heard of any of the Startup Weekend teams actually launching a business. If you know of any Saudi participants who have done so, please let me know in the comments section below, or tweet me.)

I understand. I thought the same way when I was a new entrepreneur. My first company, launched in 2004, is now closed, and the second one has required a huge strategy change to scale up. Multiplying the number of transactions you are making by 1,000 does not happen on its own.

The sad thing is that many of the businesses we have in Saudi Arabia could scale up beautifully. The problem is not a shortage of good products and services. The problem is a shortage of dreamers.

The Treasure Hidden in Plain Sight

Many Saudi companies have the potential to scale up successfully, but are not taking the opportunity. I know a publication that has an excellent brand and improvement record, and they could spread to every city in the world. It took this publication 5 years to launch in a second city, and I think it will take them another 5 years to launch in a third. But if they focused on scalability and had the right partners, they could launch in a new city every 3 months.

We also have excellent fashion designers in Saudi Arabia, but they are staying at the boutique or multi-branch level. They are not thinking about how to become the next Armani or Calvin Klein, or how to make sure their designs reach the U.S.

A few entrepreneurs are starting to wake up to this opportunity. Lately, I have had more young entrepreneurs making appointments with me, coming to my office, and discussing how to make their business ideas scalable. As with everything else, it will take time for people to adopt this mindset. As entrepreneurship becomes a bigger part of Saudi life, people will start to realize that they need to consider scalability from day one. Then we will see entrepreneurs asking themselves whether they have a million-riyal business idea, a 10-million riyal business idea, or a billion-dollar business idea from the beginning.

Until then, I will keep advocating for the importance of scalability in local magazines, on my website, during speeches, and in YouTube videos. I believe that once entrepreneurs like you understand the importance of scalability, our economy will transform.

Aiming for the Moon

Once you have a scalable business model, you will be able to see your path to a billion dollars, but many other people in your life will not. They will try to push you back into the mindset of starting small and scaling up someday. Turn it around and tell them you want to start with a billion-dollar idea and scale it down to fit the resources you already have.

There will always be people who say you are aiming too high. When you hear that, remember what W. Clement Stone said: Always aim for the moon. Even if you miss, you’ll land among the stars.

Looking for feedback on your business model?

Please send me your business plan or schedule an appointment with me through OsamaNatto.com/contact so I can help you create your billion-dollar business model.

 

[Infographic] Grading the Saudi Entrepreneurial Ecosystem with Barig Siraj

Which aspects of Saudi Arabia’s ecosystem are helping entrepreneurs succeed and which aspects are holding them back?

My most recent article, Grading the Saudi Entrepreneurial Ecosystem, answers these questions from the point of view of a highly-experienced Saudi businessman and investment expert named Barig Siraj.

While that was an article adaptation of a great speech given by Siraj, this post presents an infographic adaptation. The full text of the infographic is available below the image for those who prefer text.


Grading The Saudi Entrepreneurial Ecosystem


Grading the Saudi Entrepreneurial Ecosystem with Barig Siraj

Ideal entrepreneurial ecosystem: an environment that empowers individuals to become entrepreneurs and to thrive after launch.

Barig Siraj: an accomplished Saudi businessman with extensive experience in the public sector, private sector, and investment funding world. He often uses his investment knowledge to help other business people.


SUBJECT

GRADE

SIRAJ’S COMMENTS

Education and Culture

C

Not enough commercializable ideas. Education must be aligned with the business world’s needs.

Regulatory Framework

F

Archaic business laws! Government must provide commercial law update.

Infrastructure

A

Nice job, especially in terms of telecom infrastructure.

Workforce

C

Youths unprepared for modern business opportunities. Must align education with business world.

Support Mechanisms

A

Good effort. Many public and private sector initiatives supporting entrepreneurs.

Funding

F

Many debt instruments. Few equity options. Need government initiatives to promote equity funding.

