empowering entrepreneurship and innovation

8/8/2019 Empowering Entrepreneurship and Innovation

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RiyadhMarch 10th, 2008

PRESENTATION MATERIALS

This document is confidential and is intended

solely for the use and information of ALJ

Empowering Entrepreneurship andInnovation Financing the Future

Regional and National Program Options


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Contents

The Financing Gap

International Experiences

National and Regional Situation

Recommendations


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The Financing Gap


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Note: (*) Number of Start-ups divided by the total number of companies

Source: OECD; European Observatory for SMEs; UK DIT, OECD

0%

1%

2%

3%

4%

5%

6%

7%

0% 2% 4% 6% 8% 10% 12% 14%

GDP Growth vs. Start-Up Penetration*

Start-Up Penetration* (1988-1996)

AverageAnnualGDP

Growth(1989-1999)

JapanSweden

Finland

Italy

Norway

Belgium

Austria

Netherlands

Greece

Germany

France

Denmark

Portugal Spain

US

Ireland

Benefits of Start-Upsto the Economy

Source of Innovation

Increased competition andefficiency

Economic flexibility andadaptation

Job creation

Supply chain development

Seed-bed for future growth

Inclusion

Entrepreneurship, as evidenced by the strength of start-up activity,is a key driver of economic growth and job creation


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70%

67%

65%

59%

49%

EU

France

Germany

UK

US

60%

57%

55%

50%

43%

40%

France

Hungary

Indonesia

Germany

Singapore

US

Percentage of Total Employment in SMEsFor Selected Countries(2003)

SMEs Contribution to GDP ForSelected Countries(2002*)

Note: (*) Figures vary by country from 1997 to 2002

Source: European Commission; US Department of Statistics; OECD; UNECE; World Bank; Euromed

Once start ups mature into Small and Medium Enterprises (SMEs),they become key contributors to employment and GDP


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SMEs around the world and in Saudi Arabia face many challenges;limited access to finance is one of the most important of them

(1) European Observatory Report of SMEs (2) Riyadh Chamber of Commerce SME Survey

Europe (1) Saudi Arabia (2)

Limited access to finance

Labor force too expensive

Implementing new technologies

Implementing new forms of organization

Lack of quality management

Problematic regulations

Problems with infrastructure

Limited access to finance

Lack of skilled labor

Problems with government procedures

Lack of marketing capabilities

Technical problems

Managerial and organizational problems

Inadequate availability of data

Challenges Facing SMEs - Surveys Extracts


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Entrepreneurs and SMEs

They are a very heterogeneous group (e.g. restaurants;workshops; high tech companies; etc.)

What they have: Innovative idea to serve an unmet market demand, or a

technological innovation New product or service, or more efficient approach to

serving markets What they lack:

Market and management experience

Track record Insufficient tangible assets

Result: Traditional commercial banks and investors consider

them high risk, and are reluctant to finance them withoutguarantees

Perception: Financing is in short supply

Investors

They are also a very heterogeneous group (e.g. HNWI;family-owned conglomerates; corporations providing acommunity service; institutional investors, e.g. pension

funds)

What they have: Funds to invest

What they lack: Understanding of industries or propositions made by

entrepreneurs

Lack of time and capabilities to actively participate inmanaging their investment

Prefer to invest in companies with proven management/track record; investment potential there is typicallylimited

Result: They shy away from investing in start ups andSMEs

Perception: Good investment opportunities arein short supply

The Financing Gap

Innovative entrepreneurs and SMEs on the one hand, and investorson the other, typically face a financing gap

Supply side financing gap: Sources of finance are notavailable on terms and conditions suitable forinnovative SMEs

Demand side financing gap: Investors do not makeuse of liquidity, because of a shortage of good projectsencompassing reasonable risk


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Traditional financial institutions (e.g. banks) usually shy away fromfinancing SMEs as they consider them high risk

SMEs Share of Total Corporate Loans(2004)

Reasons for Low BankPenetration of SME Segment

10%13%15%15%

26%30%

37%

47%

80%

24%

BahrainUAEPakistanIndiaPeruArgentinaChilePortugalKoreaSpain(1)

