Crowdfunding: A new way of closing the financing gap for SMEs and entrepreneurs in Saudi Arabia

A businessman pointing toward camera selecting crowdfunding, virtual interface. (Shutterstock)
Updated 30 September 2018
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Crowdfunding: A new way of closing the financing gap for SMEs and entrepreneurs in Saudi Arabia

  • Scopeer is an equity-based crowdfunding platform that connects entrepreneurs, startups, and SMEs in Saudi Arabia with potential local and international investors

JEDDAH: In Saudi Arabia, policies and regulations, access to finance, and acquiring talent are among the biggest challenges facing entrepreneurs when starting up a business.
Raising funds is a difficulty that has been faced by entrepreneurs and small-to-medium enterprises (SMEs) globally. But it is even a greater challenge for Saudi-based entrepreneurs. Startups and SMEs here face immense difficulties securing finance from conventional sources such as bank financing, as well as bearing the burden of debt repayment during the initial stages of their development.
It is one of the main reasons why startups can fail during the consolidation stage. Only 3.2 percent of the Saudi established businesses last for more than three years, according to this year’s Global Entrepreneurship Monitor (GEM) report for Saudi Arabia.
This is evident from the fact that loans to Saudi SMEs, on average, account for less than 2 percent of total bank lending. While startups have even fewer sources of financing with most being dependent on personal resources, family, and friends.
New technology in finance has created the fintech (financial technology) industry: Online businesses and solutions that provide services in a faster, cost-effective and more streamlined manner. Innovative alternative finance, such as peer-to-peer lending (P2P) or crowdfunding, aims to help plug the SME and startup financing gap.
In July 2018, the Capital Market Authority (CMA) announced the approval of the first two trial financial technology licenses to two fintech companies, Scopeer, and Manafa Capital. This qualified the two companies to provide crowdfunding services in the Kingdom as the first results of the Financial Technology Laboratory initiative (FTIL) launched by the CMA at the beginning of 2018.
Abdulrahman Altheeb, CEO of Scopeer, told Arab News: “We worked with the CMA since March 2017 on developing the crowdfunding framework before obtaining the announced license.
“Through benefiting from other newly developed regulations and practices around the world, such as the Financial Conduct Authority in the United Kingdom, the CMA launched its FITL to introduce a set of regulations for the P2P sector that fits the Saudi market needs and behavior. It is aimed that the FITL will function for two years for research and investigatory work which will end with comprehensive market regulations.”
Scopeer is an equity-based crowdfunding platform that connects entrepreneurs, startups, and SMEs in Saudi Arabia with potential local and international investors.
“We consider ourselves a startup, and we understand the issue faced by both startups and SMEs in raising fund, and obtaining financing,” Altheeb said.
“The main goal of Scopeer is to fill the financing gap in Saudi Arabia and provide alternative financing options for startups and SMEs by introducing crowdfunding to the market.”
Crowdfunding is one of the fintech solutions, the practice of funding a project or a venture by raising money through the collective effort of a large number of people who each contribute a small amount.
It helps entrepreneurs, startups, and SMEs by showcasing their businesses and projects via an online platform.
Altheeb explained: “There are a variety of crowdfunding types that include donation-based crowdfunding, rewards-based crowdfunding, lending-based crowdfunding, and equity-based crowdfunding.”
Currently, he said, “CMA is only issuing licenses for equity-based crowdfunding, which is what we do.”
As its name suggests, equity-based crowdfunding allows contributors or investors to become owners of the company by trading capital for equity shares. As equity owners, contributors receive a financial return on their investment and ultimately receive a share of the profits in the form of a dividend or distribution.
In addition to crowdfunding activities, Scopeer will offer a comprehensive entrepreneurial network that facilitates entrepreneurs’ communication with each other and with investors.
The CEO said: “We will also offer a network of business services providers to help companies in meeting our basic requirements in order to be listed for a crowdfunding campaign. Basically, that will include reputable professionals and consultation companies who will be providing their services for free.”
He also added “requirements would include the companies’ financial position, legal frame, and scalability. And all companies will be evaluated and reviewed by our team before being listed in order to ensure their scalability and sustainability for investors.”

