The region must reclaim its rich scientific heritage, but it needs billions of dollars annually and government and institutional support.Today’s world is full of disruption. The rate at which new entrepreneurs and fresh business ideas are emerging, continues to gain momentum globally and regionally. Every day, we read about new start-ups pushing the boundaries of technology, exploration and experience.
It really is thought provoking - recently I’ve found myself reflecting on what it takes for a real innovation ecosystem to flourish and enable entrepreneurship, and why this is largely missing in our region. The landscape of technology companies in our part of the world is a good representation of the level of maturity of such an ecosystem.
According to a recent report by McKinsey & Company, among the top 1,000 tech companies by revenue, only 1 percent are located in the Middle East, compared with 44 percent in Asia Pacific and 36 percent in the US.In my view, there are five key elements that are essential to establish a thriving start-up and innovation hub.
Firstly, significant research and development through universities, companies or other institutions helps to spur idea generation and create technology to be licensed for development and commercialisation.
For example, Silicon Valley, the ‘gold standard’ of innovation and start-up ecosystems, has had a very symbiotic relationship with Stanford University. More than 40,000 companies can trace their origin to Stanford. These companies created approximately 6 million jobs, and generated annual global revenues of $3 trillion, nearly on par with the world’s sixth largest economy!
The Middle East and North Africa (MENA) has a rich scientific heritage, with some of the world’s first seats of learning in places such as Beirut, Baghdad, Alexandria and Damascus.
Today, there are simply too few world-class academic and research institutions to anchor the innovation ecosystem that we aspire to create in MENA. A robust and sustained dialogue between the corporate and academic worlds is required in order to underpin this, as well as funding structures that allow people to dedicate themselves to research in a sustainable way.
Governments also need to create an environment conducive to doing business and a legal framework for protecting intellectual property. According to the 2016 World Bank rankings on Ease of Doing Business, MENA has a long way to go in order to be able to compete globally.
The UAE, for example, enjoys a ranking of 26 for ease of doing business and 53 for starting a business. About 38 percent of MENA’s top 100 start-up founders are from Lebanon and Jordan, yet only 16 percent of entrepreneurial ventures are headquartered there.Ease of doing business and intellectual property issues are high on the national agendas of many countries regionally and I expect significant progress to be made in this area. The new UAE Federal Law on bankruptcy that came into effect last December is a great example of a leap forward to favour risk taking and entrepreneurship.
Starting a business inherently requires taking a risk. And that is not for the faint of heart. Fear of failure still tops the list of reasons why youth in the UAE decide against starting an entrepreneurial venture. Taking the number of start-ups registered on AngelList as an indicator, just one start-up is established each day in the Middle East compared to 30 in the US (adjusted for population differences).
Creating an environment conducive to risk-taking is a particularly tough challenge in a place without a learning mind set, and where failure is considered a permanent condition. Corporations, governments and investors all have a role to play to ensure this mindset shift occurs.
Entrepreneurs also need capital to fund the commercialisation of their ideas, ideally from multiple sources, including angel investor networks, venture capitalists (VCs) and primarily corporates.
One of the key discussion points at the World Economic Forum in Jordan in May was the struggle that most entrepreneurs face in transitioning from the seed funding to the Series A stage. Unfortunately, the landscape of venture capital funding generated by either corporates or independent organisations is very limited in MENA.
According to the 2017 Global Startup Ecosystem Report published by Startup Genome, in Silicon Valley early stage funding per start-up is approximately $760,000 compared with a global average of $250,000. This has a disproportionate impact not only on the ecosystem’s ability to attract entrepreneurs, but also on the value creation that takes place in the ecosystem. The value of the Silicon Valley’s ecosystem is $264bn versus a global median of $4bn.
Private organisations have a critical role to play in funding entrepreneurial ventures. This is because venture capital can bring much more to the table than just financial support: experience, access to specific markets and opportunities, support in recruiting and even in building a brand. While there are numerous top class corporate VCs in the world, from Google to Samsung, there is a dearth of such players in MENA.
I am proud that Majid Al Futtaim will lead on this dimension regionally, by establishing a sizeable VC fund to provide capital to entrepreneurs. However, in order to close the gap with the US, an additional $3.7bn annually would be required.Lastly, today more than ever, we cannot hope to establish a thriving start-up ecosystem in MENA unless this is highly connected to the other global innovation ‘centres of gravity’, from Silicon Valley to New York, to Berlin and even Shanghai.
One out of three start-ups located outside of the US report having multiple connections to Silicon Valley. It is through this exchange that Silicon Valley founders, investors and organisations remain at the leading edge of the latest global customer needs and innovations.
Ensuring that our region remains closely linked to the global economy should be a task high on the priority lists of governments and public and private sector institutions.
While much remains to be done to establish an environment in MENA where start-ups and entrepreneurs can thrive and fuel innovation, I am excited about the tremendous impetus this would provide to our economies and our societies at large. Establishing a virtuous cycle of R&D, entrepreneurial ventures and investors will, in the longer term, not only contribute meaningfully to GDP growth, but also have a positive impact on social inclusion, poverty reduction and quality of education and healthcare. It will also ensure we earn back our place as a region that can lead the way globally in idea creation and innovation.
----This article was originally published as an opinion piece in Arabian Busines