The increase in entrepreneurship and start-ups in the region has been happening over the past decade as revealed by Arabian Business in the latest trends shaping the region’s start-up ecosystem
Financial technologies and e-commerce businesses dominated the market in the Web 2.0 wave, while blockchain and cryptocurrencies are slowly growing in the region
In the post-pandemic economy, it feels like start-ups are launching almost daily in unprecedented numbers, but the Middle East entrepreneurial ecosystem has been steadily growing for almost a decade now, explained Walid Hanna, CEO and founder of MEVP, a venture capitalist firm.
Talking exclusively to Arabian Business, Hanna looked back at the evolution of start-ups in the region and the major trends that dominated each phase until today.
What can you tell us about the regional landscape for start-ups in the post-pandemic economy?
The increase in entrepreneurship and start-ups in the region has been happening over the past decade.
We [at MEVP] began our journey back in 2010 and, at that time, we used to see one or two start-ups a week, while now we receive three or four business plans a day, so the multiplier has been enormous in terms of the number of start-ups.
This has been the case post-Covid as well. When the whole ecosystem realised how important technology is during the pandemic, it gave a boost to our portfolio of companies and they grew faster and it also gave a boost to potential entrepreneurs who left their jobs to start their own businesses.
Why do you think fuelled this growth in the pre-coronavirus days?
It’s a natural progression that happened across the US, Europe and China over the past two decades and since there’s always a lag with the Middle East, it’s finally happening here now.
If you look at the penetration rates in internet usage or mobile phone usage, the Middle East has typically been lagging, the exception being countries like the UAE. But, now they’re all catching up.
What are some of the trends you’ve seen among regional start-ups, in fintech and tech in general?
Trends have been evolving over the past decade as well.
Originally there was the Web 1.0 wave, which was only content-based such as browsing the internet for cooking recipes, for example.[Start-ups] were making money, but it was based on reading, there were no interactions or transactions involved.
Then it evolved into Web 2.0, where we saw a lot of financial technologies, e-commerce sites and software-as-a-service for enterprises. We’ve invested in 60-plus companies across those verticals.
We’ve also seen a lot of mobility plays, such as Uber, and we’ve seen that model [replicated] across tuk-tuks, motorcycles, electric scooters and trucks which, in a way, is good for the environment.
Within fintech, we’ve seen a lot of sub-verticals, such as the Buy Now, Pay Later model, which is a big trend at the moment – there are around ten [such start-ups] in the region and we’ve invested in an Egypt-based one. But there are so many other trends within fintech, including micro-lending, SME-lending or treasury solutions; payment solutions in general.
The hype over non-fungible tokens and cryptocurrencies, the whole blockchain business model, has evolved tremendously over the past couple of years and is just starting to pick up in the Middle East. We’ve seen two NFT marketplaces and a couple of blockchain business models. It is still quite limited, although I expect it to grow much faster in the next three years.
How do you identify the companies you will invest in?
Just as they say “location, location, location” for real estate, it is “people, people, people” for start-ups.
If a start-up is at the earlier stages, the best thing you can look at is how investment-ready the business is and how qualified the founders are with relevant experience. We look at how dynamic, hardworking and motivated they are.
We look at the total addressable market and try to understand if it’s big enough and if they are really answering a pain point that is large enough to make serious money. This is because we are not interested in a small niche in a tiny country. For example, if a start-up is trying to solve a small issue in a country like Lebanon and the issue is not the same in Saudi Arabia and the GCC, then we are not interested.
We also look at the business model and the unit economics to see if it is viable, meaning we try to find out if the cost of producing, marketing and selling whatever product is worthwhile. If you look at the cost of acquiring a user and realise that the margin you are making out of this one product is inferior to that, then it is not worth it.
We also look at how robust and scalable the technology itself is and the stack they use. We invest in tech start-ups only.
Growth is key to our assessment of technology companies. We don’t do seed capital so when we invest in Series A, we can already witness a traction behind the start-up. If the traction is interesting, we get interested but if it is not already interesting, we don’t invest.
What are the challenges that remain for entrepreneurs in the region?
It depends on the country. In the GCC, there are no currency risks because they are pegged to the dollar, but if you look at currency in Egypt, they got really hit by the devaluation about three years ago.
There is also a political risk because of the region’s instability and relationship with its neighbouring countries.
