Startup and beyond – evolving your business venture into an SME

4 December 2017 Category:
Growth

There are few better places to start a business venture than the UAE. 

With the advent of major co-working spaces, such as Astrolabs Dubai and Impact Hub Dubai, it’s never been easier to start a new business on a budget here. What’s more, Dubai is home to numerous incubator schemes, like The Cribb and the in5 innovation center, which aim to support fledgling companies as they expand. 

These factors all help create an environment which is conducive to economic growth and the birth of new ventures. But once a businessperson has established their enterprise here, what next? One path is to take the next step and start looking to turn your startup into a small or medium-sized enterprise (SME). It may feel like a big leap of faith, but it’s a logical way to push your venture forward, increase sales, and secure your business’s future. 

Let’s look at some of the facts surrounding startups and small businesses in the Emirates. 

Startups vs SMEs: What’s the difference?

First though we should be clear about the distinction between the different phases of a new business. According to entrepreneurship guru Steve Blank startups are ‘temporary organisations designed to search for a repeatable and scalable business model’. So a startup is a growth stage company whose owner is looking to scale it up to a fully functional business, and perhaps evolve it into a workable SME. 

A startup is a growth stage company whose owner is looking to scale it up to a fully functional business.

An SME, on the other hand, has myriad definitions. In the trading sector, a venture would be considered an SME if it had turnover of up to AED 250m and/or up to 75 employees, according to the Dubai Establishment for SME Development. A manufacturing firm, however, can have the same turnover but can have up to 250 employees and still qualify as an SME. 

While the exact definition may differ from industry to industry, the term SME generally applies to small enterprises which are relatively new to the market.  

The majority of SME ventures in Dubai actually operate in the trading sector, around 60% of the total according to Dubai SME. Less than 10% of SMEs are manufacturing companies, while just over 30% are service industries. The rest are miscellaneous. 

Businesses of this size are the foundation on which our economy is built. Currently SMEs make up 95% of establishments in the UAE, contributing around 40% of the value add generated in Dubai’s economy and employing 42% of the national workforce, according to a recent report by Dubai SME. 

It stands to reason that these enterprises have immense value to the country as a whole. Reflecting this vital role – and aiming to encourage further growth – in 2014 the government introduced business-friendly legislation exempting SMEs from certain taxes, including for equipment, raw materials, and goods for production purposes. The same law states that federal bodies must dedicate 10% of their procurement budgets to purchasing goods and services from small businesses. 

Advantages for SMEs

Developing a startup into an SME isn’t an option, exactly, but more of a natural progression. Becoming an established business ought to be at the core of every startup’s business model. Moreover, taking this step offers some undeniable benefits. 

SME development-C

Gain higher profile business: For any business to grow, it needs to deal with a wide variety of businesses, and not least with larger corporations. Attracting contracts from more established ventures is far easier as an SME than as a startup. Since around 30% of businesses fold within the first two years and 50% fail in the first five years, according to the Bureau of Labor Statistics, the term ‘startup’ often has a derogatory connotation. That reputation means that some businesses avoid dealing with startups in favour of SMEs. 

Attract talented individuals: The highest performing companies need the most talented individuals to back them. It is rare that a startup will have the draw to attract experienced and knowledgeable professionals. A high level of uncertainty about the stability and sustainability of a startup business can be an off-putting factor. The less uncertain and more established status of an SME inevitably means that talented individuals are more likely to join the company’s ranks. 

Stability and gravitas: Graduating to the acclaimed level of SME is more than a mere title: it brings a new level of gravitas to any company. The higher levels of turnover required, by definition, to achieve SME status should mean greater stability for the business, almost as a matter of course. Consequently, it’s not surprising that most entrepreneurs are seeking to turn their startup enterprise into an SME as soon as practicable. 

Disadvantages for SMEs

Despite the various advantages, there are a few reasons why entrepreneurs are often cautious about taking this leap. Along with the increased status, there are also some obligations and expectations. Along these lines, let’s consider some of the disadvantages to becoming an SME.  

