Ri Insights

Why Startups Won’t Save Us

paul gadallaBy Paul Gadalla

Rai Insights Contributor

The startup wave has hit our shores with millions of dollars being poured into countries like Lebanon and Jordan to help fledgling tech companies.  But this new tech craze will hardly make a dent in the region’s economic malaise and is already being built on faulty foundations.

One of the biggest buzzwords of the last decade is “tech startup”. Indeed tech startups have become a huge trend like the .com crave in the 1990s.  Entrepreneurs are in a constant race to create the next Instagram or Snapchat.

Startups have been touted as something that could help boost non-GCC economies and promote youth entrepreneurship. Even the Central Bank of Lebanon put up $400 million to guarantee loans for Lebanese startups and Kafalat, a government owned bank program also earmarked money for SMEs.  There have also been tech hubs set up in Beirut and other Arab capitals to help those looking to create the next hit app. Yet despite the hype, startups have done little to propel local economies in the region and there have been few if any major startup successes.

It’s time that we deflate the startup hype being pushed upon the region. The reasons why startups won’t help us in our socioeconomic mailaise, especially in countries like Lebanon, are two-fold.

First, the reasons behind startup success in places like London, Berlin and Silicon Valley are not apparent in the MENA. The region still lacks proper infrastructure. Lebanon, for example, has chronic power outages and has some of the slowest internet speeds in the world not to mention some of the most expensive office space which by law is a requirement for new companies. This brings up another problem: bureaucracy.  Many Arab countries still have loads of red tape that stifle any new type of businesses and high levels of corruption.  Egypt, Jordan, Iraq and Lebanon all fare poorly on the Ease of Doing Business Index compiled by the World Bank.  Many companies cannot simply just start in like in Hollywood movies and must clear major hurdles before being allowed to operate.
Banks in the region are still risk averse with many not willing to give long term funding, which is a must, to new tech companies. Despite the Central Bank of Lebanon putting up millions for startups, little of the money has been used and gaining access to the money is still an obstacle.  One should also not forget that purchasing power and the amount of online shopping is still quite small in non-GCC countries, making scalable growth difficult in the long term.   There are also cultural differences. Many Arabs still believe gaining a university degree and a stable job is a sign of success. Having a business fail is a major disgrace.

The second reason of their failure is the nature of startups themselves. As Forbes magazine once noted : “…Entrepreneurship drives economic growth, but it requires long-term patient investments in research, a culture that accepts failure, agile and skilled talent, and a resilient ecosystem that will enable workers and ideas to flow easily from one firm to the next. As a place like Silicon Valley demonstrates, this can take decades to develop, and most policymakers won’t wait that long for the results.”

It will take at least a decade for startups that survive to mature and be able to hire a large amount of employees.  A startup ecosystem is simply too small to have a major impact on ailing Arab economies that suffer from high unemployment.
Does that mean we should abandon entrepreneurship? Absolutely not, but we must first learn to walk before we run. Merely pouring money into startups and tech centers without proper infrastructure and laws in place is a waste of money and resources. Why tell Arab youth to go through the struggles of being an entrepreneur if they cannot secure proper funding and risk being suffocated by mounds of bureaucracy? If we want a viable and sustainable startup ecosystem then we need all the resources and proper laws in place first. The $400 million put up for startups in Lebanon should have went towards upgrading the country’s fiber optic network or the electricity grid. People advocating for startups or at least in the tech scene should first advocate for less bureaucratic red tape and a more business friendly environment for startups to thrive in. Banks also must play a part too by hastening the process of doling out loans for SMEs and be willing to fund new companies in order to make Arab countries more dynamic and competitive.  If we push for these reforms we could very well help curb corruption and increase youth employment, but  by merely advertising the latest buzz word we are setting Arab youth up for another disappointment.

*Paul Gadalla is a New York native communication specialist and aspiring political analyst based in Beirut, Lebanon

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