Enablers are becoming better and better, but we still have some issues with the banks, for example. Opening up a bank account for start-ups is very challenging across the region. It takes ages and a lot of KYCs.
Five years ago, the logistics were very poor. Even the online payment systems were very poor so it was difficult for start-ups to thrive within that environment. This has been enhanced over the past couple of years but, for some reason, many customers here still want to pay cash-on-delivery and not use credit cards online. Penetration is increasing in terms of card usage but it is still lower than the global average.
Other than that, the ecosystem has evolved well and the enablers have followed. I would say the only challenge that remains is for fintech companies in terms of licence and regulations. Government regulations are making it easier by offering sandbox licences, but other than that, the regulatory framework is quite limited. The process is very slow but will happen one day I am sure.
Exits are happening, but still at a low rate where selling the start-up is difficult. There are more investors from outside the region looking at the region, which is positive, and the big regional conglomerates have also started to acquire start-ups so the trend is good but the numbers are still behind.
We have good start-ups and we want to sell them, but buyers are scarce. We should expand our horizon of buyers towards the global market, such as China or the US.
Gulf Business‘s article that as an Explainer: Is data the new oil in the GCC? is a good snapshot of the present situation of that part of MENA countries.
We all know that ‘Big Oils’ management and petrol countries alike have underscored scientific research showing the link between burning fossil fuels and a dangerously heating planet. They’ve lobbied and funded reports to either downplay or deny the risks to the climate—and humanity—of using their products. It went on unabated until the advent of clean and accessibility to all the latest technological hard and software for a broad spectrum of commercial activities.
Explainer: Is data the new oil in the GCC?
Technology has now become a key driver of economic growth in the GCC, with data already defining the region’s future, opines Maurits Tichelman, VP – Sales, Marketing, and Communications and GM – Global Markets and Partners, EMEA at Intel
Is the term ‘data is the new oil’ still relevant? Yes, data has practically become the ‘new oil’. Data is playing a significant role as a crucial source of wealth for oil-rich nations and territories such as the GCC, which has historically been particularly dependent on oil as the main contributor to the GDP.
We are witnessing a significant shift from oil to data in the region as governments embark on strategic initiatives to diversify towards more knowledge-based and tech-driven economies. Data is already playing a key role in this transformation. A concrete example of this process could be autonomous driving. Autonomous vehicles run on data in the same way that today’s cars run on gasoline. Therefore, undoubtedly, data will be the new oil.ADVERTISING
In the GCC, oil has been crucial to economic growth. Will technology/data be able to provide the same level of economic prosperity? Countries in the region are heavily investing in diversified industries such as technology, manufacturing, education, and healthcare, among others. As the Gulf states transform and diversify, the importance and impact of technology will take on an even greater role. Data is already defining the region’s future, complemented by mega projects planned with greater focus on smart infrastructure (smart cities), advanced telecoms services, and somewhat accelerated by the rapid rise of remote learning and working due to the Covid-19 pandemic.
Furthermore, technology has now become a key driver of economic growth, from providing goods and services efficiently, to optimising advanced technologies to help businesses and governments access natural resources that can benefit people. Additionally, increased efficiency of labour has improved productivity and profitability.
While we are producing ample amounts of data in the region, are we currently maximising its benefits? We are surrounded by data and it continues to grow exponentially. According to estimates, in 2021 alone, there will be 74 zetabytes of generated data and it is expected to reach 149 zetabytes by 2024. As a result, the need to understand and optimise data has become even more significant as every business uses data to some extent. However, there is a lack of knowledge and skills in utilising the data to its full potential. With the rise of digitalisation, companies and governments across the region and worldwide are investing in digital transformation, a positive indication that more organisations are now realising the importance of data.
The Covid crisis has highlighted the importance of technology – but will it retain its relevance post-pandemic across industries? The pandemic has undeniably prompted companies to invest more in technology adoption across industries including healthcare, education, retail and real estate, among others. The use of innovation technology such as virtual medical/doctor consultation has helped people during lockdowns. The Covid crisis has forced organisations and governments to adapt and prepare better to tackle future calamities with the aid of technology.