Many SMEs are unable tomeet the banks lending

criteria (positive track recordof several years andcollateral of more than 100%

of the credit facility)

Historically, a relatively smallticket size and high cost toserve have not made SMEs aprime target for banks

In most parts of the world,

specialized financialcompanies that target SMEshave only recently enteredthe market

(1) 2005 data

Source: PARC Survey, World Bank, Central Banks, Industry Interviews, Booz Allen analysis


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Specialized Financial Intermediaries

Entrepreneurs / SMEs(Technology, product,

and service innovators)

Investors(HNWI; merchant

families; corporations;institutional investors;

etc.)Financial Intermediaries(Angels; Private Equity;Venture Capital;

etc.)

They pool funds and spread the risk

They use experienced / specialized professionals whounderstand the industry to evaluate the investment

They actively manage the investment Taking Board and sometimes mgmt positions Injecting management and marketing expertise

They realize capital gains through well designed exit strategy

To bridge this financing gap, typically requires specializedfinancial intermediaries


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The Financing Life Cycle

Source: Cardullo (1999)

Time

Reve

nue

Valley of Death

1st

2nd

3rd

Mezzanine

IPO

PublicCompany

Public

Market

SecondaryOfferings

Later Stage

Early Stage

VCs, acquisitions/Mergerand Strategic Alliances

Angels, Family

& Friends

Seed Capital

BreakEven

Financial intermediaries specialize in one or several parts of thefinancing life cycle

They also specialize regionally and by industry


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Financing Sources Available for SMEs

A number of sources are available for SMEs, the most prevalent ofwhich are Private Equity and Venture Capital

Expansion(Graduation

to LargeEnterprise)

GrowthStart-upSeed

Family / Friends / Angels

Commercial Banks

Leasing and Factoring Institutions

Venture Capital (VC)* / Private Equity (PE) /

Government Supported Schemes

Capital Market

Stage of SMEDevelopment

Main Providersof

SME Financing

* Venture Capital is a subset of Private Equity, targeting higher growth (typically higher risk) investments suchas high tech ventures

PEs and VCs purchase shares in unquoted

companies; their objective is capital gain Capital gain is realized when company grows

substantially in value and the PE/VC sells his shares

Success predicated on good selection and nurturing ofgrowth companies

Non-Profit Organizations


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Entrepreneurs / SMEs(Technology, product,

and service innovators)

Investors(HNWI; merchant

families; corporations;institutional investors;

etc.)Financial Intermediaries(Angels; Venture Capital;

Private Equity; etc.)

Government can support private sectors financial intermediaries,but cannot successfully replace them

Desirable Government Contribution Best Practices

Support the establishment of private sector financial intermediaries (e.g. providematching capital; establish PPPs with financial intermediaries; etc.)

Provide grants, funds and/or guarantees to financial intermediaries to reduce(but not eliminate) the risk faced by private sector financial intermediaries

Provide advice, data and support (e.g. technical, accounting; IT; export; etc)

Improve overall investment climate, infrastructure and reduce red tape

Government Support

Typically government organizations have not succeeded infinancing start-ups and SMEs, because they usually lack thecommercial skills needed to assess risk, and ensure success


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1

Components of an Enabling Environment for Start-ups

The existence of a large base ofentrepreneurs and anentrepreneurial culture is a crucial

factor for thriving Start-up activity

Start-ups can be fragile if they donot receive effective support froman early stage

Entrepreneurial activity buildson active ideation andinnovation that facilitatespotting market opportunities

and developing new concepts

Large Base OfEntrepreneurs

Ideation &

InnovationActivity

Effective Support

to Start-ups

1 2

3

The examination of international and regional experiencessuggests that the development of entrepreneurship activityrequires a holistic approach


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1

Because good investment ideas are as important as financing topromote entrepreneurship, assistance programs exist around theworld encompassing a broad range of support activities

Source: BAH research and analysis

Examples of Programs to Promote Entrepreneurship

Education and Culture

The Kauffman Foundationin the US funds programs atthe school, technical anduniversity levels to promoteentrepreneurial spirit

The Make Your Markcampaign in the UK focuseson peer-to-peercommunication to create amore enterprising cultureamong young people