Market

A

Looks great. Huge and growing consumer market.


Message from Barig Siraj

Saudi Arabia holds a lot of promise for entrepreneurs. We must help these entrepreneurs by celebrating their successes. It is also important to discuss their failures so that they can view setbacks as opportunities to learn. By sharing these stories and spreading the word about the importance of an entrepreneurial ecosystem, we can promote educational, legal, and institutional changes that will lead to a better business environment for us all.


This infographic was created by the team at OsamaNatto.com based on a speech given by Barig Siraj at KAUST’s Seed Fund Gala lunch and award ceremony on December 18, 2013. The opinions expressed in this infographic do not necessarily represent the opinions of Osama Natto or his team.


Want to keep learning about entrepreneurship, entrepreneurial ecosystems, and start-ups? Visit OsamaNatto.com for more business-focused infographics and articles.

Osama Natto to Speak at Social Entrepreneurship Idea Lab Panel on March 17th

I will be one of the speakers at a Social Entrepreneurship Idea Lab panel entitled “Mentorship Panelists: Your Keys to Success,” scheduled from 7:00 p.m. to 8:00 p.m. on March 17. The panel is set to offer social entrepreneurs tips on selecting and approaching a mentor, as well as give speakers a chance to share their stories and advise entrepreneurs on what to do and what to avoid when working with a mentor.

The Social Entrepreneurship Idea Lab is a three-evening event held in Jeddah that offers exercises, panel discussions, and Q&A sessions aimed at helping social entrepreneurs thrive in the modern business environment. This year, it will be held nightly from March 16th through 18th.

Cooperation among Naqaa Sustainability Solutions, The Washington Institute for Advancement, and the Nesma Training Center makes this educational event possible.

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Grading the Saudi Entrepreneurial Ecosystem: A Report Card by ICT Veteran Barig Siraj

The following article is based on a speech given by Barig Siraj, who is not only an accomplished businessman with extensive experience in the public sector, private sector, and investment funding world, but also a caring friend who changed my life in 2008 with a single, incredibly educational office visit.

Barig Siraj is the Director of the Information Technology department serving Zahid Group, one of the most powerful business houses in Saudi Arabia, with interests in construction, mining, industry equipment, logistics, energy, tourism, hospitality, and real estate. Previously, Siraj was CEO of ICT Ventures, an investment firm focusing on growth-stage businesses from the MENA region in the information communication and technology sector.

The speech on which this article is based was delivered by Siraj at KAUST’s Seed Fund Gala lunch and award ceremony on December 18, 2013. It does not necessarily reflect my own opinions.

The 7 Critical Components of a Healthy Entrepreneurial Ecosystem

A healthy entrepreneurial ecosystem is an environment that allows entrepreneurs, meaning people who introduce innovative business ideas to the world, to thrive.

According to the World Economic Forum, an entrepreneurial ecosystem can be assessed by looking at the following 7 factors:

1. Education and culture

2. Regulatory framework

3. Infrastructure

4. Workforce

5. Support mechanisms

6. Funding

7. Market

Siraj has graded each facet of the entrepreneurial ecosystem we have in Saudi Arabia, with green being the best category and red being the most in need of improvement.

1. Education and Culture: Yellow

A country’s educational institutions are the source of a lot of research and innovative ideas that support entrepreneurship. Naturally, entrepreneurs don’t look into research for the sake of research, but for the purpose of developing commercializable ideas.

Those in the private sector look to universities to foster commercializable inventions and the entrepreneurs that produce them. However, Siraj warns that while Saudi universities, especially KAUST, are facilitating the commercialization of ideas in the Kingdom, not enough commercializable ideas are coming up.

Siraj’s Solution

Siraj argues that the education provided to Saudi students must be aligned with the needs of the business world. This will help the number of commercializable ideas fall into proportion with the size of Saudi Arabia’s economy and the amount of funding provided for education.