Businesses have seen the advantages and have started deploying smart and intelligent technologies such as artificial intelligence (AI) to improve safety standards and increase productivity. Thus, it is clear that technology has become an absolute necessity rather than a mere option; its relevance has never been so crucial and without a doubt the use and benefits will play a bigger role post-pandemic across industries locally, regionally and internationally.
What are the biggest challenges hindering tech adoption/data-driven growth in the region? Although organisations are implementing advanced technologies, the vast majority still operate on outdated and traditional models, which prevent them from utilising the benefits of the latest available technologies. Secondly, reluctance and resistance from employees in adopting technology poses challenges for companies. Lastly, a lack of skilled professionals is a key factor that has restricted organisations in the region from completing their digital transformation.
Looking ahead, GCC states are seeking to become global knowledge hubs. How can that journey be accelerated? GCC governments are accelerating their digital transformation journeys with progressive strategies and initiatives. Smart Dubai, Dubai Data Strategy, Saudi Arabia’s The National Strategy for Digital Transformation and the Qatar Smart Program (TASMU) are examples of the regional commitment and ambition to explore all possibilities of technology and its impact on daily life and business. These strategies, roadmaps and ambitions are the key drivers and accelerators of their technological transformation journey.
What Is the Internet of Taxes? A question answered by Toby Bargar in his article dated May 13, 2021, explains how in this day and age, the Internet generally is gradually spreading wider and wider to cover most daily life. But to this extent, who would have thought so?
So, let us see what it is all about.
What Is the Internet of Taxes?
According to a McKinsey Global Institute report, IoT could have an annual economic impact of $3.9 trillion to $11.1 trillion by 2025. Adoption is accelerating across several settings, including factories, retailers, and even the human body. In fact, smart cities will reportedly create business opportunities worth $2.46 trillion by 2025, and by 2030 more than 70% of global smart city, spending will be from the United States, Western Europe, and China. With AI and the rollout of 5G facilitating faster speeds and scalability, we will see even greater demand across sectors for IoT solutions.
An oft-repeated phrase says that nothing is certain but death and taxes; however, in the case of IoT, we can say that nothing is certain but growth and taxes – we don’t yet know how it’s all going to shake out. The demand for IoT is going to tempt federal, state, and local jurisdictions to tax it. With voice communications taxable revenues declining, taxing IoT is an attractive option to replenish their coffers.
In 1998, Congress passed a moratorium banning state and local governments from taxing internet access. This ban was extended several times. The Permanent Internet Tax Freedom Act (PITFA) converted the moratorium to a permanent ban and was fully implemented nationwide on July 1, 2020. Since the initial moratorium, the internet has risen to be a critical communication tool over other more highly taxed wireless and landline voice options, which continue a steady decline.
The ability to tax IoT may require changing laws and regulations. This process could take some time, but there is a complicated web of laws, regulations, and tax liabilities surrounding IoT in the interim. As we continue to adopt smart solutions, companies have to get smart about the nuances and risks of IoT taxability.
There are two easy questions that will help you to begin to understand your IoT taxability risk.
1) Is your company selling internet access? 2) Is your connectivity embedded or over-the-top?
Over-the-Top or Embedded Connectivity
If your device is networked over a user-supplied connection, then access is over-the-top or bring-your-own Internet connectivity. The over-the-top connection can be wired, Wi-Fi, or purchased separately from a wireless service. For example, if you sell a wireless printer, users connect through their home or office network. You are not supplying the internet, but the device. In these cases, as an IoT device maker, you likely have no responsibility for the customer’s internet connection.
Different than over-the-top, an embedded connection is part of the device. If you sell a device that comes with its own data connection as a component of the sale or service plan, it is embedded. Smartphones are a great example of an embedded connection. The relationships between device makers and network operators can feature widely variable structures. The device provider may need to account for any taxes that need to be collected related to the connection.
The World Wide Web of Gray
Defining internet access may appear intuitive, but not all connectivity is considered internet access. If you are selling a service that meets the statutory definitions of ISP service, the federal law provides a moratorium against state and local taxes.
Private connectivity, however, is often taxable. Unlike the public internet, private connectivity occurs via a Local Area Network (LAN) or Wide Area Network (WAN). This type of access is considered a taxable communication service in most states. If the network is interstate, this will also subject you to the Federal Universal Service Fund fee (FUSF), which is currently 33.4%, an all-time high for this fee and growing higher every quarter.
