The following article is based on a speech given by Barig Siraj, who is not only an accomplished businessman with extensive experience in the public sector, private sector, and investment funding world, but also a caring friend who changed my life in 2008 with a single, incredibly educational office visit.
Barig Siraj is the Director of the Information Technology department serving Zahid Group, one of the most powerful business houses in Saudi Arabia, with interests in construction, mining, industry equipment, logistics, energy, tourism, hospitality, and real estate. Previously, Siraj was CEO of ICT Ventures, an investment firm focusing on growth-stage businesses from the MENA region in the information communication and technology sector.
The speech on which this article is based was delivered by Siraj at KAUST’s Seed Fund Gala lunch and award ceremony on December 18, 2013. It does not necessarily reflect my own opinions.
The 7 Critical Components of a Healthy Entrepreneurial Ecosystem
A healthy entrepreneurial ecosystem is an environment that allows entrepreneurs, meaning people who introduce innovative business ideas to the world, to thrive.
According to the World Economic Forum, an entrepreneurial ecosystem can be assessed by looking at the following 7 factors:
1. Education and culture
2. Regulatory framework
5. Support mechanisms
Siraj has graded each facet of the entrepreneurial ecosystem we have in Saudi Arabia, with green being the best category and red being the most in need of improvement.
1. Education and Culture: Yellow
A country’s educational institutions are the source of a lot of research and innovative ideas that support entrepreneurship. Naturally, entrepreneurs don’t look into research for the sake of research, but for the purpose of developing commercializable ideas.
Those in the private sector look to universities to foster commercializable inventions and the entrepreneurs that produce them. However, Siraj warns that while Saudi universities, especially KAUST, are facilitating the commercialization of ideas in the Kingdom, not enough commercializable ideas are coming up.
Siraj argues that the education provided to Saudi students must be aligned with the needs of the business world. This will help the number of commercializable ideas fall into proportion with the size of Saudi Arabia’s economy and the amount of funding provided for education.
2. Regulatory Framework: Red
Commercial law in Saudi Arabia has not changed in about 30 years, although commercial law updates have been debated for the past 9 years. Three Ministers have passed since then, and not one them was able to make commercial law reforms.
Likewise, the regulations passed down by the Capital Market Authority have been anti-venture capital (the importance of venture capital will be further discussed in the “Funding” section of this article). Mutual fund regulations are also in need of reform.
Here are just a few of the issues that Siraj warns these outdated business laws create for entrepreneurs:
a. Security Class Limitations
Saudi commercial law only supports common shares, not preferred shares.
Preferred shares are stocks that represent a higher claim on assets than common stock. They allow anyone taking bigger investment risks, such as a venture capital firm investing in a company, to get a bigger reward than those who buy common stock. Basically, this “A, B, and C” share structure lets people with money invest in people with ideas, and is also compatible with Islamic finance.
Joint stock companies have another class of preferred stock, but to be acknowledged as a joint-stock company, the Ministry of Commerce and Industry has to declare your operation a joint-stock company.
b. No Bankruptcy
There is not much to say here, as Saudi Arabia hardly has any laws regarding bankruptcy.
c. No Stock Options
Stock options are a tool that allows entrepreneurs to attract talent and reward existing employees based on their performance and seniority.
Saudi commercial law does not allow stock options.
These and other issues, including custody of securities, potential fast-track solutions for start-ups, and portfolio valuation have been discussed in the proposed commercial law update, but have not become a reality.
According to Siraj, Saudis can only try to encourage reform and hope that the nearly 10-year-old proposed commercial law update makes it out of the Shura Council, graduates to the Council of Ministers, and is approved. This will give businessmen and women the tools needed to help the entrepreneurial ecosystem grow.
3. Infrastructure: Green
Infrastructure refers to everyday structures that help a society operate, like paved roads and fiber optic cabling. Siraj says that we are doing well in terms of infrastructure, particularly telecom infrastructure.
Saudi Arabia boasts 53 million mobile subscribers, with each person practically having two sims. Fixed broadband penetration at the household level has reached 40%.
And those are just the official statistics for 2012; the 2013 figures would show even more growth.
4. Workforce: Yellow
The Saudi workforce has grown 69% over the past 13 years. Now, a McKinsey study has predicted that the number of people who reach working age and enter the employment market will hit 7.5 million in 2020, reflecting growth of 97%. So, from now until 2020, the Kingdom will see a huge number people entering the workforce.
Unfortunately, in Siraj’s opinion, these individuals will not be ready for the modern business environment. He warns that the education young people are receiving does not line up with the opportunities being created.
Again, Siraj promotes aligned education as the key to success. If the next crop of 7.5 million youths enjoy an education aligned with entrepreneurship, Saudi Arabia’s entrepreneurial ecosystem will flourish.
5. Support Mechanisms: Green
A support mechanism is a formal method or system designed to provide assistance to people who need it. The Saudi government, not oblivious to the needs of the business world, has launched initiatives aimed at supporting entrepreneurs—as has the private sector.
One of the Ministry of Labor’s initiatives, to give an example cited by Siraj, is an accelerator program where applicants are selected on the basis of the ideas they present when applying. The type of idea they present determines which program they are placed into. By the time each participant graduates, they have a registered company, assigned mentors, and a seed ambassador.