 

Although it has been known as one of the most promising sources of funding in Europe and the US, crowdfunding is relatively new to Saudi Arabia and the developing world.
A recent report issued by the World Bank suggests that “Crowdfunding currently is predominantly a developed world phenomenon, but the potential exists for developing countries to capitalize on this new form of funding. We estimate that there are up to 344 million households in the developing world able and willing to make small crowdfund investments in community businesses.”
In its announcement earlier in July, the CMA said: “The Financial Technology Laboratory License is one of the CMA’s strategic initiatives resulting from the CMA’s ‘Financial Leadership 2020’ program which works under the umbrella of the Financial Sector Development Program, one of the Kingdom’s 2030 Vision execution programs.”

FASTFACTS

CROWDFUNDING

•Crowdfunding: The practice of funding a project or a venture by raising money through the collective effort of large number of people who each contribute a relatively small amount. •Scopeer: an equity-based crowdfunding platform that connects entrepreneurs, startups and SMEs in Saudi Arabia with potential local and international investors. •Crowdfunding is an internet-enabled way to raise money — typically from about $1,000 to $1 million – in the form of either donations or investments from multiple individuals. This new form of capital formation emerged in the wake of the 2008 financial crisis.


INTERVIEW: Karim Sabbagh, DarkMatter CEO - why digital security threats are key issue for governments and businesses

Updated 24 February 2019
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INTERVIEW: Karim Sabbagh, DarkMatter CEO - why digital security threats are key issue for governments and businesses

LONDON: Cybersecurity looks like becoming the big theme of this year, and maybe for many years to come.

In a survey in January by the World Economic Forum, the threat of cyberattack was mentioned as one of the most serious global threats by business leaders; in the Middle East it was an especially worrying concern, second only to the oil price as a perceived risk.

For Karim Sabbagh, that is both a worry and a business opportunity. “The impact on economies and societies is huge. One of the challenges we have as captains of industry and as citizens is that we’re fascinated by the ability we have to digitize things in our day-to-day lives. But the sad part is that for every dollar we spend on new digital enablement, we’re not spending enough on cybersecurity,” he said last week on the sidelines of the IDEX defense exhibition in Abu Dhabi.

Sabbagh is CEO of DarkMatter, the Middle East’s home-grown digital security firm. Amid the guns, tanks and desert camouflage gear at IDEX, he explained to Arab News why we should all be taking the threat of cyberattack much more seriously, and spending a lot more money to defend against it.

“I can show you a demonstration in our booth. I can interfere with your transport network, your airport operations or your power grid. All these things aren’t fiction, they’re all for real,” he said against a backdrop of simulated warfare displays in the UAE’s big defense show.

“The people with bad intent will continue to evolve their techniques and their approaches. So the question isn’t how do I completely eliminate the known risks, but how can I prepare for threats in the future.”

The “people with bad intent” are enemy governments, industrial spies, ransom seekers, or people who “subscribe to a cause,” he said.

“From what we’ve seen … state-led attacks were the most prevalent. In private organizations, it was more about accessing data and using that data for your own commercial benefit,” he added, leaving the distinct impression he knew far more than he was willing to say publicly.

DarkMatter has been in business since 2015, the brainchild of Faisal Al-Bannai, the Emirati entrepreneur probably best known for the Axiom chain of telecom stores he has made into one of the best-known names in Middle East retail.

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BIO

Born
•Beirut 1963

EDUCATION
•BA and MBA, American University of Beirut
•American Century University, New Mexico, US

CAREER
•Regional director for strategy, Leo Burnett Middle East
•Senior vice president, Booz & Co.
•President and CEO, SES
CEO, DarkMatter

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“He’s the single shareholder, and what he does is quite unique,” Sabbagh said. “Faisal is an entrepreneur, very driven and very passionate, with all the traits you’d like to see from entrepreneurs. He likes to see things through, and has a very long-term view.”

Sabbagh became CEO of the company last year after a stint with SES, a Luxembourg-based firm that provides satellite communications services to the US and other Western governments.

Before that, Lebanon-born Sabbagh worked for many years in the UAE and Saudi Arabia as a partner at management consulting firm Booz & Co., specializing in telecommunications and media.