There’s no room for startup mistakes: The safety net that accompanies startup status effectively disappears the moment an entrepreneur declares their business to be an SME. Accordingly, should the business get into unexpected difficulties, there may be less support available from official government bodies or other sources. 

The safety net that accompanies startup status effectively disappears the moment an entrepreneur declares their business to be an SME.

Investors may expect higher returns: There are certain expectations that come along with being an SME. Given the higher turnover investors will naturally assume they could get a more substantial return after the transition, and those higher expectations can add pressure to a business and prove challenging to meet. 

No longer eligible for startup support: The UAE government and independent bodies offer a great deal of support for novice entrepreneurs, such as that available from TiE Dubai. From educational facilities to seed funding, the approach to helping startups in the Emirates is multi-faceted, while such facilities are not always available for SMEs. 

Transitioning from a startup to an SME

There’s no single pathway for this transition, but a range of tools and techniques to assist the entrepreneur on their journey. 

Boost client reach: The world of business is all about demand and supply. Without the former, no venture can survive. Investing in market research and subsequent marketing campaigns, to assess and then stimulate demand, increases the chances that a startup entrepreneur will boost their client base meaningfully enough to grow into an SME. 

Expand the workforce: A logical way to evolve a new enterprise is to hire more staff and grow the workforce organically. As demand for a startup’s services or products increases, there will often be a need for a larger team. While scaling up a business may involve financial risk, savvy business leaders understand its inherent value. 

Create a new business culture: Culture is one area where startups and SMEs can differ markedly. Startups tend to be staffed by small and select teams who have completely bought into the core ideals of the business. As the venture starts to expand, the new staff members need to be given access to the same information and opportunities as the founding staff. Establishing a solid workplace culture from the start can pre-empt problems with assimilating new staff and ensuring they too buy into the company’s core ideals. 

Boost the admin abilities: While formal admin processes may not be integral to the success of a startup, as it starts growing and evolving into a larger company it’s important to keep on top of this area. Scaling up could even mean launching a finance department or hiring admin support staff. Company owners may also benefit by offering training and support in finance and other administrative processes for new and even existing employees. 

Accept help and mentorship: No business owner is an island. An intelligent way to grow any business is to accept help and support from the various facilities available in the UAE. The Dubai government offers more than AED 250m in subsidies and facilities to entrepreneurs and SMEs in the emirate. Tapping into these programmes and funding pots is one sure way to help ventures accelerate their growth. 

An intelligent way to grow any business is to accept help and support from the various facilities available in the UAE.

Avoid the term ‘startup’: Much like charity, PR can often start at home. When entrepreneurs call their businesses startups, they are often tarring them with an unfortunate label. Often it’s the business owners themselves who first use the term ‘SME’ when referring to their enterprise, recognising that ‘startup’ is a term that can be interpreted in a derogatory way, especially once it has been established a while. Changing tack and re-branding the venture as an SME will ultimately change perceptions of the company, both inside and outside it. 

A tough transition, but support is out there

Looking to the future, there is help and support available for entrepreneurs as they try to meet these challenges. The Dubai SME 2021 Plan is one such programme which will be offering strategic initiatives to help boost SMEs; including a new platform on which SME owners’ concerns can be voiced, advocating policies to increase funding, and creating sector-focused incubators. 

Of course, evolving a startup to the point when it becomes recognised as an SME will never be the easiest feat. It takes courage, stamina, and dedication. Still, it’s an inevitable step towards a business ultimately reaching its full potential.

Virtuzone Mainland is dedicated to helping clients open a company on the UAE mainland, providing advice and assistance with every aspect of the company formation. To set up a consultation, please call us on +971 4 457 8200, send an email to maria.capin@vz.ae or click here.

 

About the author: John Hanafin, CEO at Virtuzone Business
About the author: John Hanafin, CEO at Virtuzone Business

With 25 years of experience in the company formation industry, John Hanafin is well known in the UAE and beyond as a specialist in corporate services, and shares a passion for helping others establish and grow their own businesses across the UAE and wider region. John joined Virtugroup in 2017 after spending 12 years with The Sovereign Group as their Global Sales Director, and two years as CEO of Arton Capital.