Key takeaways from a new white paper on start-up funding in Dubai

Dubai is seeking to stimulate growth among the emirate’s start-ups with the release of a white paper outlining solutions to improve access to funding, offer greater support and build investment networks for small businesses.

Launched in March by the Dubai Chamber of Commerce and Industry (DCCI), the white paper lays out policy recommendations to support the development of small businesses, as well as address challenges facing the sector.

Meeting funding needs

Chief among these is the challenge smaller operators face in securing funding. The paper found that investors generally take a cautious approach when dealing with start-ups, preferring to work with a narrow range of business models, technologies and sectors. This ultimately leaves many without access to finance.

According to the Khalifa Fund for Enterprise Development, around 50-70% of funding applications from small and medium-sized enterprises (SMEs) are rejected by conventional banks. As a result, loans to SMEs make up just 4% of outstanding bank credit in the UAE, well below the MENA average of 9.4%.

To address this situation, the Mohammed bin Rashid Fund – part of the Department of Economic Development’s Dubai SME body – increased its funding to SMEs in Dubai by 147% last year, supporting 18 projects to the tune of Dh14m ($3.8m).

Any significant increase in finance for small businesses could translate into broader economic activity, given the significant role they play in the economy. According to data from the Dubai government, SMEs accounted for 47% of GDP and 52% of all employment as of July last year.

The report also calls for improvements to be made to the local enabling environment. The DCCI recommends closer cooperation between government, universities and investment funds, and a focus on building upon existing capacity in terms of incubators, accelerators and co-working spaces, which play an important role in supporting start-ups and entrepreneurs in the emirate.

See also: The Report – Dubai 2019

The wisdom of crowds

In addition to dedicated SME financing, crowdfunding is gaining in popularity in the emirate.

Already a crowdfunding leader in the region, particularly in the business-to-consumer (B2C) segment, Dubai is eyeing growth potential in e-commerce and finance.

“Dubai is the most mature market for crowdfunding in MENA, although there is still significant room for growth,” Chris Thomas, co-CEO and co-founder of crowdfunding firm Eureeca, told OBG. “Moreover, the start-up ecosystem in general continues to grow at a rapid pace, leading retail investors to become more educated about the challenges and opportunities of early-stage investing.”

On top of enabling the flow of much-needed finance to start-ups, Thomas added that crowdfunding platforms act as important gatekeepers in the industry.

“For every 100 start-ups that are pitched on our platform we only accept one or two. Investors can therefore be confident that they are not the first line of diligence,” he said.

Nevertheless, industry figures suggest the emirate still has room to improve when it comes to incentivising growth. In the UK, for example, the government provides tax incentives for crowdfunding.

While no such measures exist in Dubai, the government has been working to foster a more mature funding ecosystem via the Dubai Future Foundation, awarding new licences and offering support to platforms.

Should the emirate succeed in becoming more crowdfunding-friendly, it is expected to generate attractive returns, given higher levels of investment.

"In Europe, the average crowdfunding investment is $700, whereas in Dubai and the Gulf it is over $5000," Thomas told OBG.

Going global

The UAE as a whole remains the top destination for start-up funding in the MENA region, receiving 32% of all deals and 67% of funding in the first quarter of the year, according to data from Dubai-based start-up platform MAGNiTT.

In Dubai specifically, the emirate’s commitment to award 20% of all Expo 2020-related contracts to SMEs has further incentivised the development and growth of small business. Bodies such as the Dubai Startup Hub, which has 3000 member start-ups and has worked with 7000 entrepreneurs since its inception in 2016, have offered further support.

This enabling environment has fuelled foreign interest in the emirate’s start-up ecosystem, with a number of Singapore-based companies looking to use Dubai as a springboard to expand into the rest of the Middle East.

In addition, Dubai has sought to actively attract foreign companies.

In July two Indian start-ups – ShipsKart, an online e-commerce platform; and Loktra, a banking operating system – were awarded office space for one year at the Dubai Technology Entrepreneur Campus (Dtec), after winning a competition held as part of the inaugural Dubai Startup Hub Roadshow in India.

An initiative of the Dubai Silicon Oasis Authority, Dtec is the largest tech start-up co-working space in the Middle East, and has been central to Dubai’s plans to facilitate SME growth in recent times.

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