However, there are questions about whether connections to devices that do not enable a WWW experience – you connect to the internet, but the end-user can’t log onto Facebook or perform a Google search – meet the federal definitions of ISP service. If you do not meet those definitions, then your likely tax destination could be LAN/WAN.
Avoid the Dead Zone
IoT is here to stay. As you develop and deploy IoT solutions, it will be critical to stay informed on the web of tax rules that may or may not apply to your business. Monitor federal and state agencies that have jurisdiction over internet taxation and stay abreast of any changes on the horizon.
With so much uncertainty, it can be tempting to push the envelope, but a conservative interpretation of tax guidance can proactively protect you from being caught off guard.
Finally, to avoid hitting a dead zone, don’t try to navigate the changes on your own. Consult with your tax and legal advisors to ensure that you are aware of the latest developments and plan your course of action accordingly.
The MENA region, like much of the undeveloped world, is characterised by an omnipresent Informal Economy with however differing specifics. This label dates back to most countries Planned Economy. So why is now the Fintech industry poised for significant growth in the MENA region? And how? All world economies have an informal economy, and the duties of all business and governments alike leaders are to sustain, help and assist in its good maintenance and eventual development. Informal Economy is not Black Market and can easily be formalised to become the locomotive of any nation’s economic life. Could Fintech be of serious help here?
Any way, the reasons are tied to those specifics at this conjecture as well summarised by Ayad Nahas below.
The Financial Technology (Fintech) industry in the Middle East and North Africa (MENA) looks well placed to enjoy a period of substantial growth.
As many as 69% of adults remain totally unbanked in the region
Internet penetration in Saudi Arabia stood at 95.7% in January 2021
Fintech is going to be the “game-changer”
Fintech industry poised for significant growth in the MENA region
By Ayad Nahas, Communication Strategist
The Financial Technology (fintech) industry in the Middle East and North Africa (MENA) looks well placed to enjoy a period of substantial growth.
Part of this growth could come from a large unbanked population.
GCC expatriates with low and middle-income salaries constitute a large proportion of the unbanked such as in the UAE, where around 80% of the population is outside the current financial system.
Yet, regional smartphone and internet penetration is very high, reaching 2 mobile-cellular subscriptions per UAE inhabitant in 2019, while Internet penetration in Saudi Arabia stood at 95.7% in January 2021.
Regional governments spotted this opportunity and introduced regulation to substantially attract investments into the sector.
Fintech is a term that describes new technology which seeks to improve and automate the delivery and usage of financial services. At its core, fintech helps companies, business owners, and consumers better manage their financial operations, processes, and lives by applying specialized software and algorithms on computers and, increasingly, smartphones.
Fintech’s adaptability across a slew of consumer sectors is propelling its widespread acceptability. Managing finances, trading shares, furnishing payments, and shopping online (often on your smartphone) has never been more convenient.
At the forefront of the fintech disruption are agile innovations such as peer-to-peer (P2P) lending and crowdfunding, providing alternative lending platforms, and widening access to fundraising.
While they may currently still need some centralized form of finance, at the minimum, P2P lending and crowdfunding can use fintech and blockchain to quicken the process, avoid paying high banking fees, and garner the interest of digitally-minded Millennials and future Z-generations.
A recent report by consultancy firm Deloitte also states that the UAE houses over 50% of the region’s fintech companies, with nearly 39% of the population using fintech for P2P money transfer.
According to a report by Crowd Funder, a leading online source for the fintech industry, the number of financial technology companies in the Middle East increased from around 105 companies in 2015 to 250 firms in the year 2021.
Hanna Sarraf, a senior banking executive from the MENA region, said fintech is going to be the “game-changer” that will decide the winners and losers within the financial services industry, globally and in the Middle East, in the short and long terms.
He points out that new technologies and advanced data analytics are transforming the traditional banking business models from the way banks interact with customers to the way banks manage their middle and back-office operations.
The global fintech market is expected to reach $309.98 billion at a CAGR of 24.8% by the year 2022 according to many key sources from the banking industry. In the MENA, the fintech industry is expected to hit a record valuation of $3.45 bn by 2026.
The growth of this sector is currently being propelled by the rapid rise in fintech startups as a result of the very high internet penetration in the region. Another major factor is that several traditional banks are undergoing digital transformations or even becoming neo-banks, a trend especially evident in the UAE.
