Start-up firms bloom in wake of Arab Spring

Regional uprisings have created fresh demand for products and made governments more sympathetic to the needs of new and smaller companies, say Middle East entrepreneurs

Jordanian entrepeneur Majied Qasem waited three years before arranging outside funding for his start-up company, d1g.com, an Arabic social media and content-sharing platform. He finally succeeded in September 2011, eight months after Arab Spring uprisings erupted in the region.
The company now has over 35 million page views per month, with growth in traffic stimulated by online debates about a wide range of political and social issues, says Qasem, 40.
Like many entrepreneurs in the Arab world, he believes the region's political and economic upheaval has helped rather than hurt his business, by creating fresh demand for his products, persuading investors to seek new opportunities, and making governments more sympathetic to the needs of start-ups.
"Investors historically targeted well-established companies that had very low risk and provided high returns. But now, after the Arab Spring, investors are pouring the same amounts of money into multiple smaller companies, betting a few of them will see a remarkable success story," said Qasem.
"We're seeing unprecedented amounts of money paid by investors, governments and development funds to seed start-ups and small firms."
The economic damage caused by the Arab Spring has not yet faded. Egypt and Tunisia are coping with waves of industrial unrest as they seek to rebuild their tourism industries and lure back foreign investors. Libya is recovering from a civil war, while sectarian unrest still weighs on Bahrain's economy. In countries such as Jordan, governments have boosted welfare spending to try to buy social peace, undermining their finances.
But a positive result of the turmoil is that in some ways, conditions for entrepreneurs are improving, officials and businessmen say. Previously, start-up firms were sometimes discouraged by authorities as threats to small groups of privileged businessmen cooperating with authoritarian regimes. Now they are more often welcomed as tools to create jobs.
Arif Naqvi, group chief executive of Abraaj Capital, the Middle East's largest private equity firm with over $6 billion under management, said one of the most dramatic changes in the region's economic thinking since the Arab Spring was the realisation that smaller firms, not big state-linked ones, would be the engine for growth because they could create more jobs.
"I'm a great believer that the Arab Spring has more in common with the Occupy Wall Street movement, the street riots in London, and the food riots in Mumbai than it had with political change," said Naqvi.
"Mohamed Bouazizi wasn't sending a political message when he set himself on fire. He wanted to work, to live and to survive," Naqvi added, referring to the Tunisian vegetable seller whose suicide in December 2010 triggered the upheaval in the region.
Difficulty in obtaining loans from risk-averse Arab banks, which often focus on serving large clients, has long been a major obstacle to setting up businesses in the region. Foreign aid donors such as the European Union, the United States and multilateral lending bodies have stepped up efforts to fill this gap since last year.
Mouayed Makhlouf, regional director for the International Finance Corp, a unit of the World Bank, said the IFC had invested $2.2 billion in the Middle East and North Africa since January 2011, becoming a significant source of capital for private firms.
"Back in 2005 we were doing in the range of $300 million in MENA. We're now allocating more than $2 billion a year," mainly investments in small and medium-sized enterprises, he said, adding that the IFC saw investment opportunities in Lebanon, Jordan, Egypt, Iraq, Tunisia and Morocco.
While endorsing the idea of developing smaller firms, cash-strapped governments in oil-importing Arab countries have mostly lacked the resources to give them more access to funding. Distracted by political change, parliaments in those countries have been slow to make legal changes that would help start-ups, such as reforming tax and labour laws.
But governments in wealthy Gulf states, seeing unemployment as a potential source of social unrest, are paying more attention to funding smaller firms. Last year, the state-affiliated Saudi Industrial Development Fund began guaranteeing as much as 80 percent of commercial bank loans to small firms, up from 50 percent previously.
Increased government support is in turn encouraging more private investors within the Middle East to consider funding start-ups, businessmen say.
Abraaj, through its $650 million Riyada Enterprise Development Fund, has invested in 13 SMEs since 2009. It says the fund screened over 400 companies for possible investment in 2011, roughly four times the number in 2010.
"Large pools of money are being set up to invest in the right venture. More than before, investors believe in the economic, social and financial value of seeding start-ups," said Fadi Ghandour, founder and chief executive of Dubai-listed logistics company Aramex.
Ghandour, along with Abraaj's Naqvi, founded a fund in 2010 which acts as an "angel investor" in Middle Eastern start-ups. It has so far made investments in over 40 companies, more than half of the deals closing in 2011.
Some entrepreneurs think the Arab Spring is creating business opportunities for them by refocusing the attention of governments on mass living standards and social welfare.
Two such entrepreneurs founded Agricel in Dubai earlier this year. The company is promoting a soil-less, water-saving farming technology which it says can be used in arid terrain including deserts as well as urban areas.
Kunal G. Wadhwani, co-founder of Agricel, says the firm will offer the technology to Arab governments which, thanks to the political upheaval, have become more sensitive to the dangers of high food prices, water scarcity and mass poverty.
"Against the background of young populations and popular uprisings, and given the challenges of food security and water scarcity in the medium term, the region will benefit from our ability to aid new governments face these problems," he said.
Agricel's founders say they initially funded the firm themselves with support from family and friends, but recently obtained funding from a bank in Dubai. Wadhwani is a veteran entrepeneur who was involved in setting up a regional business information service a decade ago; his colleague Yalman Khan is a former investment banker.
Other firms think they will benefit because the government will get out of their way. Tunisia's revolution has removed the grip of businessmen close to former ruler Zine Al-Abidine Ben Ali from the economy, says Ridha Charfeddine, founder of Unimed, a group of pharmaceutical laboratories in the country.
"Generally speaking, now that the rules of the game are clear, everybody is equal and has their chance," he said, adding that deals and tenders involving the government had become more transparent.
Partly as a result, he said, Unimed's revenues grew at a double-digit rate last year. The company obtained a fresh investment from Abraaj Capital and investment firm Proparco in April 2011 to support its expansion.