by Zièd Bahrouni
Being an Oman-born Tunisian founder of a High-Tech company in Germany, I have had the pleasure to see how such companies are born in Europe and how they grow. Through some of our company’s business in the MENA region, we witnessed the attempts there to replicate that company building process locally. During the last three years we have formed an opinion on the significance and potential of such attempts for those countries. We have been discussing where the problems lay for those initiatives and how they could be solved. This is what we came up with.
SMEs: the dream, the inspiration and the frustration
Small and Medium Entreprises (SMEs) have been a wish for the Middle East and North Africa (MENA) countries for decades. The governments there see a sustainable and wide SME layer as a crucial component for social stability and economic growth. For the GCC countries, export-oriented SMEs are seen as a long-term substitute for the large and mainly state-owned oil sector, and rightly so. Think of the German ‘Mittelstand’, it is the engine of the German economy, and has underlined its importance during the financial crisis of 2008. In 2011, it employed 62% of the German workforce (15,7 Million), exported goods worth 195,2 Billion Euros and generated around 36% of revenue. So it is understandable that MENA countries take inspiration from Germany in building an export- and innovation-oriented SME layer. However, the way they have been trying to do so needs revising.
A significant portion of the SMEs of the future in Germany -and the western world generally- will probably come from or go through incubators, accelerators, company builders, fond or any other form of institution responsible for helping to build companies. That is why the MENA countries have been particularly looking at the way those institutions function and trying to implement it in the many institutions they have founded. However, collectively they have not managed to successfully implement the methods of those institutions locally.
Ecosystems create potential, incubators realize it…not the other way around
The majority of those institutions are built according to the western blueprint and some with significant resources. But still, for reasons to be discussed later, they have not been able to produce satisfactory results. Their financers end up losing faith in the original goal (producing companies and growing them) and the institutions end up dissolved into real estate, event management, PR or coaching businesses. In worse cases, they simply cease to exist.
So what has been the problem?
Let us take a look at how incubators, accelerators and other company-building institutions work in the western world. Fundamentally they function passively; they create a useful platform including infrastructure, funding, network, coaching, etc. and then rely on the ecosystem around them to produce the talents that would use it to build their companies. There is where the passivity lays; those institutions do not create potential, they realize the potential in the ecosystem around it.
The missing academic, industrial and social components
That is precisely why company-building institutions cannot work in the MENA region currently; there isn’t enough potential in the ecosystem around them. There are three main components that are missing in the MENA ecosystems that hinder them from producing talents and entrepreneurs. They could be summarized in academic, industrial and social factors. The first two are fairly straight forward; there aren’t enough high-quality universities and research institutes interacting with a wide innovation-oriented industry around them. Most of the talents arriving at the incubators in Europe have been through high-quality universities, where they not only acquire theoretical know-how, but also acquire the methodology required to develop a product or a business. From early on they are also exposed to the industry, where they get to apply what they learnt and get to know the market better, in which they later develop their businesses. Although the MENA countries have been investing heavily in (higher-) education and been building the industry around it, they are unfortunately still a long way behind the western world.
The other important missing aspect is the social one. It mainly concerns the incentives for young talents and the regard of the society for the journey of entrepreneurs. For the segment of locals best suited to become entrepreneurs -presumably young talented graduates-, the incentives drive them mainly into a stable and maximum wage in the short run. That on its turn is also due to the fact that the supply of such talents is short and the demand for them is huge, especially the local ones. Therefore, for a talented young graduate in the MENA region to take up entrepreneurship, he or she must overcome a lot of financial temptations and social pressures. Becoming an entrepreneur would almost always mean limited financial returns (at least in terms of liquidity) in the first few years and would probably require a high level of commitment. Both of those things would mean falling short on the almost sacred task of building a family as soon as possible.
Strategy: Building long-term foundation while creating short-term inspiration
Although it is difficult and it takes time, the solution has been obvious for decades: to build an ecosystem with enough potential. It is necessary to invest in the (higher-) educational system and to build / attract an innovation-oriented industry around it. That is the sustainable solution for a lot of economic and social challenges facing the MENA countries, but one that will still take generations. The authorities should try to accelerate that process, or at least not slow it down unnecessarily. Until then, western-style incubators or company-builders probably would not work.
But that is not to say that no company-building institution could work at this point of time. They just need to be different. Their goal would be to try to help the few entrepreneurs produced by the ecosystem to build their companies. The aim of that would be to create a few showcases that would hopefully change the social component mentioned above while waiting on developing the academic and industrial one. In other words if company-builders manage to build a few quite successful innovative companies -that will inevitably be heavily publicized-, it would inspire the younger generations that would be going through a more productive ecosystem. It would hopefully offer them an alternative to the traditional career path but at the same time provide a use-case for the necessary amount of commitment and work.
So, how would an incubator, accelerator or company builder work in the MENA region at this point of time? That would be the subject of the next article. In it we would take a look at the problems faced by the few entrepreneurs produced by the ecosystem. From that a solution would be developed in accordance with the strategy above and the particularities of the MENA region.