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PRESENTATION MATERIALS

Empowering Entrepreneurship and


Innovation – Financing the Future
Regional and National Program Options

Riyadh
March 10th, 2008

This document is confidential and is intended


solely for the use and information of ALJ

0
Contents

 The Financing Gap

 International Experiences

 National and Regional Situation

 Recommendations

1
The Financing Gap

2
Entrepreneurship, as evidenced by the strength of start-up activity,
is a key driver of economic growth and job creation

GDP Growth vs. Start-Up Penetration*


7% Benefits of Start-Ups
to the Economy
Ireland
6%  Source of Innovation
Average Annual GDP Growth (1989-1999)

5%
 Increased competition and
efficiency
US

4%
Netherlands
Portugal  Economic flexibility and
Spain
Greece adaptation
3% Norway
Denmark  Job creation
Austria
2% Sweden
Japan Belgium France  Supply chain development
Finland
Italy
1%  “Seed-bed” for future growth
Germany
 Inclusion
0%
0% 2% 4% 6% 8% 10% 12% 14%

Start-Up Penetration* (1988-1996)


Note: (*) Number of Start-ups divided by the total number of companies
Source: OECD; European Observatory for SMEs; UK DIT, OECD

3
Once start ups mature into Small and Medium Enterprises (SMEs),
they become key contributors to employment and GDP

Percentage of Total Employment in SMEs SMEs Contribution to GDP For


For Selected Countries Selected Countries
(2003) (2002*)

70% France 60%


EU

Hungary 57%
France 67%

Indonesia 55%

Germany 65%

Germany 50%

UK 59%
Singapore 43%

US 49% US 40%

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


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

4
SMEs around the world and in Saudi Arabia face many challenges;
limited access to finance is one of the most important of them

Challenges Facing SMEs - Surveys Extracts

Europe (1) Saudi Arabia (2)

Limited access to finance Limited access to finance

Labor force too expensive Lack of skilled labor


Implementing new technologies Problems with government procedures
Implementing new forms of organization
Lack of marketing capabilities
Lack of quality management
Technical problems
Problematic regulations
Managerial and organizational problems
Problems with infrastructure
Inadequate availability of data

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

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Innovative entrepreneurs and SMEs on the one hand, and investors
on the other, typically face a financing gap
The Financing Gap

Entrepreneurs and SMEs Investors

 They are a very heterogeneous group (e.g. restaurants;  They are also a very heterogeneous group (e.g. HNWI;
workshops; high tech companies; etc.) family-owned conglomerates; corporations providing a
community service; institutional investors, e.g. pension
 What they have: funds)
– Innovative idea to serve an unmet market demand, or a
technological innovation  What they have: Funds to invest
– New product or service, or more efficient approach to
serving markets  What they lack:
– Understanding of industries or propositions made by
 What they lack: entrepreneurs
– Market and management experience – Lack of time and capabilities to actively participate in
– Track record managing their investment
– Insufficient tangible assets – Prefer to invest in companies with proven management/
track record; investment potential there is typically
 Result: Traditional commercial banks and investors consider limited
them high risk, and are reluctant to finance them without
guarantees  Result: They shy away from investing in start ups and
SMEs

 Perception: Financing is in short supply  Perception: Good investment opportunities are


in short supply

Supply side financing gap: Sources of finance are not Demand side financing gap: Investors do not make
available on terms and conditions suitable for use of liquidity, because of a shortage of good projects
innovative SMEs encompassing reasonable risk

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

Reasons for Low Bank


SMEs Share of Total Corporate Loans Penetration of SME Segment
(2004)
 Many SMEs are unable to
80%
meet the banks’ lending
criteria (positive track record
of several years and
collateral of more than 100%
of the credit facility)
47%
 Historically, a relatively small
37%
30%
ticket size and high cost to
26% 24% serve have not made SMEs a
prime target for banks
15% 15% 13%
10%
 In most parts of the world,
specialized financial
(1)
Spain Korea Portugal Chile Argentina Peru India Pakistan UAE Bahrain companies that target SMEs
have only recently entered
the market

(1) 2005 data


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

7
To bridge this financing gap, typically requires specialized
financial intermediaries

Specialized Financial Intermediaries

Investors
Entrepreneurs / SMEs (HNWI; merchant
(Technology, product, families; corporations;
and service innovators) institutional investors;
Financial Intermediaries etc.)
(Angels; Private Equity;
Venture Capital;
etc.)
 They pool funds and spread the risk
 They use experienced / specialized professionals who
understand 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

