3 striking trends shaping start-ups in the Middle East

"We know the risk of the region, we are from the region…this is our region."
Ronaldo Mouchawar, CEO of Souq.com

The Middle East is facing rising geopolitical tensions, the world's highest youth unemployment and a shift away from oil-based economies. In this context, the success of its start-ups could well determine the whole region’s success. Already, the Middle East’s only unicorn, a ride-hailing app called Careem, has created more than 500,000 jobs. It is currently training female drivers in Saudi Arabia, in anticipation of the ban on them driving being lifted in June.

In May 2017, the World Economic Forum convened 100 of the top Arab start-ups at the Middle East North Africa Summit, hosted at the Dead Sea in Jordan. They came together to discuss common challenges and opportunities for growth and reform, joined by leading CEOs and policymakers in the region.

Since then, the start-up scene in the Arab world has continued to evolve. Start-ups are increasingly partnering with large corporations, lobbying governments successfully and securing investment from non-traditional sources, while continuing to tackle regional challenges with regional solutions.

In fact, the World Economic Forum’s Digital Arab World whitepaper, launched at Davos 2018 by Sheikha Bodour bint Sultan Al Qasimi, Chairperson of the Sharjah Investment and Development Authority (Shurooq) and the MENA Regional Business Council, builds the case for why the region is uniquely positioned to create a robust entrepreneurship ecosystem, in which start-ups can grow and thrive.

As the Middle East embraces the digital revolution, three striking trends are emerging in its start-up scene:

Increasingly, companies realize that partnering with start-ups gives them access to fresh, innovative ideas that can help shape their own business, while also demonstrating their efforts to support local communities. In Beirut, telecommunications company Zain is sponsoring an innovation programme that provides office space, mentorship and sales support to six selected scalable start-ups.

Matchmaking programmes achieve similar ends. At the Arab Supply Chain Impact Initiative in Sharjah, companies signed 16 memorandas of understanding (MoUs) with small and medium-size businesses. Meanwhile, members of the World Economic Forum’s Regional Business Council (RBC), which includes some of the leading businesses in the region, are pledging to allocate 10% of their annual procurement budget to SMEs, start-ups and entrepreneurs by 2020.

"Large businesses have realized that partnering with start-ups is a win-win scenario," noted Sheikha Bodour, "because by doing so, not only do they contribute to socio-economic progress, but they also tap into an unlimited source of innovation. On the other hand, start-ups are eager to prove themselves, so they provide large businesses with excellent service and cutting-edge solutions."

Start-ups are beginning to see success lobbying governments, in a bid for bottom-up policymaking. After two years of work from a group of local entrepreneurs, and with the support of key ministers, the Tunisian government recently passed the Startup Reform Act, a 20-measure law and legal framework to support the creation, development and internationalization of Tunisian start-ups.

A similar initiative in Egypt, known as the Startups Manifesto, has been gaining traction. Its leader, CEO of RiseUp Abdelhameed Shara, writes: “The ultimate objective is to enable a thriving entrepreneurship ecosystem in Egypt. By outlining current challenges and proposing concrete solutions, we enable continuous dialogue between all relevant stakeholders, while also being a reference point for reforms.”

Lamsa, an Abu Dhabi-based start-up operating across the region to support the development of Arabic-speaking children, recently partnered with the United Arab Emirates’ Mohammed bin Rashid Innovation Fund. The $550 million fund is an initiative conceived and sponsored by the Ministry of Finance to support local innovators. It will provide the resources Lamsa needs to accelerate its growth and impact.

Elsewhere in the Emirates, the Dubai Future Foundation has launched a number of innovative projects such as Area 2071, Dubai 10x, and a 12-week accelerator programme to providing a nurturing environment for start-ups.

In Bahrain, the government has collaborated with entrepreneurs, investors, and academic institutions to create the Startup Bahrain initiative. This provides entrepreneurs with tools and funding to help create and scale their business, and take advantage of the newly created FinTech sandbox.

In Oman, the government is even involving start-ups in decision-making processes. It recently appointed entrepreneurs as Board Members on government entities, including on the Omani Public Authority of SME Development. Mohammed Salim Al Harthy, CEO of Akkasa Production and a Board Member for Al Ruffed Fund, the largest start-up fund in Oman writes: “This helps the government understand start-ups’ needs and create an empowering and enabling ecosystem in Oman.”

Start-ups address regional challenges with regional solutions. Competition is heating up from regional and international players. Over the past year, this has been especially true in the e-commerce space, in a way that few outsiders would have predicted.

In July 2017, rather than entering a new market by itself, as it always had done up to that point, Amazon purchased Souq.com for a record-breaking $580 million. Goldman Sachs called the deal "the biggest-ever technology M&A transaction in the Arab world". The acquisition served not only to validate the viability of e-commerce in the region, but also boosted related sectors like logistics and payment systems.

In fact, this announcement was part of a broader movement in the e-commerce space. It came hot on the heels of a March 2017 announcement by Dubai’s Emaar Malls, under the Chairship of Dubai real estate tycoon Mohammed Alabbar, that it had paid $151 million for a 51% stake in e-commerce fashion website Namshi. A few months later, Mr. Alabbar and Saudi Arabia’s Public Investment Fund announced $1 billion in capital for Noon.com, an e-commerce platform to compete directly with Amazon in the region.

The acquired companies had proven business models in the region. For example, the Souq.com acquisition included Payfort, an online payment gateway already popular in the region.

Yet we must be careful not to paint the region with a broad brush. Indeed, part of the rationale behind Amazon’s acquisition is the rich variety and differences across countries in the Arab world. As one start-up put it: "although we share a common history and culture, expanding into a neighbouring country can be even more difficult than expanding into the US." What works in one country will not necessarily be a one-size-fits-all solution for expansion into others. Start-ups will have to continue to adapt their business models as they grow.

Ideas and businesses coming out of the Middle East, combined with the renewed interest and investment in its start-up ecosystem, are positioning the Arab world as a force to be reckoned with.

But these challenges also force those who remain to think creatively about how to work around the system. This makes for better companies, say many entrepreneurs, and creates space for youth hungry for new opportunities. As one founder puts it: "Our youth no longer want handouts. They want to build their own futures." Arab entrepreneurs are certainly taking their future - and that of their countries - into their own hands.