Startup success by the numbers – battling the odds23 March 2017 Category:
Starting a new business is a gamble. You can have a great idea, research your market, draw up your business plan and burn the midnight oil, but you can’t be certain how things will unfold.
As a centre of innovation and entrepreneurial spirit, the UAE is replete with interesting statistics on startups in the region. According to theintelligentsme.com there are around 300,000 small and medium enterprises in the UAE, contributing more than 60% of the region’s GDP. In Dubai, meanwhile, SMEs represent 95% of all establishments and make up 42% of the workforce, adding some 40% to the value-add of the economy – a significant contribution.
But the picture isn’t always rosy. Starting a new business in the region is complicated, competitive and a constantly shifting picture. So let’s take a look at some of the numbers and try to make sense of them.
1. Success stats: Getting to the bottom of how many small businesses succeed is tricky, because it invites further questions. What do we mean by ‘SME’? What kind of timescales are we talking about, and by ‘success’ do we mean businesses that flourish or just those that survive?
Dubai SME, a division of the Department of Economic Development (DED), has three categories of SME: micro-businesses, small businesses and medium businesses. But essentially an SME in Dubai is defined as a business with turnover of up to AED 250m in trading or manufacturing, or AED 200m in services.
An SME in Dubai is defined as a business with turnover of up to AED 250m in trading or manufacturing, or AED 200m in services.
A 2016 study by the Organisation for Economic Co-operation and Development (OECD) found that the survival rate in the UAE manufacturing sector was 83% after year one, falling to 69% after two years and 55% after three years. In services, the figures were slightly lower: around 80%, 70% and 50% respectively. These figures square with the latest quarterly business confidence survey from Dubai SME, which in general finds manufacturing to be a sector that is more confident about future prospects than trading or services.
2. Profitability: In the US, a nationwide survey of small businesses by the National Federation of Independent Business (NFIB) a few years ago looked at how many US businesses break even, how many make a profit and how many fall by the wayside. This survey found that during the lifetime of a business, 39% make a profit, 30% break even and around 30% actually lose money and go on to fail.
In the UAE, as in any other territory, the challenges of making ends meet vary greatly between individual businesses. Speaking in 2013 the Chief Executive Officer of Dubai SME, Abdul Baset Al Janahi, noted that, ‘Financial support is the major stumbling block … [SMEs] need working capital support until they reach break-even point, which is the first three to five years.’
In its 2016 report, meanwhile, Dubai SME suggested that for SMEs, the key impediments to business operations were competition, delay in payments/receivables and poor market conditions. With that in mind, it’s worth looking at some figures around the reality of starting – and progressing with – a business venture in the UAE.
3. How easy is it to do business? Research from the Emirates National Bank of Dubai in 2014 found that in each of the two previous years the number of new SMEs in the Emirate grew by more than 14%. Trade and repair is the most popular sector for SMEs, with over 130,000 operating in the region (ahead of construction and manufacturing with 60,000 and 30,000 respectively).
Assuming an average increase of 10% per year, the Emirates NBD study estimated that by 2020 a further 195,750 firms could be established in Dubai, of which 95% were likely to be SMEs.
That’s a lot of new businesses, so what’s behind the optimism?
As a place to set up a new business, the UAE scores highly. According to recent figures from the World Bank, the UAE comes in at number 53 among the world’s economies for ease of starting a business. Looking back at the figures from a year ago, that’s a jump of 12 places. However on a less cheery note, the UAE fell four places in terms of ease of getting credit. We’ll explore this later.
According to recent figures from the World Bank, the UAE comes in at number 53 among the world’s economies for ease of starting a business.
It’s also worth noting that while the UAE is ranked 53 for starting a business it ranks significantly better – number 26 – in terms of doing business. This suggests that getting started as a new business in the UAE may be harder than doing business once established.
4. Entrepreneurial spirit: Of course starting a small business isn’t just about statistics. Perseverance is the thing that separates a successful entrepreneur from the rest. As Benjamin Franklin said, ‘Energy and persistence conquer all things’.
