Lack of funds hinder Saudi scale-ups

Saudi Arabia has had an underdeveloped private equity and venture capital market compared to other countries in the region and banks remain wary of lending to businesses. (Getty Images)
Updated 12 December 2018
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Lack of funds hinder Saudi scale-ups

  • SMEs with proven business models that are on the verge of rapid growth often struggle due to a lack of financing options in the Kingdom
  • The Saudi government is offering entrepreneurs subsidized licenses to set up businesses as well as providing scale-ups with mentorship programs

LONDON: Small-to-medium-sized companies (SMEs) in Saudi Arabia looking to take the next step in the growth of their businesses often struggle due to a lack of funding options in the Kingdom, a report found.
Saudi Arabia has an underdeveloped private equity and venture capital market compared to other countries in the region and the banks remain wary of lending to these so-called “scale-up” businesses, according to research published on Tuesday by consultancy Strategy& and Endeavor — an entrepreneur mentorship provider based in New York.
Scale-ups are defined as SMEs with proven business models on the verge of a phase of rapid growth in revenue or staff numbers. Typically they account for 5 percent of a country’s SMEs, the report said.
Saudi Arabia was ranked “below average” on a “scale-up readiness” index compiled by the two consultancies that aim to assess how supportive the business environment is for smaller companies on the precipice of growth throughout the Middle East and North Africa.
The UAE was judged as the leading country in the region for scale-ups, according to the index.
Small scale-up firms in Saudi Arabia face a further challenge of attracting talent to work for them due to the reluctance of Saudi nationals to give up the healthy salaries and security of working for the public sector, the report said. This means these companies have to employ expensive expatriate employees.
The Kingdom is starting to improve the environment for scale-up businesses, said Mahmoud Makki, partner with Strategy&, Middle East. “The government of Saudi Arabia is pursuing reforms that aim to benefit scale-ups and catalyze the entire entrepreneurship ecosystem,” he said.
Reforms include the creation of a “one-stop-shop” portal to help entrepreneurs find out about regulations and how to launch new businesses.
The Saudi government is offering entrepreneurs subsidized licenses to set up businesses as well as providing scale-ups with mentorship programs. The Kingdom’s ministry of economy and planning is working on a new strategy called the “National Champions Program” that aims to help scale-up firms access export markets.
The research sets out recommendations for the region’s governments, advising them to help scale-ups access larger companies by subsidizing the purchase of goods from scale-ups.
Smaller businesses also need access to clear and transparent regulations and better technological infrastructure to bring down the costs of setting up.
“Focusing on scale-ups as a distinct segment with its unique needs will definitely create a more vibrant eco-system and accordingly expedite economic growth and the pace of innovation in the Kingdom of Saudi Arabia and the region,” said Amr Goussous, partner with PwC ME.


Foreign investors hope India dials back policy shocks after Modi win

Updated 49 min 21 sec ago
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Foreign investors hope India dials back policy shocks after Modi win

  • Modi’s pro-business image and India’s youthful population have lured foreign investors
  • After Modi’s win, about a dozen officials of foreign companies in India and their advisers said they hoped he would ease his stance and dilute some of the policies

NEW DELHI: Foreign companies in India have welcomed Prime Minister Narendra Modi’s election victory for the political stability it brings, but now they need to see him soften a protectionist stance adopted in the past year.
Modi’s pro-business image and India’s youthful population have lured foreign investors, with US firms such as Amazon.com , Walmart and Mastercard committing billions of dollars in investments and ramping up hiring.
India is also the biggest market by users for firms such as Facebook Inc, and its subsidiary, WhatsApp.
But from around 2017, critics say, the Hindu nationalist leader took a harder, protectionist line on sectors such as e-commerce and technology, crafting some policies that appeared to aim at whipping up patriotic fervor ahead of elections.

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“I hope he’s now back to wooing businesses,” said Prasanto Roy, a technology policy analyst based in New Delhi, who advises global tech firms.
“Global firms remain deeply concerned about the lack of policy stability or predictability, this has sent a worrying message to global investors.”
India stuck to its policies despite protests and aggressive lobbying by the United States government, US-India trade bodies and companies themselves.
Small hurdles
Modi was set to hold talks on Friday to form a new cabinet after election panel data showed his Bharatiya Janata Party had won 302 of the 542 seats at stake and was leading in one more, up from the 282 it won in 2014.
After Modi’s win, about a dozen officials of foreign companies in India and their advisers told Reuters they hoped he would ease his stance and dilute some of the policies.
Other investors hope the government will avoid sudden policy changes on investment and regulation that catch them off guard and prove very costly, urging instead industry-wide consultation that permits time to prepare.
Protectionism concerns “are small hurdles you have to go through,” however, said Prem Watsa, the chairman of Canadian diversified investment firm Fairfax Financial, which has investments of $5 billion in India.
“There will be more business-friendly policies and more private enterprise coming into India,” he told Reuters in an interview.
Tech, healthcare and beyond
Among the firms looking for more friendly steps are global payments companies that had benefited since 2016 from Modi’s push for electronic payments instead of cash.
Last year, however, firms such as Mastercard and Visa were asked to store more of their data in India, to allow “unfettered supervisory access,” a change that prompted WhatsApp to delay plans for a payments service.
Modi’s government has also drafted a law to clamp similar stringent data norms on the entire sector.
But abrupt changes to rules on foreign investment in e-commerce stoked alarm at firms such as Amazon, which saw India operations disrupted briefly in February, and Walmart, just months after it invested $16 billion in India’s Flipkart.
Policy changes also hurt foreign players in the $5-billion medical device industry, such as Abbott Laboratories, Boston Scientific and Johnson & Johnson, following 2017 price caps on products such as heart stents and knee implants.
Modi’s government said the move aimed to help poor patients and curb profiteering, but the US government and lobby groups said it harmed innovation, profits and investment plans.
“If foreign companies see their future in this country on a long-term basis...they will have to look at the interests of the people,” Ashwani MaHajjan, an official of a nationalist group that pushed for some of the measures, told Reuters.
That view was echoed this week by two policymakers who said government policies will focus on strengthening India’s own companies, while providing foreign players with adequate opportunities for growth.
Such comments worry foreign executives who fear Modi is not about to change his protectionist stance in a hurry, with one offical of a US tech firm saying, “I’d rather be more worried than be optimistic.”