Financing Milieu for the Entrepreneur:

1
Financing Milieu for the Entrepreneur Emerging
Perspectives

Suresh Kumar
TiECON Dubai 16th Jan 2005
2
Entrepreneurship Enterprise

• Definitional clarity is important.
  Entrepreneurship is a clumsy French (?)
  expression, and sadly to some, does not exactly
  mean what it says / or does!
• Entrepreneur is defined in the dictionary as
  one who undertakes a commercial enterprise with
  chance of profit or loss.
• The UAE and GCC would readily take such a role to
  heart. Dubais entrepot status and trading
  ethos over 150 years, are seeped deeply into its
  financial and business practices.
• Semantics apart, I prefer the term enterprise,
  i.e. an undertaking (especially readiness) to be
  involved in bold or difficult engagements.
• UAEs financial architecture is only barely
  evolving in depth and diversity and could do with
  a lot of enterprise without the instant coffee
  syndrome of quick kill / PL!

3
The Enterprise Eco-System

• Globally, entrepreneurship took a new meaning,
  following the IT and new economy initiatives.
• In the GCC, family-based entrepreneurship among
  the native citizens escalated into a new art
  form especially in real estate, trading and
  retail businesses, hotels, healthcare,
  restaurants, education and light manufacturing.
• Given entry barriers to property and business
  ownership, expatriate entrepreneurship could only
  and largely blossom within the free zones
  framework.
• Dubai has always welcomed and thrived in
  unconventional innovation hype, risk-taking,
  seemingly outlandish ideas brinkmanship, a
  cultivated dare-devil attitude all part of the
  self-belief / make-up of an entrepreneur.

4
GCC- Macroeconomic environment

• Strategic geographic location Beneath the GCC
  region lie half of the planet's known and
  extractable oil reserves
• Unprecedented economic and social transformation
  over the last three decades, but let us now
  embrace expanded regional statistics - 1.8
  billion people and US 2 trillion of GDP!

5
Key growth areas opportunities for investments
Revenues from oil will ensure sustained
government spending on construction efforts in
infrastructure,aviation,and a host of other
sector-level development efforts such as the
Dubai International Financial Center (DIFC)and
Dubai Health Care City (DHCC)
Service sectors dependent on infrastructure for
take-off
Knowledge and Health
6
Financial Assistance in the UAE- Entrepreneurship
support

• Mohammed Bin Rashid Establishment for young
  Business leaders
• Intalaq
• Al Tomooh
• Dubai Investments/ MSharie
• Injazat Fund
• Estithmaar / Ethmaar
• Emirates Industrial Bank
• Shuaa Capital
• Abu Dhabi Investment Company
• National Investor
• Amlak PJSC
• EFS

7
Entrepreneurship - UAE Commercial Banks

• UAE has some 50 Banks with 400 branches, but all
  geared for the
• old economy
• traditional trade finance
• conventional banking reliant on security, cash
  flow and well-worn structures / cocoon
• Certainly not prudent for banks that rely on
  short-term liabilities (deposits of one and
  three months) to lend or invest in start-up
  ventures or even provide late stage equity
  capital.
• Besides, banks are constrained by a limit on
  exposure to commercial companies. Per Union Law
  No. 10, banks cannot invest more than 25 of
  their shareholders funds in equity-like
  securities including bonds!

8
UAE Entrepreneurs The overwhelming support
system

• A mind shift away from the rentier economy
  driven by a need to spur self-employment is
  paramount.
• National financial institutions focus only on
  nationals and their businesses.
• Therefore, expatriate entrepreneurship in the
  non-free zone economy necessarily hinges on
  finding national partners as sponsors/ service
  agents and overseas equity and fund flows.
• Expatriate lending contends with the context of
  some large scale defalcations that afflicted the
  UAE banks in the past. Understandably, there is
  much reluctance to provide equity capital or
  long-term funding for expatriate entreprenuership

9
Non-Banking Financial Institutions (NBFIs)
Entrepreneurship Support

• Commercial banks are thus not best placed /
  equipped to support entrepreneurship.
• UAE / GCC needs venture capital, private equity
  funds and Development Banks that focus on
  entrepreneurs and can hope to profit from them!
  No free lunch!
• Angel (private) investors can nurture and nourish
  entrepreneurship through cross-shareholding e.g.
  suppliers and customers can pitch in, as can
  legal and accounting firms chip in.
• Investment banks are few and far between in the
  UAE and are regulated no differently from
  commercial banks.
• Only successful entrepreneurs seem to attract
  late-stage money with no early stage support
  mechanisms. Therefore, GCC banks extend their
  umbrellas when the sun shines brightly only to
  take them away when it starts to rain!

10
VC Private Equity Current Scenario

• Venture capital and private equity are specialist
  activities that need specialist institutions
  who can also provide synergy services, value
  extraction, IPO private placement capabilities.
• Businesses with good viability and cash flow are
  preferred.
• The Dubai authorities are likely to be more
  amenable, in the listing of the free zone
  companies.
• Private equity industry in the GCC has evolved
  over the last 5 years to only about US 1
  billion.

11
GCC Private Public Equity Exit Opportunities
Family Business
Stock Exchange
Family business groups currently present the best
entry exit potential private equity and
placement will follow suit.
USD 3Bn of IPOs in the whole region compared to
USD 43 Bn in the U.S.
12
Entrepreneurial Entities - Financial
Fulfilment
Stage Funding Sources Exit Opportunities Seed
/ Start-Up Angel Investors, Venture Capital
Personal funds, family trade buyout
friends Growth Stage Venture
capitalists, Private equity trade institutio
nal investors, buy out mutual funds Mature
Stage Venture capital, Trade buyout, IPOs
Private equity investors, private
placement management buyouts, leveraged
buyouts, bank financing for equity
capital
13
Some Out of the Box Ideas

• Expat Entrepreneurs (EEs) can co-opt UAE
  nationals into entrepreneurship. Not necessarily
  as partners or shareholders, but in a mentoring
  fashion, as trainees and future managers in
  marketing, IT, logistics etc., where they can
  make significant value accretion.
• EEs must work towards national objectives i.e.
  employment, demonstrable economic growth and
  excellence in the chosen endeavours.
• Such positive and affirmative actions can help
  diminish the dichotomies between nationals and
  expatriate entrepreneurship.

14
Some Out of the Box Ideas .

• TiE can take the lead and create a cluster for
  entrepreneurship financing by bringing in
  leading law and accounting firms, insurance
  companies (that can de-risk or indemnify / insure
  credit and key-man risks), marketing and
  logistics service providers and financial
  institutions, that in their mature home markets,
  have a track record in VC, private equity and in
  financing or creating incubators and enterprises
  in the making.
• If TiE helps launch a mutual fund with cross
  guarantees from member-investors and provide
  assurance of mentoring and appraisal support, it
  will find some of us, including the financial
  institutions, a lot more forthcoming and
  reassured! That is a gauntlet / challenge!

15
Entrerpreneurship Wealth Job Creation

• In a society, that is well governed, poverty is
  something to be ashamed of.
• However, in a society that is ill-governed,
  wealth and entrepreneurship are frowned upon.
• Descartes, a Greek philosopher, and a B.C.
  contemporary of Aristotle