Company laws hinder growth of smaller firms in Saudi and UAE, says leading VC

Middle East Venture Partners has a $250 million fund for companies across the region

Commercial laws in Saudi Arabia and the United Arab Emirates limit growth opportunities of emerging companies with full foreign ownership, making it harder for them to list on local exchanges, Rabih Khoury, partner and chief exit officer of the UAE’s Middle East Venture Partners has said.

Saudi Arabia and the UAE have both updated their commercial laws over the past two years. However, the changes did not completely remove the requirement for new companies to have a local partner holding a certain percentage of equity shares, meaning that expatriate founders of successful firms in both countries are unlikely to seek local market listings.

In November of last year, the UAE amended its commercial law to allow the government to exempt certain companies and sectors from the 51 percent local ownership requirement specified in the country’s commercial law, according to law firm Baker Mckenzie website.

Saudi Arabia has also opened certain sectors to full foreign ownership. It opened the retail and wholesale sectors to 100 percent foreign ownership in 2015 and did the same with engineering consultancies last year. In August last year, the head of Saudi Arabia’s General Investment Authority told Reuters that the authority plans to open the health and education markets to full foreign ownership.

“For us (VC investors), what makes it worse is that we don’t get to go to an IPO market,” Khoury said in an interview with Zawya on Tuesday, on the sidelines of the Middle East Investment Forum held over a three-day period in Dubai last week.

According to Khoury, the current commercial laws in Saudi Arabia and the UAE could, in the long term, lead to a negative impact on the wider economy and companies’ evaluation of local markets.

“If you look at the public markets in the UAE, they don’t reflect the real economy anymore because a lot of the fast growing tech companies cannot IPO,” Khoury said. “IPOs create a valuation upon which you can benchmark,” he added.

Other VCs have voiced similar concerns about the Saudi and UAE commercial laws.

“It reflects outdated, non-global bureaucracy that truly is not changing things,” Chris Rogers, a partner in the US-based VC firm Lumia Capital, said during a panel discussion on the Saudi market at the Middle East Investment Forum on Wednesday. 

However, Rogers added that he is not worried about the new companies’ ability to IPO in the GCC, as most of them can raise money on international stock markets. “I think the way tech is moving, it is global. It rarely respects geopolitical boundaries,” he said.

Khoury said that most of the companies in which his firm invests get their licenses offshore, to get better bankruptcy protection and stock options. 

The UAE passed a new bankruptcy law last year and Saudi Arabia passed one earlier this year, in attempts to attract more investment into the country.

Khoury said the idea that entrepreneurs are usually very young and inexperienced is fallacious.

“In our portfolio, the average age of our entrepreneurs is 38 years old,” he said, adding that maturity is an important factor in the success of any company.

“Everybody looks at Mark Zuckerberg and assume(s) that everyone (entrepreneur) is 18 years old,” he added.

Established in 2009, Middle East Venture Partners invests in companies in early and/or growth stages in the Middle East, with a current focus on the GCC markets. The company currently runs 43 investments in the region.

It announced last year a $250 million third round of funds for Series B companies, a classification given to firms that are already generating revenue and have previously been through at least one fundraising round.

“We invest to take it (a company) from $1 million or $2 million revenues to $20 million,” Khoury said. He said that his company typically takes stakes of about 20 percent in companies in exchange for funding of between $2 million – $15 million, depending on a company’s prospects.

Khoury said he believes that investing in Series B companies “is the right risk-reward equation for the Arab world”.

Start-ups funded by external investors usually go through a number of phases of development before these funders can achieve an exit. The first stage is known as the seed stage, the stage where one person or a group of people come up with a business idea and/or plan. In this stage, a startup seeks an angel investor or incubator to help turn its idea into a business. If the company begins to generate revenue, it can then receive a more substantial funding package to help it grow at the Series A stage.

“There is a role for the angel investor and there is a role for us (VC firms),” Khoury said.

“Accelerators and incubators create good entrepreneurs, but they don’t create good companies,” he added.