Ideation and Innovation

The Center for RegionalEconomic Issues in Ohioencourages ideation bypublishing reports oneconomic issues

The Australian NationalInnovation System providesfunding to promote R&D

The London InnovationCenter creates a hub forsharing and commercializingideas and provides linksbetween more than a dozenacademic institutions

Support and Financing

The European Business AngelNetwork pools funds todecrease individual angel riskand offer start-ups increasedfinancing

In France, lANVAR offers start-up assistance schemes such assubsidies and 0% interest loans

The Software TechnologyParks of India oversees IndiasSilicon Valley in Bangalore

The Online DevelopmentGroup promotes e-commerce inSingapore and providesconsulting services to start-ups


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1Source: SBA

The SBA Mission and Objectives

The Small Business Administration (SBA) was established in 1953 as an independent government agency

To aid, counsel, assist and protect the interests of small business concerns, to preserve free competitiveenterprise, and to maintain and strengthen the overall economy of [the USA]

The SBA helps Americans start, build and grow businesses, through an extensive network of fieldoffices and partnerships with public and private organizations, SBA delivers its services throughout theUS

SBA Business Loan Programs SBA sets guidelines for loans, while its partners

(Lenders, Development and Microfinanceorganizations) make loans to small businesses

SBA backs those loans with a guarantee toreduce the risk to its lending partners. The loanguarantee transfers the risk of borrower non-payment, up to the amount of the guarantee,

from the lender to SBA

SBA also provides bonds to contractors

The SBA makes no grants to investors (only tosome development organizations)

SBA Investment Programs The SBA licenses Small Business Investment

Companies (SBICs)

SBICs provide their own capital and with fundsborrowed at favorable rates through the FederalGovernment, SBICs provide venture capital tosmall independent businesses, both new andalready established

All SBICs are profit-motivated businesses. Amajor incentive for SBICs to invest in smallbusinesses is the chance to share in the successof the small business if it grows and prospers.

The USA established the SBA to support small business, anactivity viewed as important for economic prosperity


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1

Case Study - Malaysia

Malaysia implemented several initiatives to improve SME access tofinancing

Initiatives to Improve Financing Access

The Government has increased its allocation to SME lending/ grants (via the Small and Medium Industries DevelopmentCorporation, SMIDEC)

A Memorandum of Understanding between SMIDEC andBank Negara Malaysia BNM, the Central Bank, and

commercial banks was signed to increase the portion of SMEfinancing

Two development banks were merged to form a large SMEbank

SME bank loans increased from 32% of total outstandingloans in 2000 to 47% of total outstanding loans in 2006. BNMis currently providing advisory services to SMEs concerning

financing options Bank efforts have been complemented by other sources:

Growing VC industry which strongly supports theinformation technology sector

MESDAQ, the second board of the stock exchange solelycatering for medium sized companies

SMEs constitute 99% of totalestablishments

SMEs constitute 44% of total output

SMEs constitute 47% of value added

SMEs employ 65% of the total

workforce

SME Contribution to theEconomy


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National and Regional Situation


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1

The private equity industry has witnessed dramatic growth duringthe last three years there is an abundance of liquidity in themarket, some of which may be available for SMEs

MENA Private Equity Fund Sizes(1)

(USD Billion) (2002-2006)

MENA Private Equity Industry Growth

Note: (1) Includes real estate funds, but does not include private equity funds targeting non-MENA markets, or non-private equity investorsSource: Zawya, Gulf Venture Capital Association and Booz Allen analysis

4.4

14.4

21.3

1.4

Up to 2002

CAGR: +169%

0.7

2003

0.4

2004 2005 2006 Total

Capital Committed Annually toPrivate Equity Funds rose 20-fold

between 2003 and 2006

1.00.7

0.3

4.4

7.1

2002 2003 2004 2005 2006

MENA Private Equity Annual Fund Raising(USD Billion) (2002-2006)

Over 90 private equity firmsare currently active in the

region, managing at least 120

funds


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2

However, start-up activity has been limited to date in the region,even in better positioned countries, such as the UAE

