Budding entrepreneurs struggling to raise funds to start their businesses should turn to their families and friends for financial support, says the chief executive of a Dubai Government venture designed to assist fledgling companies.
Private equity companies also have a part to play by increasing their risk appetite to invest in start-ups as part of a drive to form a more developed venture capital industry, said Abdul Baset al Janahi, the chief executive of the Mohammed bin Rashid Establishment for SME Development (MBRE).
But first, entrepreneurs should look closer to home for investment, he said. "If you have an idea and have four friends who each put in Dh20,000 (US$5,444), that's Dh80,000 for your business," he said. "This is how it starts. This is how the merchants started, this is how all the entrepreneurs did it."
MBRE was set up eight years ago to foster a spirit of entrepreneurship and create businesses. Since then it has generated more than 1,000 businesses and 6,000 jobs.
Difficulty in obtaining funding has been highlighted as a barrier to entrepreneurs seeking to start and grow their businesses as bank lending and other sources of finance remain restricted after the global recession. SMEs (small to medium enterprises) are a crucial component of the Dubai economy, accounting for about 95 per cent of companies and employing some 40 per cent of the workforce.
Part of the problem is that the UAE does not have a fully developed venture capital industry or "angel investor" network. Such investors play a crucial role in the US, UK and other developed markets by helping to fill the funding gap between money provided by friends and family and bank credit.
Venture capitalists manage the pooled money of others in a professional private equity fund. Angel investors usually put forward their own funds and are often a secondary source of financing for start-ups in the West.
Abraaj Capital, a private equity group based in Dubai, is among the most active venture capital investors in the Middle East.
MBRE is in talks with other private equity houses to encourage them to step up their investments. Next year it will launch its Dubai SME 100 Index, detailing the 100 biggest small businesses in the emirate, partly to raise their profile among investors.
"We need to ignite the angel investors, the venture capitalists," said Mr al Janahi. "Abraaj looks at existing profitable businesses that are less risky but I encourage people like Abraaj to look at riskier assets that can have bigger returns."
Liquid of Life, a sustainable water company, was launched in March after raising an equal split of financing between friends and family and private equity investors based in the UAE. It is hoping to raise more finance from private equity as it expands.
"For us, what was crucial was the advice given by private equity investors as they have decades of business experience and helped to advise, which friends and family were not able to," said Rukhsana Kausar, a founding partner of Liquid of Life.
MBRE also plans to launch a second-tier stock market to help SMEs grow to the next stage of development. SMEs have been hard hit by the sluggish credit growth since many banks remain reluctant to lend to them, typically because of a perceived increased risk of defaulting.
Despite the tricky business conditions, MBRE is expecting a 5 per cent or 6 per cent increase in start-up applications next year.