Other support mechanisms include Sirb (an angel investment network launched under KACST), Wa’ed (a venture capital fund sponsored by Aramco), and various providers of private sector funding. An interesting example of the latter is Endeavor, a New York-based non-profit that focuses on supporting high-impact, growth-stage companies and linking them with other entrepreneurs around the world. Endeavor now has a Saudi office dedicated to local companies. “Super angel” Dave McClure, founder of the venture fund 500 Startups, visited Saudi Arabia in late 2013 and expressed serious interest in one of the companies the local Endeavor office was working with.
Another private sector example is Wamda, an entrepreneurship support platform serving the MENA region. Wamda’s Mix N’ Mentor program brings people with ideas together with established mentors for networking and discussion.
As for future programs, the Chamber of Commerce is planning to establish an angel investment network that will encourage entrepreneurs, as well as existing companies that either want to grow or are struggling, to meet investors and make deals.
So, Siraj is happy with the number of mechanisms available, many of which are hosted in Jeddah, that can aid entrepreneurs.
6. Funding: Red
Funding can come either in the form of debt or equity, with Saudi Arabia having a lot of debt instruments, but few equity opportunities.
Debt-based financing mechanisms include secured loans, unsecured loans, asset financing, project financing, and crowdfunding (as seen on Kickstarter). An Islamic finance version of crowdfunding has also been developed in which the investor asks the entrepreneur to manufacture something for them according to a set of specs in exchange for a promise of funds.
Examples of debt-based funding providers include:
• Saudi Credit and Savings Bank
• The Centennial Fund
But Siraj warns that “the issue with debt is it’s a burden, if you have to actually pay it back.”
So, what do we have on the equity side?
Informally, equity-based financing comes from what Siraj calls “the triple F”: family, friends, and fools. The formal channels are investment companies, venture capital firms, fundraisers, angel investors, and a new class of angels called super angels. While angels may invest in one, two, or three start-ups per year, super angels like Dave McClure have a portfolio of 15 to 20 start-ups per year.
Each of the equity shareholders described above looks at entrepreneurs in a different way. Siraj describes himself as a “strategic investor,” meaning he works with investment companies and is interested in dividends. There are also patient capital investors, who have their eye on long-term returns, and philanthropic investors, who are interested in making a positive social or environmental impact.
Venture capital firms, like Siraj’s STC Ventures, tend to provide private sector funding to earlier-stage start-ups, while private equity providers are geared toward later-stage start-ups. According to Siraj, this creates a “valley of death,” with many companies failing to pass through from earlier-stage funding to later-stage funding during their period of negative revenue.
So, while KAUST’s Seed Fund is helping start-ups make it over this hurdle, Siraj argues there’s still a lack of public sector equity programs in Saudi Arabia.
Meanwhile, the United States has been exercising equity-based influence since the Cold War era. When the Soviet Union launched Sputnik, Congress said, as paraphrased by Siraj, “Wait a minute, we need innovators!” So, the government launched the Small Business Innovation Research program, which put 6 dollars toward funding entrepreneurs for each dollar that the private sector invested. This created a domino effect, building up to the flourishing venture capital industry we see in the United States today, which provides a lot of funding to entrepreneurs.
So, while Saudi Arabia offers debt instruments, these are a burden, and Siraj warns that there is no real equity funding path available as an alternative.
The Saudi government needs to create initiatives that encourage equity funding, says Siraj. For example, the government could help by removing some of the risk that comes with investment. Businessmen and women have seen this work around the world, even as nearby as Egypt and Jordan.
7. Market: Green
With the Kingdom’s pyramid-shaped population, Saudis are enjoying a huge, and growing, consumer market. These consumers are searching for energy, desalinated water, places to live, and services. The growth of the telecom market, as discussed in the “Infrastructure” section of this article, also reflects this trend.
So, for an entrepreneur, Siraj says that the Saudi market represents an excellent opportunity.
Overall, Siraj argues that Saudi Arabia holds a lot of promise for entrepreneurs. It’s evolving in way that will eventually allow an entrepreneurial ecosystem to flourish, and thus, entrepreneurs who are active now will have room to grow in the future.
According to Siraj, we can help these entrepreneurs grow by celebrating them and their successes. He says that one of his friends, for example, created a popular website and was able to sell it to a Turkish gaming company for 10 million riyals. Likewise, an entrepreneurial KAUST student named Abdullah Asif told the Chamber of Commerce in December that his 2013 revenue equaled 8 million riyals. These are among the stories that Siraj says must be heard.
The other stories that Siraj encourages Saudis to focus on are the failures. Entrepreneurs must understand that, as Siraj says, “what doesn’t break you makes you stronger”. As an example, Siraj brought up an entrepreneur who he works with named Wahid, who used to be part of the Arabia.com team. The original Arabia.com failed, but out of that company, 10 successful companies emerged, all created by entrepreneurs who learned from that company’s failure.
Siraj says that sharing these stories and spreading the word about the importance of an entrepreneurial ecosystem will help us create an environment that will spur better alignment between higher education and the business world, as well as encourage the government to modernize our commercial law and create initiatives that help entrepreneurs obtain the equity funding they need.
According to Siraj, when these goals are achieved, we will finally see venture capital firms created, commercializable ideas flowing from universities to boardrooms, and a thriving entrepreneurial ecosystem flourishing all around us.