In a survey by the Boston Consulting Group (BCG) last October, 70% of respondents said they are actively searching for a new bank, and 87% said they would be willing to open an account with a branchless digital-only lender.
Today, the UAE is leading the pack in financial technology and developing itself as a digital-first nation when it comes to banking, payments, and fintech, as evidenced by the UAE’s first digital bank to provide both retail and corporate banking services and which will soon be launched and led by Former Emaar Chairman, Mohamed Alabbar.
According to many experts, the fintech market in the MENA region is set to account for 8% of the Middle East financial services revenue by 2022. COVID-19 turned out to be a wakeup call to switch from traditionally deployed financial services to more sustainable finance and technology platforms
The fintech revolution is set to continue to disrupt, and traditional banks must keep up with the pace of technology in order to stay relevant and competitive. In this rapidly evolving, ever-changing market, it’s time to innovate, integrate and accelerate into the future.
The pandemic has helped boost digital marketplaces in the region, opines Muhammad Chbib, CEO at Tradeling.
7 November 2020
The pandemic has propelled the use of e-commerce in the region and globally. What are the key trends you have seen? The most significant trend is the growth of homegrown capabilities in e-commerce in the region. Globally, while e-commerce has been recording strong growth – accelerated no doubt by the pandemic – the region has witnessed a transformational growth in the evolution of the digital economy. Not only have our homegrown companies demonstrated strong resolve to meet the needs of the people and support them, we have seen a tremendous amount of entrepreneurship – with new startups entering the market and building their own niche.
The second trend is more consumers warming up to the possibilities offered by e-commerce. While digital commerce was gaining momentum, one of the factors that has stymied its growth in the region is the relatively lower credit card penetration in some markets. There have also been typical concerns associated with conducting everyday business online. However, one thing the pandemic has brought about is the adoption of digital payments and the increased confidence of consumers to shop online and conduct e-commerce transactions.
In the B2B e-commerce space, how high is the penetration in the GCC market? Has it grown significantly this year? While B2B e-commerce was evolving at a slower pace compared to consumer-oriented digital business, this year has witnessed a real transformation. I believe it is a case of supply and demand. What matters is that in the new reality, business customers too want to access products and services easily, quickly and efficiently. We see a growth in the B2B marketplace – here in the UAE – and growing enquiries from across the GCC.
Which are the verticals within the sector where you see most scope for growth? It is really a matter of bringing more options to the customer, whatever the vertical. Customers like to shop around and feel they get value for money and exemplary service. But it is also a matter of sourcing new products and services that aren’t in the region yet.
For those entering the digital B2B industry, what are the main challenges? The main challenges are finding the right talent with expertise and insights into the B2B sector, which is a different terrain compared to B2C e-commerce. An in-depth understanding of the global market is essential in addition to knowledge of the trading dynamics. You must be flexible and agile to overcome any unprecedented situation. It is also a matter of understanding the customer – the B2B customer is very different from the B2C customer.
Our priority is making the customer journey seamless, taking away their pain points and streamlining processes to ensure efficiencies that save them time and money.
Tradeling launched in April, in the midst of the lockdown – how was your experience? Do you have any immediate plans to expand? We created Tradeling during the pandemic to connect regional and global suppliers to MENA-based business demand. Today, we have close to 400 suppliers from over 25 countries with gross merchandising value increasing from zero to a high two-digit million figure in just three months.
The key to overcoming the challenges was to enhance market confidence and we took decisive steps in this regard. Today, we have gone from a team of 40 to nearly 100 people and we continue to hire.
From logistics to financing support to ensuring a fully secure payment gateway, we are the first of our kind B2B platform across the region. This is our USP and this integrated approach to business has enabled us to address the challenges.
Looking ahead, what is the future of digital marketplaces in the region? Digital marketplaces constitute the future of retail and in the new reality, they will record a stronger rate of growth compared to brick-and-mortar retail. But the key for success is to define your own unique niche for the marketplace; increasingly, we see online aggregators trying to capitalise on the opportunity, which will only lead to market fragmentation. What we need is bold, innovative ideas that will help accelerate the momentum of e-commerce growth in the region.COVID-19DIGITAL MARKETPLACEE-COMMERCEGCCTRADELING
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