Where are all the venture capitalists?
As Qatar looks to diversify from its reliance on hydrocarbon energy, a symbiotic culture of entrepreneurship and investment is an ideal means to develop a strong economy.The Edge looks at the challenges in funding the SME sector and asks whether there is scope for private sector venture capitalists or angel investors here.
Despite support from the Qatari government and the numerous initiatives it has backed, the small and medium enterprises (SME) sector in the country still faces many obstacles.
Though it is slowly changing, among these obstacles is the lack of engagement in start-ups from the local population, which it is widely acknowledged, is largely the result of the majority being in comfortable highly paid public sector jobs. The private sector in Qatar is also dominated by well diversified family businesses, ostensibly making it hard for small businesses to break into these markets.
The regulatory framework for setting up a business and access to funding in Qatar are also constraints hindering growth in the local SME sector. One of the biggest complaints is the prohibitive nature of start-up costs. Khalifa Al Misnad is a Qatari entrepreneur and lawyer involved in numerous business ventures including his Doha-based law firm, Al Misnad and Rifaat, which provides local and international legal advice.
While Al Misnad points out that part of the reason start-up costs are so high is that the Qatari government is effectively creating a barrier to “fly by night” companies, he agrees the system does need to change. “I think the government has some concerns in terms of allowing companies to set up that are actually credible, he adds. “Then there are young entrepreneurs we see with simple business ideas that may not require a lot of financial needs to startup are actually filtered out. The angel investor can help out with that.”
BUILDING A START-UP SCENE
Nevertheless, the government has established initiatives, and seems to be making an effort to create an environment that is conducive for the development of SMEs.
In fact most organisations working in Qatar developing the SME sector are either governmental or quasi-governmental. Enterprise Qatar is a QR2 billion initiative to catalyse entrepreneurship and SME development within the country. Among education services and funding, it advocates for new corporate governance policies to benefit the SME sector.
Al Dhameem is a lending initiative set up by the Qatar Development Bank to assist SMEs and start-ups in borrowing from banks. Another source of funding for SMEs is the junior bourse setup by the Qatar Exchange geared towards SMEs with flexible regulations, making it easier to access capital for expansion. Silatech’s SILA angel network is yet another attempt at addressing the start-up equity gap by connecting angel investors in the region with entrepreneurs.
Finnish investor Mikko Suonenlahti, previously based in Qatar, is active in the field of technology with more than 30 years experience. He points out that government involvement in the early development of an investment ready ecosystem is vital. “Governments in the United States (US) and many European countries are very active in the pre-seed and seed stages of venture capital, as well as with business incubators and as limited partners in funds,” he explains.
WHERE ARE ALL THE VENTURE CAPITALISTS?
For different sources of public capital to be available in Qatar for creating the start-up ecosystem, says Suonenlahti, you also need a symbiotic relationship with the private sector. Part of the reason why much has not happened in Qatar, he feels, is that private equity firms in the region have always been very risk averse and have shied away from the inherent risk involved in unproven start-ups or SMEs.
“There is a lot of idle capital lying in the side-lines, including with family businesses,” says Suonenlahti, adding that this could be used to create a venture capital fund. This creates the scope to develop the high risk, high rewards model under which venture capital funds work.
To make it easier to identify solid opportunities for investment, organisations such as ictQatar, the country’s Information Technology policy and regulatory body, have identified more than 68 distinct ICT investment opportunities within the country. Prioritised opportunities such as cyber security, Arabic digital content – which they support through their incubator programme – and data management and monetisation ventures, provide attractive investment opportunities to any investor or venture capital fund, as they have scalability.
Al Misnad and Suonenlahti agree that scalability of ideas is key to driving investment. “Qatar’s market is quite small,” says Al Misnad, “so it has to be something that can scale at least through the region. And with online [ideas], it makes it more achievable, so that would be preferable.” Al Misnad adds that innovation and a local perspective is important in this part of the world. “You do not want to just hop on the bandwagon of someone who is franchising another idea…understanding what different cultures need is an important dynamic.”
The highly publicised Qatar National Food Security Programme is a good example of an innovative and locally relevant programme, with around US$25 billion (QR91 billion) earmarked for its development, super high-tech industries such as these require large investments. These could provide enormous returns, as technology addressing food shortages have applications in numerous countries beyond Qatar. Other issues such as addressing water shortages and energy efficiency could all lead to large returns.
This is exactly what the Qatar Science and Technology Park (QSTP) is doing by creating an environment to attract investment in healthcare, energy, the environment and ICT – all highly lucrative and specialised areas. QSTP, an established free zone, has a legal framework that is more accommodating to investors, especially those from overseas, allowing for 100 percent foreign ownership and unrestricted reparation of profits and capital. QSTP is an excellent blueprint for an eco system that will nurture and attract investment, and can be replicated in sectors beyond technology.
ATTRACTING FOREIGN INVESTMENT
Venture capital is regulated in many countries like the United Kingdom, the correct regulatory framework can prove advantageous in attracting foreign investment into the SME sector, explains Suonenlahti. As the foreign venture capital industry in Qatar is regulated, Suonenlahti sees this as a positive contributing factor in the venture capital and private equity ecosystem.
“As Qatar is building its institutions, including venture capitals,” he furthers, “there is big value added from the regulators in bringing best practices from the financial services industry as a whole. Transparency and regulation are in the interests of investors and make Qatar a better place to invest in.”
Within this ecosystem is the Qatar Financial Centre (QFC), which is another local entity fostering investment in the country. While the QSTP free zone functions as an avenue for investment, the QFC regulatory authority works on developing a strong framework, modelled on international best practices, for a variety of finance based entities, including private equity firms such as venture capitals, to function in.
Whilst it is technically not a free zone, organisations functioning within QFC are also allowed full foreign ownership and unrestricted reparation of profits, and are only required to pay a 10 percent corporation tax on local profits.
The QFC also offers Qatar based firms the same opportunities, which could be lucrative for the creation of a local venture capital fund and deploying extra capital in the sidelines, including that of family businesses.
Venture capitals and the markets of venture capital backed companies are now global, Suonenlahti adds, as are capital flows, entrepreneurs and technological expertise.
Around 20 percent of technology founders in the US are from the Middle East and North Africa region, reveals Suonenlahti, who says that many are interested in relocating to Qatar and incorporating their start-ups in here.
The potential for funding, research universities, availability of software engineers in the region and access to the MENA, Asian and European markets and regulation, are all driving factors he adds. “Qatar is one of the huge beneficiaries of globalisation,” he says. “Small countries like Estonia are creating thriving start-up ecosystems by channelling public funding back to entrepreneurs – from tax provided by Skype’s success. Estonia certainly is not limited by its small size or distance from key markets. Nor should Qatar be.”