2. Regulatory Framework: Red

Commercial law in Saudi Arabia has not changed in about 30 years, although commercial law updates have been debated for the past 9 years. Three Ministers have passed since then, and not one them was able to make commercial law reforms.

Likewise, the regulations passed down by the Capital Market Authority have been anti-venture capital (the importance of venture capital will be further discussed in the “Funding” section of this article). Mutual fund regulations are also in need of reform.

Here are just a few of the issues that Siraj warns these outdated business laws create for entrepreneurs:

a. Security Class Limitations

Saudi commercial law only supports common shares, not preferred shares.

Preferred shares are stocks that represent a higher claim on assets than common stock. They allow anyone taking bigger investment risks, such as a venture capital firm investing in a company, to get a bigger reward than those who buy common stock. Basically, this “A, B, and C” share structure lets people with money invest in people with ideas, and is also compatible with Islamic finance.

Joint stock companies have another class of preferred stock, but to be acknowledged as a joint-stock company, the Ministry of Commerce and Industry has to declare your operation a joint-stock company.

b. No Bankruptcy

There is not much to say here, as Saudi Arabia hardly has any laws regarding bankruptcy.

c. No Stock Options

Stock options are a tool that allows entrepreneurs to attract talent and reward existing employees based on their performance and seniority.

Saudi commercial law does not allow stock options.

These and other issues, including custody of securities, potential fast-track solutions for start-ups, and portfolio valuation have been discussed in the proposed commercial law update, but have not become a reality.

Siraj’s Solution

According to Siraj, Saudis can only try to encourage reform and hope that the nearly 10-year-old proposed commercial law update makes it out of the Shura Council, graduates to the Council of Ministers, and is approved. This will give businessmen and women the tools needed to help the entrepreneurial ecosystem grow.

3. Infrastructure: Green

Infrastructure refers to everyday structures that help a society operate, like paved roads and fiber optic cabling. Siraj says that we are doing well in terms of infrastructure, particularly telecom infrastructure.

Saudi Arabia boasts 53 million mobile subscribers, with each person practically having two sims. Fixed broadband penetration at the household level has reached 40%.

And those are just the official statistics for 2012; the 2013 figures would show even more growth.

4. Workforce: Yellow

The Saudi workforce has grown 69% over the past 13 years. Now, a McKinsey study has predicted that the number of people who reach working age and enter the employment market will hit 7.5 million in 2020, reflecting growth of 97%. So, from now until 2020, the Kingdom will see a huge number people entering the workforce.

Unfortunately, in Siraj’s opinion, these individuals will not be ready for the modern business environment. He warns that the education young people are receiving does not line up with the opportunities being created.

Siraj’s Solution

Again, Siraj promotes aligned education as the key to success. If the next crop of 7.5 million youths enjoy an education aligned with entrepreneurship, Saudi Arabia’s entrepreneurial ecosystem will flourish.

5. Support Mechanisms: Green

A support mechanism is a formal method or system designed to provide assistance to people who need it. The Saudi government, not oblivious to the needs of the business world, has launched initiatives aimed at supporting entrepreneurs—as has the private sector.

One of the Ministry of Labor’s initiatives, to give an example cited by Siraj, is an accelerator program where applicants are selected on the basis of the ideas they present when applying. The type of idea they present determines which program they are placed into. By the time each participant graduates, they have a registered company, assigned mentors, and a seed ambassador.

Other support mechanisms include Sirb (an angel investment network launched under KACST), Wa’ed (a venture capital fund sponsored by Aramco), and various providers of private sector funding. An interesting example of the latter is Endeavor, a New York-based non-profit that focuses on supporting high-impact, growth-stage companies and linking them with other entrepreneurs around the world. Endeavor now has a Saudi office dedicated to local companies. “Super angel” Dave McClure, founder of the venture fund 500 Startups, visited Saudi Arabia in late 2013 and expressed serious interest in one of the companies the local Endeavor office was working with.