8
Financial intermediaries specialize in one or several parts of the
financing life cycle
The Financing Life Cycle

Secondary
Offerings
VCs, acquisitions/Merger
and Strategic Alliances
Angels, Family
& Friends
Later Stage
Seed Capital
Early Stage
Public
Revenue

Market

Mezzanine
IPO
Break
3rd
Even
2nd
Public
1st
Company
Valley of Death
Time
Source: Cardullo (1999)

They also specialize regionally and by industry


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A number of sources are available for SMEs, the most prevalent of
which are Private Equity and Venture Capital
Financing Sources Available for SMEs

Expansion
Stage of SME (Graduation
Seed Start-up Growth
Development to Large
Enterprise)
Family / Friends / Angels

Government Supported Schemes

Non-Profit Organizations
Main Providers
of
Venture Capital (VC)* / Private Equity (PE) /
SME Financing

 PEs and VCs purchase shares in unquoted Commercial Banks


companies; their objective is capital gain
 Capital gain is realized when company grows
Leasing and Factoring Institutions
substantially in value and the PE/VC sells his shares
 Success predicated on good selection and nurturing of
growth companies Capital Market

* Venture Capital is a subset of Private Equity, targeting higher growth (typically higher risk) investments such
as high tech ventures
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Government can support private sectors financial intermediaries,
but cannot successfully replace them

Government Support

Investors
Entrepreneurs / SMEs (HNWI; merchant
(Technology, product, families; corporations;
and service innovators) institutional investors;
etc.)
Financial Intermediaries
(Angels; Venture Capital;
Private Equity; etc.)

Desirable Government Contribution – Best Practices


 Support the establishment of private sector financial intermediaries (e.g. provide
matching 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

Typically government organizations have not succeeded in


financing start-ups and SMEs, because they usually lack the
commercial skills needed to assess risk, and ensure success 11
International Experiences

12
The examination of international and regional experiences
suggests that the development of entrepreneurship activity
requires a holistic approach
Components of an Enabling Environment for Start-ups

Entrepreneurial activity builds


The existence of a large base of
on active ideation and
entrepreneurs and an 1 Large Base Of 2 innovation that facilitate
entrepreneurial culture is a crucial Entrepreneurs
Ideation & spotting market opportunities
factor for thriving Start-up activity Innovation and developing new concepts
Activity

Effective Support
to Start-ups
3

Start-ups can be fragile if they do


not receive effective support from
an early stage

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Because good investment ideas are as important as financing to
promote entrepreneurship, assistance programs exist around the
world encompassing a broad range of support activities
Examples of Programs to Promote Entrepreneurship

Education and Culture Ideation and Innovation Support and Financing

 The Kauffman Foundation  The Center for Regional  The European Business Angel
in the US funds programs at Economic Issues in Ohio Network pools funds to
the school, technical and encourages ideation by decrease individual angel risk
university levels to promote publishing reports on and offer start-ups increased
entrepreneurial spirit economic issues financing

 The “Make Your Mark”  The Australian National  In France, l’ANVAR offers start-
campaign in the UK focuses Innovation System provides up assistance schemes such as
on peer-to-peer funding to promote R&D subsidies and 0% interest loans
communication to create a
more enterprising culture  The London Innovation  The Software Technology
among young people Center creates a hub for Parks of India oversees India’s
sharing and commercializing Silicon Valley in Bangalore
ideas and provides links
between more than a dozen  The Online Development
academic institutions Group promotes e-commerce in
Singapore and provides
consulting services to start-ups

Source: BAH research and analysis


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

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 competitive
enterprise, 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 field
offices and partnerships with public and private organizations, SBA delivers its services throughout the
US”

SBA Business Loan Programs SBA Investment Programs


 SBA sets guidelines for loans, while its partners  The SBA licenses Small Business Investment
(Lenders, Development and Microfinance Companies (SBICs)
organizations) make loans to small businesses
 SBICs provide their own capital and with funds
 SBA backs those loans with a guarantee to borrowed at favorable rates through the Federal
reduce the risk to its lending partners. The loan Government, SBICs provide venture capital to
guarantee transfers the risk of borrower non- small independent businesses, both new and
payment, up to the amount of the guarantee, already established
from the lender to SBA
 All SBICs are profit-motivated businesses. A
 SBA also provides bonds to contractors major incentive for SBICs to invest in small
businesses is the chance to share in the success
 The SBA makes no grants to investors (only to
of the small business if it grows and prospers.
some development organizations)

