Dubai Chamber proposes ways to meet funding challenges of startups

DUBAI: A new whitepaper published by Dubai Chamber of Commerce and Industry on start-ups has called for closer cooperation between universities, government agencies and investment funds to expand the scope of investments that can support the growth of startups in the UAE.

The whitepaper has been published in collaboration with Roland Berger.

The findings were released during Dubai Startup Hub’s Entrepreneurship Advocacy event series. The event, joined by banking and finance leaders, industry experts and entrepreneurs, shed light on the key funding challenges faced by startups in the UAE, building on a previous whitepaper released last year which focused on obstacles associated with opening a bank account in the country.

Results of the whitepaper were based on the feedback and insights provided by banks, startups, venture capital firms, angel investors, incubators, accelerates and government entities in the UAE that were surveyed.

Navigating the complex local funding ecosystem, high hurdle rates to qualify for capital on the equity side, and insufficient risk appetite on the debt lenders side were identified as key challenges for startups in the UAE.

The whitepaper examined common issues experienced by first-time entrepreneurs and highlighted the need for more reliable and up-to-date information on startup funding in the UAE.

According to the findings, investors have an appetite for only a limited number of business models, technologies and sectors, and in some cases, signalled interest, with many adopting a “wait and see” approach before committing capital. In addition, many banks still require startups to have an established company track record of at least three years before they can qualify for funding.

While the UAE has successfully attracted a diverse set of investors, investing in startups as an asset class is still relatively new, with the appetite to invest generally directed to other asset classes, such as real estate and commodities. This is changing fast, but some obstacles remain, such as the lack of reliable market data, which adds complexity, cost and uncertainty when it comes to due diligence.

The key building blocks for a thriving ecosystem are in place and the whitepaper noted that the number of startups in the UAE has grown considerably in recent years as the country has become a preferred regional destination for entrepreneurs operating in a wide variety of sectors and fields.

The focus now needs to shift to elevating and deepening the ecosystem to the next level by building deep sector and technology specific ecosystems and fostering cooperation between universities, government institutions and funds is required, the report said.

By adopting these recommendations, the UAE can move steadily forward in its mission to be a world leader in innovation, and develop an entrepreneurial ecosystem where startups, SMEs, and major corporations can promote the use of modern technology, diversifying the economy, and creating new job opportunities.

The whitepaper also highlighted the important role played by incubators in supporting startups and entrepreneurs. Incubators can provide affordable office space, training, mentoring and networking support. The UAE boasts some excellent innovation, incubator, accelerator and co-working spaces, but they need to build on their capacity to cater to the growing number of entrepreneurs. Most of these spaces still come at a cost that require start-ups to run for a fair period on a self-financed basis.

The whitepaper goes on to note that startups are still experiencing some degree of difficulty in opening a bank account in the UAE, largely due to the various risk policies adopted by banks. The report called on government entities to play a leading role in reducing the risks incurred by banks in financing early-stage startups.

Existing building blocks of the broader ecosystem can be further strengthened, such as building and financing more high-quality incubators, or fostering a more vibrant angel investor and crowdfunding landscape. Other solutions outlined by the report included: encouraging equity investors invest in early-stage startups, and reframing the way banks evaluate startup loans by integrating them into corporate social responsibility programmes.

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