Another private sector example is Wamda, an entrepreneurship support platform serving the MENA region. Wamda’s Mix N’ Mentor program brings people with ideas together with established mentors for networking and discussion.

As for future programs, the Chamber of Commerce is planning to establish an angel investment network that will encourage entrepreneurs, as well as existing companies that either want to grow or are struggling, to meet investors and make deals.

So, Siraj is happy with the number of mechanisms available, many of which are hosted in Jeddah, that can aid entrepreneurs.

6. Funding: Red

Funding can come either in the form of debt or equity, with Saudi Arabia having a lot of debt instruments, but few equity opportunities.

Debt

Debt-based financing mechanisms include secured loans, unsecured loans, asset financing, project financing, and crowdfunding (as seen on Kickstarter). An Islamic finance version of crowdfunding has also been developed in which the investor asks the entrepreneur to manufacture something for them according to a set of specs in exchange for a promise of funds.

Examples of debt-based funding providers include:

Saudi Credit and Savings Bank

The Centennial Fund

Kafala

But Siraj warns that “the issue with debt is it’s a burden, if you have to actually pay it back.”

So, what do we have on the equity side?

Equity

Informally, equity-based financing comes from what Siraj calls “the triple F”: family, friends, and fools. The formal channels are investment companies, venture capital firms, fundraisers, angel investors, and a new class of angels called super angels. While angels may invest in one, two, or three start-ups per year, super angels like Dave McClure have a portfolio of 15 to 20 start-ups per year.

Each of the equity shareholders described above looks at entrepreneurs in a different way. Siraj describes himself as a “strategic investor,” meaning he works with investment companies and is interested in dividends. There are also patient capital investors, who have their eye on long-term returns, and philanthropic investors, who are interested in making a positive social or environmental impact.

Venture capital firms, like STC Ventures, tend to provide private sector funding to earlier-stage start-ups, while private equity providers are geared toward later-stage start-ups. According to Siraj, this creates a “valley of death,” with many companies failing to pass through from earlier-stage funding to later-stage funding during their period of negative revenue.

So, while KAUST’s Seed Fund is helping start-ups make it over this hurdle, Siraj argues there’s still a lack of public sector equity programs in Saudi Arabia.

Meanwhile, the United States has been exercising equity-based influence since the Cold War era. When the Soviet Union launched Sputnik, Congress said, as paraphrased by Siraj, “Wait a minute, we need innovators!” So, the government launched the Small Business Innovation Research program, which put 6 dollars toward funding entrepreneurs for each dollar that the private sector invested. This created a domino effect, building up to the flourishing venture capital industry we see in the United States today, which provides a lot of funding to entrepreneurs.

So, while Saudi Arabia offers debt instruments, these are a burden, and Siraj warns that there is no real equity funding path available as an alternative.

Siraj’s Solution

The Saudi government needs to create initiatives that encourage equity funding, says Siraj. For example, the government could help by removing some of the risk that comes with investment. Businessmen and women have seen this work around the world, even as nearby as Egypt and Jordan.

7. Market: Green

With the Kingdom’s pyramid-shaped population, Saudis are enjoying a huge, and growing, consumer market. These consumers are searching for energy, desalinated water, places to live, and services. The growth of the telecom market, as discussed in the “Infrastructure” section of this article, also reflects this trend.

So, for an entrepreneur, Siraj says that the Saudi market represents an excellent opportunity.

Siraj’s Outlook

Overall, Siraj argues that Saudi Arabia holds a lot of promise for entrepreneurs. It’s evolving in way that will eventually allow an entrepreneurial ecosystem to flourish, and thus, entrepreneurs who are active now will have room to grow in the future.

