hi s i s t he l a s t a r t i c l e i n t hre e -part s e r i e s on Dubai’s knowledge economy. The first part discussed how t o c re a t e a world- c la s s e c onomy by at t ra c t i ng e l i t e workers. Part two focused on the role of education. Today we explore how a knowledge economy can promote the growth of entrepreneurship. half way around the world for the opportunity to get his company’s ‘story’ in front of a crowd of potential financiers.
“Angels” are another funding source, but are not part of the mainstream venture capital industry. Angels are usually highwealth individuals who make investments that other venture capitalists shun.
In most countries, banks are not a good source for start-up capital primarily because new companies have no credit history to rely on when making the loan decision. The exception is where governments provide some sort of guarantee to the bank if the business fails.
However, here again, the Middle East may eventually create a venture capital industry that is different because of the role of Islamic banking. Under Sharia, equal risk sharing is required so that Islamic banks may end up playing a key role in venture capital whereas in non-Islamic banks typically do not.
Experts have found that the experience of venture capitalists themselves is an important factor in the success of their investments, and specifically experience within the industry being funded.
A successful venture capitalist in telecommunications would not necessarily be successful at medical imaging or biotechnology.
In fact, this industry specific experience is so important, some experts say, that it overshadows experience as a venture capitalist per se. However, having said that, venture capitalists can often replicate successes from one company to the next in the same or closely-related industries.
Venture capitalists also tend to be very actively involved in the management of the start-up. As one expert dryly observed, “the talents needed to start a business are not necessarily the talents needed to manage it competently.”
Venture capitalists also provide credibility to a start-up company just as a prestigious investment banking firm lends its good name to a public stock offering. The involvement of successful venture capitalists is a signal that the start-up has received a ‘seal of approval.’
company public” — to sell stock through an initial public offering (IPO). This is where the millionaires are made. This is also why it’s important to have a robust, healthy stock market.
Logic suggests that more start-ups eventually lead to more initial public offerings. But it doesn’t work that way. Instead, experts say, more initial public offerings create more start-ups, at least in late stages of funding. In other words, stock markets must give encouraging signals to venture capitalists.
Venture capitalists are not the only ones watching for these signals. Entrepreneurs and employees are often
willing to work at be- low-market wages in trade for lucrative stock options which can be worth a fortune if the company goes public. Microsoft has created four billionaires and many millionaire employees.
However, it’s difficult for a start-up in Dubai, for example, to go public in London or New York.
In fact, venture capitalists tend to be highly geographically concentrated and stick close to home. Because venture capital has been centred in developed countries, the issue arises of whether their methods can be cloned in developing economies.
Some observers note that there are differences, while others see the gradual emergence of a “universal” approach to venture capital. But in the Middle East, these issues are not so clear because no other market has had a like combination of liquidity and Islamic law.
Still, developed economies offer a starter recipe. As one wag says, “combine liberal amounts of technology, entrepreneurs, capital, and sunshine. Add one university. Stir vigorously.”
The relationships are clear. As one researcher notes, labour-force quality, not just quantity, has a consistent, stable, and strong relationship with economic growth.
Michael Porter — the Harvard guru of national competitive advantage — sums up the issue by saying “Universities and specialised research centres are the driving force behind innovation in nearly every region.
Although companies and individuals do create a large number of innovations, universities and research centres institutionalise entrepreneurship and ensure a steady flow of new ideas.” He is, of course, speaking of research-oriented universities.
Even with the right ingredients — research, innovation, entrepreneurs, venture capital, an active IPO market and supportive infrastructure — a chef may still be needed to get things cooking. There should be a challenge or a goal that drives innovation and encourage funding.
In the US, for example, President John Kennedy in 1963 challenged the US to put a man on the Moon within ten years. The Soviets had just launched the first manned spacecraft, bruising American egos. But Kennedy also wanted to spur a sluggish US economy.
The space challenge, helped by generous government funding, galvanised entrepreneurs and venture capitalists alike. All sorts of technologies were needed to go deeper into space, and many of these turned out to have lucrative commercial applications. Going to the Moon was good for the economy.
New Zealand attacked the problem of encouraging innovation by creating a Ministry of Research, Science and Technology to advise the government on policy that relates to research.
This includes increasing the level of research and development, structuring the research system, commercialising results and making sure that research is responsive to environmental and social issues. Again, a galvanising force.
If the UAE apparently has all the ingredients for encouraging entrepreneurship, what is left to see results is to create the challenge and the need for them.