Arab Tech Industry in Need of Easier Access to Capital, Friendlier Regulations and Government Support
Less than 0.15% of the dividends of GCC-listed companies and 0.59% of those of the UAE’s dividends invested in tech start-ups vs. 5% in the USA
The nascent technology sector in the Arab region needs to be reinforced by government support and backed by proper funding from sovereign wealth funds (SWFs) and local institutional investors if it is to flourish and create the next technology titans, according to BECO Capital, a regional Venture Capital firm that invests in technology start-ups.
The Arab World finally has the opportunity to participate in the 6th technological revolution and will need to back the sector with policy action that involves improving access to capital and easier, supportive regulation. “In the last 400 years, we missed the major five technological revolutions; the industrial revolution, steam engines, steel and electricity, automotive production and now IT since 1971. This is our opportunity to leapfrog into the next phase of development if we all realise the importance of this tech revolution that is happening around us and support it. We should back the sector with capital and easier and fast-tracked regulation.”
Speaking at the 8th MIT Pan Arab Conference on growth and sustainability in the evolving landscape of the region, Dany Farha, the company’s Chief Executive Officer, says: “The technology sector is vastly underfunded in our region and local regulations do not encourage or support start-up funding or even early stage funding.”
In the United States, five per cent of public company dividends are invested in technology start-ups, which is low by all standards. In the Gulf Cooperation Council (GCC) states, this figure is estimated to be much lower at a mere0.15% of the listed companies’ dividends, with the UAE faring slightly better at 0.59%, or four times that of the GCC, of its public companies’ dividends invested in start-ups.
Dany Farha says: “Investing in the tech sector should become a matter of strategic importance and governments need to encourage their SWFs to channel funds towards our regional emerging Titans and to offer them special VIP hand holding to form true strategic partnerships. This will fast-track these companies to become public and quickly cultivate our ecosystem. We are not talking about government hand-outs here but about developing a new asset class for investors in order to propel the next generation of start-ups.”
According to him, supporting winning start-ups or potential “unicorns”- a Silicon Valley term for tech companies which are expected to break the US$1 billion valuation ceiling, will create sustainable economic value and contribute to alleviating the standards of living. Access of start-ups to smart capital and operating within friendlier regulatory frameworks in the region could tackle some of its pressing challenges and speed track the role of entrepreneurship and innovation in an evolving Arab World.
He explains: “Governments should realise the importance of this tech revolution that is happening around us and support it wholeheartedly. They should back the sector with capital and easier regulation. Keeping locally-bred, world-class start-ups that will become the next technology titans in our ecosystem will create a virtuous cycle of entrepreneurship and innovation.
“Investing in regional start-ups at an early stage will lead to growth, create value, generate more and better paying jobs”, he affirms, giving an example of Singapore, a country which had a stunning US$1.7 billion VC funding in 2013 compared to China’s $3.46 billion. The government of Singapore has contributed around S$100 million dollars into its early stage start-ups during that year.
China and Russia are also supporting this trend. Government and regulatory authorities in both countries are ensuring that financial capital from both the business community and SWFs was invested in their nations’ emerging Titans and that these tech companies are given all the hand holding to take them public. Examples of China’s tech giants include JD.com, Tencent, Baidu and most recently Alibaba and Russia’s Mail.ru, which became Europe’s largest listed internet business.
“Arab governments should invite their SWFs, some of which are consistently ranked amongst the world’s top ten, to finance venture capital in a strategic move to retain value. When winning start-ups get local funding, their enterprise value, profits and talent will be recycled into the local economy and invested in new winners. Loosing a winner to an international strategic buyer or VC firm in an early exit narrows the ripple effects on the economy and limits the broader outcome. The region risks loosing its technology unicorns if it allows its technology champions to be snapped by international investors too early, and this, it should try to avoid at all costs.” Dany Farha insists. “Investing in regional start-ups, growing them and taking them public on the local exchanges or selling them to a strategic buyer will spur Merger & Acquisitions (M&A) activities, carrying on the positive cycle in the economy and generating shareholder returns, one of the ultimate aims of SWFs”, he concludes.
(Issued by Borouj Consulting on behalf of BECO Capital)