According to Siraj, we can help these entrepreneurs grow by celebrating them and their successes. He says that one of his friends, for example, created a popular website and was able to sell it to a Turkish gaming company for 10 million riyals. Likewise, an entrepreneurial KAUST student named Abdullah Asif told the Chamber of Commerce in December that his 2013 revenue equaled 8 million riyals. These are among the stories that Siraj says must be heard.

The other stories that Siraj encourages Saudis to focus on are the failures. Entrepreneurs must understand that, as Siraj says, “what doesn’t break you makes you stronger”. As an example, Siraj brought up an entrepreneur who he works with named Wahid, who used to be part of the Arabia.com team. The original Arabia.com failed, but out of that company, 10 successful companies emerged, all created by entrepreneurs who learned from that company’s failure.

Siraj says that sharing these stories and spreading the word about the importance of an entrepreneurial ecosystem will help us create an environment that will spur better alignment between higher education and the business world, as well as encourage the government to modernize our commercial law and create initiatives that help entrepreneurs obtain the equity funding they need.

According to Siraj, when these goals are achieved, we will finally see venture capital firms created, commercializable ideas flowing from universities to boardrooms, and a thriving entrepreneurial ecosystem flourishing all around us.

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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.

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

If you’re thinking about launching a start-up, asking yourself just four questions right now could save you years of struggling later. I covered this topic in detail in my last article, 4 Tough Questions to Ask Yourself Before Launching a Start-Up in Saudi Arabia. Now this article has been adapted into an infographic, with extra information on topics like trending potential start-up locations added in. The full text of the infographic is also available on this page for those who prefer text.

Please see the text version below if you are having trouble viewing this image.

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

Starting a company anywhere is difficult, but as a Saudi entrepreneur, you will need to deal with special issues. Be sure you can answer the 4 questions in this infographic before you launch your start-up.

1. Is your business model scalable?

Scalable business model: A design that lets your company grow without having to keep hiring more people, and keeps growth ahead of expenses.

Ask yourself:

  • Will your business stop growing if you stop hiring more team members?
  • Will you need to grow your resources at the same rate as your business growth rate?

If you answered “yes” to both of those questions, your business model is not really scalable. It will be difficult for your company to grow no matter how hard you work.

To Do: 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?

Infrastructure: The everyday services and facilities 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.

The facts…

Saudi Arabia currently has the following gaps in infrastructure:

  • No affordable, local online payment system
  • Outdated commercial laws set up with construction and trading businesses in mind, not service-based businesses
  • Obsolete intellectual property laws

To Do: 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 model to work with missing infrastructure while still remaining scalable?

3. Will you be able to finance your business without using traditional funding channels?

Traditional options for financing: Ways of getting funding, such as applying for bank loans, that don’t work for most Saudi start-ups.

The facts…

Banks that offer small business loans: don’t offer enough money for scalable start-ups

Governmental entrepreneurship organizations: don’t offer enough money for scalable start-ups

Banks that fund big corporations: have financial requirements most start-ups can’t meet

Venture capital funds: are helpful, but focus more on companies in the growth stage, not the start-up or early stage

Angel investors: are helpful, but very reluctant to invest in intangible assets
To Do: Perfect 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?

Saudi Arabia is a good consumption market, but often not a good base for an innovative start-up business. This is due to issues like gaps in infrastructure and lack of trust in local brands.

The facts…

Dubai Internet City—Free economic zone: easy to set up there, but can be expensive, and might make it harder to reach U.S. and European markets

Amman, Jordan—Easy to set up a business, easy to access from Saudi Arabia, availability of affordable talents

Istanbul, Turkey—Good infrastructure available and easy access to European markets, but can be expensive due to currency fluctuations

Berlin, Germany—Low cost of operations and inexpensive access to talented professionals, but dealing with different taxation system can be complicated

To Do: Consider different countries, both inside and outside of the MENA region, as possible sites for your headquarters. You can still serve Saudi customers by maintaining a 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.

Most of what determines whether your start-up will succeed or fail happens before you even launch. 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.

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