He takes a broad view of the digital communications business in the five business sectors DarkMatter serves.

“How do I come up with technologies, devices and applications that can give me peace of mind that communication on these devices is secure? As we were doing work on those things, we also started engagement in areas concerning digital transformation, and questions about how the government provides new services that are digitized to all its citizens and residents,” he said.

A key part of DarkMatter’s work is the interaction of humans with technology. Sabbagh cites a recent cyber-attack in Singapore, in which the country’s medical records were accessed and compromised.

After a lengthy audit, the authorities discovered there were two main reasons. One was that on the network there were patches and fixes that weren’t done. So there was something that belonged to the realm of known vulnerability that wasn’t attended to,” he said.

“The second one was human capital. Through human intervention that attack was enabled, not by design but by accident. It boils down to technology and humans, the story of humanity since we invented fire.”

Why is the threat of cyberattack so high up the list of concerns for the Middle East? Sabbagh examined this in a work he co-authored in 2008 entitled “Oasis Economies,” which examined the social tensions created in traditional Arab societies going through the modernization process. He feels the lessons then still apply today.

“My conclusion is that as you try to liberalize economies but try to preserve the social safety net, as you try to liberalize the way people go about their daily lives while preserving the culture, you’re constantly trying to manage these tensions,” he said.

Highly digitized and progressive Arab youths live side by side with more conservative forces, he added.

Smart nations and smart business can’t be truly smart unless they secure their communications.

Karim Sabbagh, DarkMatter CEO

“In one family, even one household, you move from a very traditional way of living to the kids being astrophysicists, building probes to land on the moon. I’m not exaggerating,” he said.

“We have a highly digitized young population, not like the ageing populations of the West. These digital tools are available to them and they can be very productive, but if used inadequately they can be very harmful. So it doesn’t surprise me that the awareness around cyber threats in the region is very pronounced, and rightly so.”

These issues are especially pronounced in Saudi Arabia, which is going through the rapid transformational process of its Vision 2030 reform plan.

The modernization strategy involves the creation of a series of hi-tech hubs such as NEOM, the $500 billion megaproject involving a highly automated conurbation in the Kingdom’s northwest.

“In the old world, the industrial technology and the information technology operated in two different environments, but today there’s a big intersection between them,” Sabbagh said.

“The bigger the intersection the more efficient these businesses are, but the downside is that there’s a bigger attack surface from a cybersecurity standpoint. So the more countries such as Saudi Arabia advance their digitization processes, the more advanced they’ll become, but the downside is that the attack surface expands.”

The solution, he believes, is “defense, defense, defense” against cyberattack. “The best attack is defense,” he added.

Expansion of DarkMatter into Saudi Arabia is one of the priorities for later this year, moving the firm outside its UAE base and complementing existing business centers in Canada, Finland and India. “Saudi Arabia is probably one of the markets we’ll look at very closely,” he said.

One line of defense Sabbagh unveiled at IDEX was the new version of DarkMatter’s successful Katim phone, an ultra-secure and virtually indestructible mobile device that the firm is aiming at the defense, energy and government sectors.

The first version of the device was a big commercial success, but the second is designed to operate in even more hostile environments, with the promise of total data security.

“It’s designed to military standards in terms of ruggedness. Our engineers ran over it in a truck, and I wasn’t amused until they showed me a video of the phone working afterward,” he said.

“You can immerse it in water for 30 minutes and it still works. If the phone detects any attempt to try to interfere with it, either physically or via software, the data stored on it will automatically self-destruct. It’s a leap forward for us,” he added, emphasizing the “quantum resistant crypto protocols” that DarkMatter uses.

What do governments, always protective of data security, think of the new device? “The government is one of the users, as well as businesses where you have critical infrastructure being deployed,” he said.

Sabbagh summed up DarkMatter’s essential business philosophy: “Smart nations and smart business can’t be truly smart unless they can secure their communications. If they aren’t secure I can access their communications, hack them and interrupt their operations. People can give me all the smart slogans they want, but if I can hack you and interrupt your information, that’s not a very smart proposition.”