Investing in MENA’s entrepreneurs: What is really needed?

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This article has been crossposted with the Consultative Group to Assist the Poor.

The Middle East and North Africa is in dire need of entrepreneurial growth and opportunities. With countries needing to create millions of jobs, new enterprises that do not simply start but grow, can play an instrumental role in the region’s employment agenda while also supporting other regional goals such as economic diversification. However, research from the Wamda Research Lab highlights substantial challenges preventing companies from receiving the funding they need to grow. In our most recent report, Enhancing Access: Assessing the Funding Landscape for MENA’s Startups, we analyze a sample of 254 companies that have received equity investment and 65 institutions providing funding to entrepreneurs in the region to better understand the trends and challenges that characterize the funding process in MENA.

Access to funding is a critical determinant in startup growth in MENA. For companies to scale from the seed to growth stages they will need a steady stream of capital. Obtaining capital is part and parcel of the entrepreneurial journey, prompting policymakers to focus on increasing access to capital as a priority area for supporting entrepreneurs. However, if stakeholders in the MENA region’s entrepreneurship ecosystem wish to make a tangible impact through investing in entrepreneurs, they must decide on the types, amounts, and frequency of funding that are needed.

The WRL has identified over 200 institutions and programs mandated to support entrepreneurs in MENA in 2014, which does not include micro-finance organizations. This figure is a substantial increase from the estimated 30 institutions that were operating in 2008. Concerning funding entities specifically, the WRL found 50 funding sources in 2013, compared to fewer than 20 in 2008. In our research, we also identified 28 equity investments in 2009, which more than tripled to 99 in 2012.

These developments are indeed promising. Not only are more financial resources becoming available to support startups, but they are also being disbursed. Accessing funding can play a direct role in ensuring that companies grow and create jobs in the process.

However, our research also found a concerning gap that can place a large barrier in front of startups. Between 2009 and 2012 we identified 220 investments made in startup ventures. Seventy-six percent of these investments were below $200,000. In most countries we looked at, median funding ranges were also at or below $200,000. Funding of this size is critical when a company is in its early stages, yet as they seek to scale, enterprises need much larger funding sizes. Accessing bigger amounts of capital can determine if an entrepreneur opens a new office, develops a new product or even hires new employees.

To grow, companies may also need multiple rounds of funding, both equity investments and loans. However, we also found that most, 68%, of the companies in our sample had not received more than one round of funding and only 12% had received a bank loan.

Of course, these funding gaps could be explained by the young age of the companies we analyzed. The average firm age was between two and three years old, so one could argue that most of the companies in our sample were not at an age yet that required them to raise larger funds. Furthermore, just because a company does not receive funding does not mean that there is a funding gap. Bad business models, poor market knowledge and unstable teams can also prevent a company from obtaining capital even if it is available in abundance.

To better understand these trends we spoke with a handful of investors, entrepreneurs and other experts from across the region. We found that while there is consensus that more funding is available, few companies are able to access larger funding sizes that are needed to help them to scale.

In fact, when we asked a sample of 65 institutions providing funding to entrepreneurs in MENA, 66% said that scaling was the most challenging phase of business growth for entrepreneurs. Moreover, half of the surveyed funders said that a small supply of venture funding was the top challenge to obtaining investment for entrepreneurs in the region. Additionally, nearly 60% of funders pointed to entrepreneurs needing better strategic planning and decision-making skills, suggesting that there are also non-financial issues that could impinge on the fundraising agenda.

MENA is in the midst of an unprecedented wave of support for entrepreneurship. From North Africa to the Gulf, new funds, incubators, events, and networks have cropped up in half a decade. Simultaneously, this ecosystem is gradually developing best practices that are being transferred across borders throughout the region.

To capitalize on the region's burgeoning startup community the supporting ecosystem will need to not simply increase access to finance, but understand the most appropriate sizes, types and frequency of funding that its most promising companies need. These considerations must be a core element of any entrepreneurship agenda.


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