Commentaries

Addressing the Key Challenges Facing the “Entrepreneurial Streak” in Young Saudis

Mark C. Thompson Senior Associate Fellow, KFCRIS Assistant Professor of Studies, KFUPM

January 4th 2018

A strong entrepreneurial streak runs through young Saudis, who today are becoming “incredibly open to starting up a of their own,” according to Global Entrepreneurship Monitor (GEM) 2016/17 National Report, produced by the Prince Mohammed Bin Salman College for Business and Entrepreneurship (MBSC), a business school based in the King Abdullah Economic City.1 There is a reason for this: the demographics of the kingdom serve as a double-edged sword, says Marc Andreessen, a prominent American entrepreneur. On the one hand, “the vast numbers of young people coming into adulthood” provide an unprecedented pool of talent for creativeness and innovation; on the other, traditional business models are not able to absorb them all.2 Therefore, entrepreneurship will have to be part of the solution.

Responding to the challenge posed by lower oil prices to the sustainability of the Saudi economy, the Saudi leadership is encouraging citizens to become entrepreneurial. For instance, Vision 2030 aims to increase the contribution of small and medium-sized enterprises (SMEs) to the kingdom’s gross domestic product (GDP) from 20 percent in 2015 to 35 percent by 2030.3 Careers in entrepreneurship are becoming more attractive to young Saudis, who increasingly realize that a start-up may offer better

(1) Global Entrepreneurship Monitor (GEM), GEM Saudi Arabia 2016/2017 National Report, p. 5; the report can be downloaded at: http://www.gemconsortium.org/country-profile/141. (2) Marc Andreessen, Foreword, in Startup Rising: The Entrepreneurial Revolution Remaking the Middle East, ed. Christopher M. Schroeder (New York: Palgrave Macmillan, 2013). (3) Kingdom of Saudi Arabia, The Kingdom of Saudi Arabia’s Vision 2030, April 2016; the report can be downloaded at: http://vision2030.gov.sa/en .

Addressing the Key Challenges Facing Commentaries the “Entrepreneurial Streak” in Young Saudis 1 employment opportunities, a greater degree of freedom, and higher financial rewards than public sector jobs, as well as providing an escape from the nepotistic hierarchy that remains dominant in the Saudi economy. At the Misk Global Forum, convened in in November 2017, which I joined, one of the speakers in the panel discussion focusing on entrepreneurship asked the audience for a show of hands in answer to the question, “Who wants to start their own business?” The response was astounding, with approximately 70 percent of the predominantly young audience answering in the affirmative. A number of young Saudis I have spoken to also told me that start-ups represent a “more hopeful scenario” than other types of employment in terms of long-term career prospects.

Nevertheless, successful entrepreneurship is easier said than done. Globally, SMEs tend to suffer from the funding problem: there are a great number of young people with good ideas but without enough cash. Moreover, even if capital is secured, many do not survive the initial stage of business: according to one entrepreneur from Riyadh, around 65 percent of start-up fail to repay their loans. SMEs also have to cope with the disadvantage posed by their size: They do not benefit from economies of scale, while large companies in the kingdom, for instance, are able to manufacture products in large quantities and at relatively low costs. However, besides these universal challenges to SMEs, in Saudi Arabia there also appear to be issues that are either unique or more predominant than in economies in other regions. This paper will highlight three challenges facing Saudi entrepreneurs in particular: the uncompetitive institutional configurations, fear of failure, and the problem of “whom to talk to.”

The Uncompetitive Institutional Configurations First, the uncompetitive institutional configurations, such as the complexity of the laws and the amount of overregulation, create substantive challenges to would-be entrepreneurs. While Andreessen highlights the fact that entrepreneurial ecosystems are being built “bottom up, enabled by access to software,” regardless of the amount of government assistance,4 (and there is even a concern that some Saudi start- ups rely too heavily on technology and fail to focus sufficiently on production and services), many young Saudis whom I interviewed think that excessive bureaucracy in the kingdom has been making it difficult for them to open a business. Regulations tend to be unclear and/or out-of-date, creating a major pain point for would-be entrepreneurs. Some argue that the Ministry of Labor’s Nitaqat program for promoting Saudization is overly complex in its procedures and works against entrepreneurs. In the opinion of many entrepreneurs, the trouble with the local authorities is that they “react rather than enable.” Fahd Al-Rasheed, vice chairman of the MBSC, asserts that for the kingdom to harness the capabilities of its youth, institutional support for entrepreneurship needs to be overhauled.5 In this regard, the General Authority for Small and Medium Enterprises (SMEA), a governmental body established in 2016 to address issues and problems facing Saudi SMEs, appears to have a number of tasks to undertake.

