The Upside Of Downturns For Entrepreneurs
"Fortune favors the bold," the adage goes. It certainly works for those who defy recessions to launch a business.
It seems that entrepreneurship has lately become an attractive alternative to employment, with many barriers to starting your own business coming down. For example, the costs of running a business are dropping. With telework, smaller offices are becoming the norm, lowering rents in the process. More talent is available from near and far thanks to unemployment and remote working. And then there's the falling costs of technology like cloud computing.
In a lot of places around the world, there has been a steep rise in new business registrations since the pandemic. The USA recently saw almost half a million new companies being formed in one month, doubling the volume of a year prior, while several European countries established new record. While these numbers are not published as frequently for MENA markets, there is anecdotal evidence of a similar trend here in the region.
Crises provide an interesting context. In 2009, when the financial crisis hit MENA, new business registrations continued growing in some of its markets, including Saudi Arabia. The following year, the rebound was almost universal, with the UAE recording a 23% increase in 2010 and a further 40% in 2011. Taking the current pandemic into consideration, earlier this year, the Dubai Multi Commodities Centre (DMCC) -a commodities free zone- revealed that in 2020, it had recorded its highest number of new company registrations in five years. Last year, the Dubai International Financial Center also saw its largest number of new registrations since its inception 16 years ago. The surge among free zone registrations come on top of the 43,000 new formations processed by Dubai's Department of Economic Development.
While some of these entrepreneurs will have gone into a new venture by choice and conviction, others will have been pushed into it by adversity resulting from the crisis. Without furlough schemes and other forms of social protection in the region, the need to generate an income can be the final push that business executives require to become their own boss, even if reluctantly. Today's entrepreneurs are reinventing the rules of engagement, finding ways to build their career away from traditional corporate models.
It appears that economic downturns may be good for them. Looking at more than 600,000 LinkedIn profiles of US professionals who graduated between 1996 and 2014, researchers found that entrepreneurs who started their business in a recession had more success. They were more likely to thrive, innovate and secure funding than peers who controlled their timing and chose more auspicious conditions. It seems these entrepreneurs by force had a greater hunger for success. Using a listing as the criteria for success, researchers included Dropbox, Airbnb, Instagram, and YouTube. The Middle East has a few survivors of its own. Careem, Fetchr, Mumzworld, and Mawdoo3 all launched soon after the 2008/9 financial crisis.
This hasn't escaped the investor community, with some VCs actually seeking out recession entrepreneurs. This opens up finance from angel investors, seed funds, and crowd funding sites. As stock markets are buoyant and interest rates low, money is also pouring into later stage venture capital. A recent Magnitt report reveals the same trend in the Middle East, with over US$1 billion invested in MENA's startup ecosystem in 2020 across 496 deals- a new record for a maturing sector. The data revealed a gradual diversification in terms of the industries involved in digital transformation, as well as the prioritization of certain sectors due to the pandemic, such as healthcare, food and beverage, and e-commerce.
Investors have an important role to play in stimulating growth, for themselves as well as the overall market. A 2016 report by Endeavor Insight on the Middle East's economic recovery and revitalization highlighted the impact of entrepreneurship's "multiplier effect" on an economy. The report noted that for every 10 successful new enterprises, nearly $1.5 billion in new valuations and more than 2,500 jobs are directly created.
The growth potential is vast. Startups and SMEs represent more than 94% of companies in the UAE, employ about 86% of the country's private sector workforce, and generate about half of its non-oil GDP. At least they did before the pandemic struck. And as many startups have seen demand evaporate with the pandemic, support for new businesses is more critical than ever. An IBM Institute study found that 90% of startups fail within the first five years of their inception.
One reason is finance. The 500 or so deals reported by Magnitt are a very small proportion of the market. The need for cash is much greater. I obviously welcome the Emirates Development Bank's $8.2 billion package of financial support for the UAE's SMEs and startups. The devil will be in the detail. The funds will support priority industrial sectors over five years, financing some 13,500 SMEs and creating 25,000 jobs. While the headline figures are impressive, there is plenty more to do. If the initiative is to succeed, the decisions to distribute the funds will also have to be wise and fair, without favor or discrimination.
Now is the time to support entrepreneurship, with finance as well as guidance in leadership and innovation, to make sure the economic diversification and recovery goals are met. The odds may well be in recession entrepreneurs' favor, but like all startups, they will still need all the help they can get to succeed.