Source: SBA
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Malaysia implemented several initiatives to improve SME access to
financing
Case Study - Malaysia

Initiatives to Improve Financing Access

 The Government has increased its allocation to SME lending


/ grants (via the Small and Medium Industries Development
SME Contribution to the
Corporation, SMIDEC)
Economy
 A Memorandum of Understanding between SMIDEC and  SMEs constitute 99% of total
Bank Negara Malaysia “BNM”, the Central Bank, and establishments
commercial banks was signed to increase the portion of SME
financing
 SMEs constitute 44% of total output
 Two development banks were merged to form a large SME
bank
 SME bank loans increased from 32% of total outstanding  SMEs constitute 47% of value added
loans in 2000 to 47% of total outstanding loans in 2006. BNM
is currently providing advisory services to SMEs concerning  SMEs employ 65% of the total
financing options workforce
 Bank efforts have been complemented by other sources:
– Growing VC industry which strongly supports the
information technology sector
– MESDAQ, the second board of the stock exchange solely
catering for medium sized companies

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National and Regional Situation

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The private equity industry has witnessed dramatic growth during
the last three years –there is an abundance of liquidity in the
market, some of which may be available for SMEs
MENA Private Equity Industry Growth
MENA Private Equity Fund Sizes(1) MENA Private Equity Annual Fund Raising
(USD Billion) (2002-2006) (USD Billion) (2002-2006)

21.3
Capital Committed Annually to Over 90 private equity firms
Private Equity Funds rose 20-fold are currently active in the 7.1
between 2003 and 2006 region, managing at least 120
funds
CAGR: +169%
14.4
4.4

4.4
1.0
0.7
1.4 0.4 0.3
0.7

2003 2004 2005 2006 Total 2002 2003 2004 2005 2006
Up to 2002

Note: (1) Includes real estate funds, but does not include private equity funds targeting non-MENA markets, or non-private equity investors
Source: Zawya, Gulf Venture Capital Association and Booz Allen analysis
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However, start-up activity has been limited to date in the region,
even in better positioned countries, such as the UAE
Early-stage Entrepreneurial Activity*
19.3%
(% of Adult Population, 2006)

16.2%

12.0% 11.7%

10.4% 10.0%
9.1%

7.4% 7.1%
6.1%
5.6% 5.3%
5.0% 4.9% 4.9%
4.4% 4.2%
3.7% 3.5%
2.9% 2.5%
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Note: (*) Early-stage entrepreneurial activity includes nascent entrepreneurial activity and new business owners
Source: Global Entrepreneurship Monitor,2006

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Due to low spending on R&D in the Arab world, the creation
process for new ideas / ventures is very weak
R&D Expenditures in Arab World Vs. Other Countries
(As % of GDP)
(1996-2002*)
Sweden 4.6%

Finland 3.4%

Japan 3.1%

US 2.8%

Germany 2.5%

OECD Average 2.3%

France 2.2%

Singapore 2.1%

UK 1.9%

Ireland 1.2%

Brazil 1.1%

China 1.1%
Private sector funds only 4% of the total
Turkey 0.6% investment in R&D, out of which 45% is
development of existing products and 22%
Tunisia 0.5% for infrastructure financing

Jordan 0.36%

Arab Average 0.2%


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

21
We have witnessed recently a number of initiatives in Saudi Arabia
to promote entrepreneurship
Entrepreneurship Support Initiatives in
Saudi Arabia

 In 2004, the government announced a SR200 million guarantee scheme –


shared 50-50 with private banks – aimed at encouraging banks to fund
SMEs. The Saudi Industrial Development Fund (SIDF) was engaged to
manage the scheme
Government Support to
Small Business  The Saudi Government also earmarked funds for Bank Al Tasleef to support
SMEs
 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 by
Mohammed Abdulatif Jameel in June 2007 in Jeddah. It offers either financial
Non-Profit Organizations support for start-ups, microfinance and loans for vocational training
have been established
 The Centennial Fund provides micro-finance to create jobs for enterprising
young Saudis

 A number of industry clusters are being developed in Economic Cities and


Establishment of ICT elsewhere
clusters  The Madinah ICT Economic City has been announced, and is being
implemented; another was recently announced for Riyadh

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In Jordan, entrepreneurs wishing to start a business face a variety
of administrative, cost and financing hurdles
Indicators for “Ease of Starting a Business” Most Problematic Factors for Doing
(2004) Business in Jordan*
(In % of Respondents) – (2004)