2.5%2.9%3.5%3.7%

4.2%4.4%4.9%4.9%5.0%5.3%

5.6%6.1%

7.1%7.4%

10.0%10.4%

11.7%12.0%

16.2%

19.3%

9.1%

Italy

Japa

n

Sw

eden

UAE

Germ

any

Fra

nce

Rus

sia

Singap

ore

Finl

and

South

Afric

a

Unite

dKingd

om

Tur

key

Ca

nada

Ire

land

Nor

way

UnitedS

tate

sIn

dia

Braz

il

Aus

tralia

Chin

a

Indone

sia

Early-stage Entrepreneurial Activity*

(% of Adult Population, 2006)

Note: (*) Early-stage entrepreneurial activity includes nascent entrepreneurial activity and new business owners

Source: Global Entrepreneurship Monitor,2006


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2

4.6%

3.4%

3.1%

2.8%

2.5%

2.3%

2.2%

2.1%

1.9%

1.2%

1.1%

1.1%

0.6%

0.5%

0.2%

0.36%

Sweden

Finland

Japan

US

Germany

OECD Average

France

Singapore

UK

Ireland

Brazil

China

Turkey

Tunisia

Jordan

Arab Average

Note: (*) Data refers to the most recent year between 1996-2002

Source: Human Development Report (2004), UNDP; The Arab Human Development Report (2003), UNDP; Global Competitiveness Report, 2002-2003, World Economic Forum

R&D Expenditures in Arab World Vs. Other Countries(As % of GDP)(1996-2002*)

Private sector funds only 4% of the total

investment in R&D, out of which 45% isdevelopment of existing products and 22%for infrastructure financing

Due to low spending on R&D in the Arab world, the creationprocess for new ideas / ventures is very weak


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2

We have witnessed recently a number of initiatives in Saudi Arabiato promote entrepreneurship

In 2004, the government announced a SR200 million guarantee schemeshared 50-50 with private banks aimed at encouraging banks to fundSMEs. The Saudi Industrial Development Fund (SIDF) was engaged tomanage the scheme

The Saudi Government also earmarked funds for Bank Al Tasleef to supportSMEs

The government is considering establishment of a Small Business Authority Export support and financing programs are also under consideration

Bab Rizk Jameel Center (Gateway to Prosperity), was established byMohammed Abdulatif Jameel in June 2007 in Jeddah. It offers either financialsupport for start-ups, microfinance and loans for vocational training

The Centennial Fund provides micro-finance to create jobs for enterprisingyoung Saudis

A number of industry clusters are being developed in Economic Cities andelsewhere

The Madinah ICT Economic City has been announced, and is beingimplemented; another was recently announced for Riyadh

Non-Profit Organizationshave been established

Government Support toSmall Business

Establishment of ICTclusters

Entrepreneurship Support Initiatives inSaudi Arabia


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2

Note: (*) From a list of 14 factors, respondents were asked to select the five most problematic for doing business in their country and to rank them between 1 (most problematic) and 5. Thbars in the figure show the responses weighted according to their rankings

Source: Doing business in Jordan 2005; World Bank Report; AMIR Entrepreneur Roadmap report; BAH interviews and analysis

Indicators for Ease of Starting a Business

(2004)

11

36

6

25

Number of

Procedures

Time

(In Days)

52%

8%

44%

1,114%

Cost (As

% of Income Per

Capita)

Minimum Capital

(As % of Income

Per Capita)

Jordan OECD Average

Process Indicators Price Indicators

X 1.8

X 1.4

X 6.5

X 25

19%

12%

12%

12%

11%

10%

5%

4%

Access to

Financing

Bureaucracy

Educated

Workforce

Tax Rates

Tax

Regulations

Poor Work

Ethic

Labor

Regulations

Infrastructure

Most Problematic Factors for DoingBusiness in Jordan*

(In % of Respondents) (2004)

In Jordan, entrepreneurs wishing to start a business face a varietyof administrative, cost and financing hurdles


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2

Cultural Attitudes (Quotes)

People feel that it is too difficult to open a new

business

Setting up a business is for highly educated people

who can afford to fail

Opening a business is seen as a last resort optionfor people in poor financial situation