Looking at how entrepreneurs in the Emirates are viewed, there are some interesting quirks. Entrepreneurship in the UAE is closely linked to status, and running your own business is highly regarded. The OECD found that 89% of UAE nationals surveyed believed entrepreneurs to have high social status. That’s significantly higher than the worldwide average of 62%.
It’s also interesting to look at how UAE nationals view risk. The OECD found that only 40% of those who identify a new business opportunity believe that fear of failure will stop them. And while the global average for people who believe they have the skills to succeed as entrepreneurs hovers around 39%, in the UAE it’s much higher, at 52%.
These figures suggest clearly that not only is entrepreneurialism popular in the Emirates, it’s hardwired into the region’s psyche.
5. Obstacles: All this suggests that the UAE is awash with new business ventures because it attracts and produces people with the drive and self-belief to become successful entrepreneurs. However, bravery alone won’t suffice if the infrastructure isn’t in place to nurture and support SMEs, so let’s look at some figures that illustrate the help that is available for new businesses in the region.
Although things have been improving in recent years, it’s clear that access to credit for SMEs in the Emirates isn’t easy.
According to the OECD, the lending requirements of commercial banks in the region are strict. Due partly to a significant emphasis on collateral, loan applications are rejected between 50 and 70% of the time; and many borrowers are discouraged from even applying for bank finance. Interest rates on business loans are high too, which makes access to funding a challenge. Reflecting these difficulties, a 2013 Dubai SME study found that approximately 80% of SMEs surveyed had used personal savings as their main source of business finance.
There are other issues too. The bankruptcy law in the region has traditionally been complex and harsh, leading to a protracted, ad-hoc procedure for businesses that don’t survive. In the UAE, the insolvency process is expensive and time consuming, averaging 5.1 years, compared to an average of 1.7 years elsewhere in the world.
In the UAE, the insolvency process is expensive and time consuming, averaging 5.1 years, compared to an average of 1.7 years elsewhere in the world.
6. Moving in the right direction: It’s not all bad news though. According to KPMG, the region’s new insolvency laws are ‘a step forward for the UAE’s insolvency regime, and contain much to be welcomed’. Among the reforms, the new laws decriminalise ‘bankruptcy by default’ and put a greater focus on restructuring struggling companies.
SME banking in the region has expanded in recent years too. Of the 52 banks in the UAE, 40 offer SME banking, and many have set up operations tailored to SMEs, precisely because they’re recognised as a high-growth area. Furthermore, many banks are now looking to exempt SMEs from the need for bank guarantees.
Initiatives like the Khalifa Fund for Enterprise Development (KFED) are playing an important role as well. Since its launch in 2007 the KFED has put AED 2bn towards helping local enterprises, aiming to create a new generation of Emirati entrepreneurs. Recognising that 37% of the region’s SMEs are already exporters – or capable of becoming exporters – the Fund is working to encourage enterprises to operate beyond their home market. This ties in closely with the goals of Abu Dhabi Economic Vision 2030, to diversify the economy and create job opportunities for Emiratis.
What’s the outlook?
The figures paint a picture of a landscape in which SMEs still face plenty of challenges, but in which there are plenty of opportunities for those with the grit and determination to succeed. The legislative environment and banking access are improving, albeit slowly, and support for SMEs is increasingly aligned to bigger regional initiatives. Dubai’s Strategic Plan 2021 aims to ‘elevate the Emirate’s status as a leading destination for work and tourism’, while the preparations for Expo 2020 will naturally focus significant attention on the region’s economy as well.
Dubai’s budget for 2017 stands at AED 47.3bn and Dubai SME is forecasting a strong first quarter for the year. The opportunities are there, even if they need some uncovering and some obstacles still need to be navigated.
But the other half of the challenge – turning raw opportunity into tangible reality – depends on your determination to succeed. And that is something that entrepreneurs in the UAE have in plentiful supply.