(4) Andreessen, Foreword. (5) GEM, Global Entrepreneurship Monitor Saudi Arabia 2016/17 National Report, p. 5.

Addressing the Key Challenges Facing 2 the “Entrepreneurial Streak” in Young Saudis Commentaries Fear of Failure The second challenge is that, in spite of their high entrepreneurial intentions, many young Saudis remain risk-averse due to a fear of failure. According to the GEM Report mentioned earlier, around 41 percent of the Saudi adult population identify fear of failure as an obstacle to starting a business.6 In the opinion of a young entrepreneur whose start-up is being incubated at the Entrepreneurship Institute (EI) in the Dhahran Techno Valley, hosted by the King Fahd University of and Minerals (KFUPM- DTV), because of the absence of a well-developed bankruptcy regime, many Saudis feel that they only have “one chance,” and thus tend to hesitate to launch a business, even when investment is offered, out of fear of “getting burned” and going into debt. Some prefer to start a business while having another full-time job as they are afraid there will be no Plan B in the case of failure; in some cases, they even perceive the “risk of succeeding” – that the individual will become so tied to the project that it begins taking over his or her entire life.

In reality, this fear of failure appears to be more pronounced in some sectors than others. For instance, there is a growing sense of risk in the field of online applications, where the market is already extremely crowded. While some apps have been incubated exceptionally successfully, such as Wain Nakel (Where to Eat?), an app for finding a place to eat,7 and Faheem (Expert), an app for findinga tutor,8 many others have faced significant challenges. The opposite appears to be occurring in the “food truck” trend. This trend began in May 2016, when a food connoisseur, Ahmed Mesawa, obtained the first license for a traveling restaurant in the kingdom: he imported a vehicle from the United Kingdom and launched a business that he named Strit Shef (Street chef).9 In no time at all, the food truck trend swept across the kingdom, generating sizable revenues for young entrepreneurs. Nevertheless, the resultant low perceived risk in this new sector has been making many young people now simply following the trend and making investments without sufficient culinary expertise, experience, or knowledge of the market.

The Problem of “Whom to Talk to” Finally, many entrepreneurs address the fact that gaining access to know-how and establishing contacts are real challenges in the field. Young entrepreneurs without sufficient exposure to the business environment tend to lack knowledge of how to manage business. To effectively start up and scale up, these young businesspeople require constructive advice from established experts in the sector. As an example, the EI entrepreneur quoted earlier said that many of his colleagues continue to draw on the advice given to them by the speaker at one of the EI’s special one-off coaching sessions on app and website development. These young entrepreneurs believe that more individuals in influential positions

(6) Ibid., p. 40. (7) http://wainnakel.com/. (8) https://faheemapp.com/. (9) A. Afnan, “Saudi Arabia’s Food Truck Craze,Raseef22, April 30, 2017, https://raseef22.com/en/life/2017/04/30/saudi-arabias- food-truck-craze/.

Addressing the Key Challenges Facing Commentaries the “Entrepreneurial Streak” in Young Saudis 3 in the private sector, such as leaders in business conglomerates, could, and should, provide assistance to them, such as, for instance, through organizing mentoring programs. In reality, however, a would- be entrepreneur who contacts a company seeking advice is likely to either simply be ignored or to be charged a high consultancy fee.

Instead, incubators, like the EI, and other institutions such as Saudi Aramco’s Wa‘ed Programme, the Taqadam Accelerator of the King Abdullah University of Science and Technology (KAUST), Flat6Labs Jeddah, the Badir Program for Technology Incubators at the King Abdulaziz City for Science and Technology (KACST), the Riyadh Techno Valley hosted by the , and Wadi Makkah, carry out that responsibility for mentoring and facilitate coaching and training sessions. The SMEA now also encourages would-be entrepreneurs to take a course in business basics at different institutions in order to learn how to write items such as business plans and feasibility studies. Furthermore, the Labor Ministry’s Saudization schemes also provide training programs targeting certain sectors. As an example, a young entrepreneur and his partner successfully opened a cell phone shop in al-Aflaj in early 2017 after they had received short training courses organized by the government targeting this sector, including courses on how to repair different types of devices. (The full Saudization of the mobile phone sector was implemented in September 2016, although expat street vendors still compete with Saudi shops today and tasattur, or fake Saudization, remains widespread in the sector.10) Al-Rasheed contends that there is a real need to close the gap between the entrepreneurial aspirations of the population and the skills young local citizens acquire through their education.11

(10) “Despite Saudization Law, Expats Dominate Mobile Phone Sector,” Saudi Gazette, October 23, 2017. (11) Global Entrepreneurship Monitor Saudi Arabia 2016/17 National Report, p. 5.

Addressing the Key Challenges Facing 4 the “Entrepreneurial Streak” in Young Saudis Commentaries