Securing funding for an SME or startup can without a doubt be one of the most difficult and stressful undertakings of any entrepreneur. From preparing an effective pitch deck and presentation, to ensuring all your company’s financials are clearly accounted for and put together, to actually finding the right source of funding, securing funding is a challenging but crucial step for any enterprise.
While banks have played a major role in funding a significant portion of the country’s SMEs and startups, the barrier to entry and the fine print are some of the noticeable hurdles to contend with. According to the Khalifa Fund, approximately 50-70% of SME applications for funding are rejected by conventional banks. Additionally, loans to SMEs account for just 4% of the outstanding bank credit in the UAE, below the MENA average of 9.3%.
Furthermore, many banks have not been able to keep up with the innovation and digital transformation pace of the global ecosystem, and are still lagging behind.
Luckily for entrepreneurs in the UAE, the ecosystem’s aforementioned development has brought forth alternative sources of finance that companies can leverage.
Perhaps foremost among these are angel investors, which have long since been the crutch for many aspiring entrepreneurs in the UAE. This kind of investor, usually comprised of high-net-worth individuals (HNWIs) and/or friends and family, is unique in that they have a personal interest in the business they are funding, and are taking a significant risk by supporting it. They usually ask for ownership equity or convertible debt.
As the name suggests, they are often benevolent investors who will want to support your business beyond just funding, even offering advice and mentorship in some cases, while being less restrictive in the conditions for receiving their help.
If you are based in Abu Dhabi, you will want to reach out to the Emirates Angels Investors Association, which offers a community of the emirate’s angel investors who are always on the lookout for interesting projects.
Incubators and accelerators
In recent years, the UAE has become a host to a growing number of incubators and accelerators, both homegrown and international, which has significantly elevated the local and regional ecosystem.
These organisations are great because they provide comprehensive support to a startup beyond just funding. Oftentimes, they won’t necessarily fund companies, but will instead help them connect with investors and other key network connections to help set them up for future success.
Some names to research when looking for incubators and accelerators in the UAE include Flat6Labs Ignite, Plug and Play Abu Dhabi, in5, Intelak, startAD and DIFC Fintech Hive. Entities like Hub71, Abu Dhabi Global Market (ADGM) and twofour54 often host a variety of incubators and accelerators as well, so you may want to reach out to find out about any ongoing programmes.
There is quite a growing number of incubators and accelerators in the UAE, so try and find the one that is right for your company.
Venture Capitalists (VCs)
The superstars of the funding scene, venture capitalist firms are revered for the role they play in the startup ecosystem, as they helped fund many of the biggest companies in Silicon Valley today.
Generally, VCs offer private equity at the early stages of a startup’s life cycle, focusing on companies with a high potential for growth and expansion.
However, the downside for many companies is that VC funds come with a lot more strings attached. More often than not, VCs will demand equity in a company they seek to support, which means they get a say in how the company is run and can diminish control from the founders. Also, while they are technically a source of alternative financing, dealing with them can be similar to dealing with banks, in that they are very corporate-like, and can be very demanding and slow to respond. Still, the funds and expertise they offer are often top-shelf, and can prove indispensable to a company on a sharp growth trajectory.
Some VCs in the UAE include Shorooq Partners, Wamda Capital, MEVP, and Sequoia Capital (yes, they opened an office here this year).
Private Equity (PE)
While venture capital is a form of private equity, the term is used to identify the fact that that money is often going to an early-stage startup, to help boost its operations and help it grow.
Private equity, on the other hand, is often used to denote funding that is targeted at more mature startups/scaleups/SMEs, with the goal of buying a majority stake, taking over the company, or growing it further to later sell it and gain a large ROI. Given the types of companies they target, PE investments tend to be much less risky than VC investments.
Examples of private equity firms include Gulf Capital and Waha Capital.
Over the past decade or so, crowdfunding has established itself as a fresh but very viable means of funding. However, it is a rather broad term than can be broken down into 3 relevant categories:
Reward crowdfunding: This method is usually used to fund a product or project, where investors are rewarded with goods or services at a later stage. Companies like Kickstarter, Indiegogo and Zoomaal offer this.
Equity crowdfunding: This involves a group of investors coming together to offer an SME or startup funds in exchange for shares or a stake in the business. Companies like Eureeca offer this.
Debt crowdfunding: This method involves investors providing a company with funds in exchange for interest that is paid later. Companies like peer-to-peer lending platform Beehive offer this.
Check our in-depth explainer of crowdfunding here.