Recent moves help position Dubai as a regional centre for start-ups

A leading centre for entrepreneurship in the MENA region, the UAE counted 940 start-ups as of late August 2017, according to Magnitt, a Middle Eastern start-up support service provider and directory. The largest subsegment of this was e-commerce, with 135 listed start-ups. This figure is by far the highest of any country in the Middle East and represents roughly one-quarter of the regional total. While a breakdown of start-ups by emirate is not available, the majority are located in Abu Dhabi and Dubai, due to the high rates of connectivity and the diverse international populations in these areas. The scene is also developing rapidly; in 2016 around six new companies per week joined the Dubai Technology Entrepreneur Centre (DTEC), a technology and entrepreneurship innovation hub.

Support Infrastructure

Another factor underpinning development of the local start-up scene is supporting infrastructure: there are a large number of accelerators and incubators in the emirate, many of which are backed by local authorities. Development of this ecosystem began in 2003, when the ICT free zone, Dubai Internet City, launched the First Steps business centre dedicated to supporting the development of small and medium-sized enterprises, as well as entrepreneurs working in the sector. Numerous incubators and accelerators have since been set up, including Turn8, which is backed by the government-owned ports operator and logistics provider DP World. In May 2017 another ICT free zone, Dubai Silicon Oasis Authority, established the Dubai Smart City Accelerator for smart city-related start-ups and projects. In 2016 the authorities also launched the Dubai Future Accelerators programme, which – though its primary focus is developing new technologies rather than incubating start-ups – works intimately with early-stage companies. The initiative facilitates collaboration between technology firms and government entities over a 12-week programme, with the objective of helping firms develop their products. Incubators operating in the emirate include Astrolands Dubai, Silicon Oasis Founders and TechHub, a partner of Google.

Free zones not specifically focused on ICT are also becoming more prominent. “Increasingly, many free zones are developing start-up strategies that offer one-stop-shop services, from small office co-working spaces to entrepreneurial networking events,” Alexandar Williams, director of business development at the Department of Economic Development, told OBG. Recently launched free zone accelerators include the new financial technology (fintech) accelerator, FinTech Hive, launched jointly in January 2017 by the Dubai International Financial Centre (DIFC) and Accenture, a professional services company. The first round of the initiative, involving 11 start-ups, began in August 2017. To support this undertaking, in May 2017 the Dubai Financial Services Authority, the DIFC regulator, established a special licensing framework for firms wishing to pilot fintech projects (see Banking chapter). Beehive, a prominent Dubai-based fintech start-up, has pioneered a marketplace for peer-to-peer lending, while Blockchain, a key focus of the Smart Dubai initiative, is attracting interest in the fintech segment, with local start-up ArabianChain developing a blockchain-based platform to facilitate Islamic banking and government services.

Success Stories

The emirate has witnessed several major technology start-up success stories. Prominent among these is Souq.com, an e-commerce platform and online marketplace that global e-commerce leader Amazon acquired for a reported $580m in a deal finalised in July 2017 (see overview). Another case study is Careem, a ride-hailing app similar to Uber or Lyft, which was founded in 2012 and is now available in more than 50 cities. The company received $350m in financing in late 2016, causing investors, including Saudi Telecom Company and Rakuten, a Japanese e-commerce provider, to value it at around $1bn. Other major investors in the company include Saudi-based travel and tourism services firm Al Tayyar; the Kingdom Holding Company, a Saudi conglomerate that acquired its stake from the previous backer, Abraaj, a UAE-based private equity firm, in June 2017; and Dubai-based venture capital firms Beco Capital and Wamda Capital. In August 2017 Didi Chuxing, a Chinese ride-hailing company that acquired Uber’s Chinese operations in 2016, announced it had agreed to establish a strategic partnership with Careem as part of its expansion plans in the MENA region.

Financing

Securing funding, a challenge for all start-ups, can be especially difficult in the Middle East. Models of financing geared towards start-ups that are prominent in other areas – such as angel investment networks and venture capital firms – are not yet well developed in the region. Investors also tend to prefer traditional ventures, such as property, over start-ups, which are perceived as riskier investments. However, an early-stage finance scene is beginning to emerge in Dubai, and several venture capital firms are now active in the emirate, including Wamda Capital and Beco Capital. Start-up and early-stage-oriented crowdfunding sites such as VentureSouq have also started to emerge.

While gaps in the market remain, success stories of some local start-ups, such as Careem’s $350m round of funding, suggest the availability of capital could be improving. “Amazon’s acquisition of Souq. com has shown that viable exits are possible, which is boosting investor interest,” Louis Lebbos, founding partner of AstroLabs, told OBG. However, the availability of financing depends on the size and stage of investment. “Raising Series A and seed funding of around $500,000-1m is relatively easy compared to higher rounds, especially around the $5m-10m range,” he said. “As a result, many start-ups have to look to other countries for capital, as in the example of Careem. Furthermore, the larger US venture capital funds do not tend to have offices here, and have plenty of opportunities at home, making US financing hard to obtain,” he added.

Hans Henrik Christensen, director for technology and entrepreneurship at DTEC, echoed these concerns. “The availability of financing has improved since 2012, but it will be some time before a significant venture capital industry is established, and Dubai has a long way to go before it can even begin to compete with Silicon Valley,” he told OBG, adding that attitudes towards risk and reward in entrepreneurship need to change. “One of the principle reasons Silicon Valley has been successful is that failure is not condemned, but rather seen as a part of the path to success. This mindset is not commonplace in the region, though the situation has improved somewhat in recent years,” he added.

Operating Environment

Industry figures suggest there are a number of other obstacles to overcome before Dubai can become a start-up hub. “The government is working to establish an ecosystem that encourages creativity and innovation, and Dubai is becoming a model for the region in terms of tech-focused entrepreneurship,” Charbel AbouJaoude, CEO of investment advisory firm Alcazar Capital, told OBG. “However, the sector still needs more investment in areas, such as research capacity, in order to really begin to take off.”

Lebbos said that the broader operating environment for start-ups needs a range of improvements to enable the segment’s development, and that this would be more effective than top-down initiatives such as accelerator creation by government-backed entities. “Changes such as increased emphasis on coding and start-ups in schools, improved financial infrastructure, and lower internet access costs would have a big impact,” he told OBG. “In general, the cost of doing business in Dubai is very high and needs to come down, because start-ups generally must be able to cover their operating costs for at least several years before they can begin making a profit.”