Process Indicators Price Indicators


36 1,114% Access to
19%
Financing

X 1.4
Bureaucracy 12%
25 X 25
Educated
12%
Workforce
52%
44% Tax Rates 12%

11 Tax
X 6.5 11%
Regulations
6 X 1.8
Poor Work
8% 10%
Ethic

Labor
5%
Number of Time Cost (As Minimum Capital Regulations
Procedures (In Days) % of Income Per (As % of Income
Capita) Per Capita) Infrastructure 4%

Jordan OECD Average

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. The
bars 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

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Cultural barriers hinder entrepreneurship, while the country’s
education system has only recently undergone needed reforms
The Case of Jordan – Culture and Education

Cultural Attitudes (Quotes) Education System


 “People feel that it is too difficult to open a new  Until recently, Jordan’s education system was
business” characterized as highly traditional and not
matching labor market needs
 “Setting up a business is for highly educated people
who can afford to fail”
 Two major reform programs were initiated to
modernize the education system and begin
 “Opening a business is seen as a last resort option
instilling an entrepreneurship culture at an early
for people in poor financial situation”
age
 “There have been so many failures that
entrepreneurial risk is perceived as very high”  Early signs have shown these initiatives to be quite
promising, but achieving long-term results would
 “Mothers never hope for their children to become require resources, monitoring and evaluation
businessmen, they rather see them as government
employees”

Source: BAH interviews and analysis

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Recommendations

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A number of government initiatives may be considered to promote
entrepreneurship

 Promote establishment of small business investment companies, and


Government Policies to provide Government equity participation (e.g., in SBICs in the US)
Improve Access to
Financing
 Encourage establishment of business angel networks or BANs

 Reduce hurdles and red tape facing the establishment of companies and
Improving Regulations and the transfer of company assets and ownerships
Investment Climate  Provide good infrastructure
 Improve credit assessment and debt recovery system

 Establish efficient financial markets to provide an exit for Private Equity and
Venture Capital investors and allow the most deserving firms to have access
Creating Efficient Financial to financing
Markets
 Establish investment instruments that support PE and VC financing (e.g.
preferred stock; etc.)

Other Government Initiatives  Provide business and technical support (e.g. business plan preparation;
to Promote Entrepreneurship accounting; IT; export and trade fairs)

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It is also important to develop the managerial, technical financial
skills needed for Venture Capital and Private Equity funds to
evaluate 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 understanding
of the industries in which they operate

 There is also a need to develop capabilities to manage the entire investment cycle
– Starting with “origination” of investments –i.e. identification of good investment opportunities
– Evaluation
– Turnaround / monitoring
– Exit

 A regional network is needed aligned with regional development: Organizations financing


start-ups and SMEs need to be located near their clients, again to understand their particular
situation 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 to


establish strategic partnership with international players, and to
learn from international experiences
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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)
UCL Ventures
SPV incubation
incubation Research Scientists
space
space Hot Desks Other “Incubators”

Total Space
Required - 2005
“Incubation”
Floor-flexible
Office Space ~ 35,000 sq. ft
(Upper 3-4 floors)

E.g. Business Links


E.g. NHS Hubs
E.g. UCL Ventures
E.g. London
~ 14,000 sq. ft
Technology
Service Providers (incl. LIC offices)
Network
Floor-permanent
Office Space
~ 80,000
sq. ft
Break out rooms 150 Seater raised
Exhibit space Break out rooms lecture theatre
Extra teaching areas Videowall

~ 21,000 sq. ft

Event/Teaching “Flat” lecture Atrium


Floor theatre
Reception

Extra teaching areas Dead space


Bar and restaurant ~ 10,000 sq. ft

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It is a physical focal point for innovation in London, and a good
example of a holistic approach for “empowering entrepreneurship
and innovation”

Supply:
London’s Professional Business
Innovation Technology Other HEI’s
services Skills
Assets

London Innovation Centre


 Physical focal point
Orchestration of Innovation activities  Venue for
 Teaching/training networking / events
 Networking and Events  Showcase for
 Technology Transfer
 Exhibition/showcase space innovation
 Access to professional services
Focal Point  Access to funds  Incubation space
 Information hub for entrepreneurs
(Physical Space)  Incubation  Business support
/innovators
activities
Provide a physical hub for the innovation activities of LTN and others  Funding

Demand:
London High
Individual Idea
Enterprise Large Enterprise Potential
Enterpreneurs Flow
Community SMEs

35