Dubai, 17 May 2016: Dubai SME, the agency of the Department of Economic Development (DED) in Dubai mandated to develop the small and medium enterprise (SME) sector, has launched a report on the ‘State of SME Equity Investment in Dubai,’ the first initiative of its kind in the Gulf region, to encourage investment in the sector and attract direct capital into areas with vast potential for entrepreneurial and start-up growth, from private equity (PE) investors, venture capitalists (VCs)and angel investors.
The report was released during the first ‘SME Equity Financing Forum,’ organised by Dubai SME today at the Armani Hotel, Dubai.
Launched as part of the Dubai SME 2021 Strategic Plan, the report is well-aligned with the strategic economic direction of the UAE, particularly the focus of Dubai on innovation and investment towards building a knowledge economy. It also falls the first-ever authentic estimate on the market size, scope and potential impact of equity investment in SMES, in addition to overall state of equity investment in SMES across the UAE.
The report provides for the first time a comprehensive picture of the state of investment in SMEs in Dubai, along with inputs from all stakeholders in SME equity financing, including entrepreneurs, investors, venture capitalists, legal institutions, SME development entities and academic institutions, as well as government organisations.
Dubai SME launched the Equity Investment Initiative in 2014 with the goal of unlocking investment and funding in SMEs and entrepreneurial projects. The equity investment landscape was studied in the first phase of the initiative and the recommendations in the report formed the basis of actions plans in the second phase.
The second phase of the initiative will witness the launch of Dubai Ventures Network to raise awareness on the importance of equity investment in SMEs, to create an ecosystem for equity investment in SMEs by involving all key players (Angel Investors, Venture Capital Funds, SMEs, Entrepreneurs, incubators, accelerators, Universities, Policy Makers, .. etc), to improve capabilities of investors, and to facilitate and advocate developing a supportive regulatory framework for SME equity investment.
“The ‘State of SME Equity Investment’ report represents an ideal opportunity in the medium to long term, not only for SMEs in Dubai, but also for those across the region. The estimated total investment in small businesses in the region is about three billion dirhams, and with clear strategies these funds can be channelled into sectors of vast growth potential,” said His Excellency Sami Al Qamzi, Director General of DED.
“However, limited source of funding to start businesses is a major gap in our SME ecosystem, which is underlined by the finding in the report that 80% of the start-ups relied on self-financing as a source of capital,” Al Qamzi said, adding that addressing market gaps and channelling investments into SMEs is critical to Dubai’s knowledge economy initiative. “Based on the findings in the report, Dubai SME has formulated strategies and initiatives to improve SME performance in the years ahead, facilitate SME access to financing, and enhance SME competitive as well as their value-add to the UAE economy,” he said.
Al Qamzi emphasised that Dubai has become an internationally reputed entrepreneurial hub with a distinct group of SMEs in vital sectors. “We continue to develop these distinguished SMEs and enable them to grow and expand to neighbouring markets. It’s a top priority for Dubai to build an integrated support system for SMEs and quality them to meet the diverse challenges of going global.”
The report refers to the slow pace of innovation among SMEs in Dubai even when they have the potential to attract investment and remain growing. The presence of a strong institutional and legal framework to regulate investment activity is essential to improve investor confidence, unlock capital and attract investors, says the report.
“Dubai SME has put in tremendous efforts into this report, which included a complete study of SME investment patterns across the project life cycle, from the establishment phase to expansion, as well as views and challenges related to the prevailing investment landscape. We will work on the recommendations in the report to fill the gaps identified, and promote equity financing, thus creating an environment conducive to SME growth and sustainable development in Dubai,” commented Abdul Baset Al Janahi, CEO of Dubai SME.
Al Janahi said the Dubai SME has identified a number of potential initiatives based on the gaps identified in the report. Key initiatives have also been identified as a means of addressing the gaps mentioned as part of the Dubai SME 2021 Strategic Plan and they will be implemented in collaboration with key stakeholders in the entrepreneurial ecosystem.
“The report has recommended raising awareness about the risks and benefits of investing in start-ups, highlighting SME success stories, facilitating communication between investors and start-ups, and promoting networking among various stakeholders such as business incubators, universities etc, among many others. Other recommendations include enabling investors to evaluate opportunities and SME potential, as well as building entrepreneurial capabilities in sourcing and negotiating investment,” Al Janahi said.
The report calls for robust insolvency and bankruptcy regime for onshore companies in the UAE and exploring the option of a secondary market, which would allow small and mid-sized companies to list without complex regulatory pre-conditions related to corporate governance and accounting. A sponsor-supervised capital market model, which will allow an SME to be brought to list by a sponsor with expertise in corporate finance and regulatory compliance has also been suggested, in addition to allowing SMEs to raise capital up to a certain limit without significant regulatory burden.
The report recommends that there should be international standards to help investors assess the feasibility of business ideas as well as investment options in infrastructure, eco-innovation, including technical centers and centres of excellence in research and development. Absence of authoritative trading benchmarks makes investors apprehensive of investing in business ideas and evaluating risks, says the report.
The report noted that the total value of capital investments in SMEs across Dubai amounted to nearly AED110 million in 2014 and it is expected to grow by 15% in the near term on the back of a 30% growth in the number of deals, driven largely by activity from existing incubators/accelerators and early-stage investment firms.
Additionally, the expected increase in the number of industry-specific incubators and accelerators, triggered by strategic government investments; is likely to further boost a growth of startups within the economy. The UAE, particularly Dubai, has witnessed a lot of foreign interest from business angels in the US and Europe, which presents an opportunity to convert these into active investors, focused on UAE-based businesses.
The Forum also witnessed the signing on a memorandum of understanding between Dubai SME and The European Trade Association for Business Angels (EBAN) to launch joint initiatives, organizing specialised training programmes, and developing specialised capability development programmes, in addition to organising events to connect with international networks within EBAN.