There have been so many failures that

entrepreneurial risk is perceived as very high

Mothers never hope for their children to become

businessmen, they rather see them as government

employees

Source: BAH interviews and analysis

The Case of Jordan Culture and Education

Education System

Until recently, Jordans education system was

characterized as highly traditional and notmatching labor market needs

Two major reform programs were initiated to

modernize the education system and begininstilling an entrepreneurship culture at an earlyage

Early signs have shown these initiatives to be quitepromising, but achieving long-term results wouldrequire resources, monitoring and evaluation

Cultural barriers hinder entrepreneurship, while the countryseducation system has only recently undergone needed reforms


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Recommendations


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3

A number of government initiatives may be considered to promoteentrepreneurship

Promote establishment of small business investment companies, andprovide Government equity participation (e.g., in SBICs in the US)

Encourage establishment of business angel networks or BANs

Reduce hurdles and red tape facing the establishment of companies andthe transfer of company assets and ownerships

Provide good infrastructure

Improve credit assessment and debt recovery system

Provide business and technical support (e.g. business plan preparation;accounting; IT; export and trade fairs)

Government Policies toImprove Access to

Financing

Improving Regulations andInvestment Climate

Other Government Initiativesto Promote Entrepreneurship

Establish efficient financial markets to provide an exit for Private Equity andVenture Capital investors and allow the most deserving firms to have accessto financing

Establish investment instruments that support PE and VC financing (e.g.preferred stock; etc.)

Creating Efficient FinancialMarkets

I i l i d l h i l h i l fi i l


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3

It is also important to develop the managerial, technical financialskills needed for Venture Capital and Private Equity funds toevaluate and monitor investment in SMEs

Industry specific expertise: Start-ups and SMEs are too heterogeneous to have a one size

fits all approach; minimizing the risk involved in these investments requires an understandingof the industries in which they operate

There is also a need to develop capabilities to manage the entire investment cycle

Starting with origination of investmentsi.e. identification of good investment opportunities

Evaluation

Turnaround / monitoring Exit

A regional network is needed aligned with regional development: Organizations financingstart-ups and SMEs need to be located near their clients, again to understand their particularsituation and thus minimize risk: A PE or VC firm in Dubai or Riyadh, are not well placed to

finance start-ups or small business in say Madinah or Jizan.

The fastest and most expedient way to develop this expertise is toestablish strategic partnership with international players, and tolearn from international experiences

Th L d I ti C t h d i b ildi f 80 000ft2


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3

~ 80,000

sq. ft

Incubation

Floor-flexibleOffice Space

(Upper 3-4 floors)

Total Space

Required - 2005

~ 35,000 sq. ft

SPV incubationspace

UCL Venturesincubation

spaceOther Incubators

Research Scientists

Hot Desks

Service Providers

Floor-permanentOffice Space

E.g. Business Links

E.g. UCL VenturesE.g. NHS Hubs

E.g. LondonTechnology

Network

~ 14,000 sq. ft(incl. LIC offices)

Event/Teaching

Floor

Flat lecture

theatre

Break out rooms

Bar and restaurant

150 Seater raisedlecture theatre

Videowall

Exhibit space

Extra teaching areas

Break out rooms

~ 21,000 sq. ft

Extra teaching areas

Reception

Atrium

~ 10,000 sq. ft Dead space

The London Innovation Center, housed in a building of ~80,000ft2

(7,700m2 building) is associated with the London Business School(LBS), and the University College London (UCL)

It i h i l f l i t f i ti i L d d d


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3

It is a physical focal point for innovation in London, and a goodexample of a holistic approach for empowering entrepreneurshipand innovation

Large EnterpriseIndividual

Enterpreneurs

HighPotential

SMEs

London Innovation Centre

Teaching/training

Technology Transfer

Access to professional services

Information hub for entrepreneurs

/innovators

Networking and Events

Exhibition/showcase space Access to funds

Incubation

Supply:

Londons

InnovationAssets

Demand:

LondonEnterpriseCommunity

TechnologyBusiness

Skills

Focal Point

(Physical Space)

IdeaFlow

Orchestration of Innovation activities

Provide a physical hub for the innovation activities of LTN and others

Professionalservices

Other HEIs

Physical focal point

Venue fornetworking / events

Showcase for

innovation Incubation space

Business support

activities

Funding

empowering entrepreneurship and innovation

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