Does your country have what it takes to become the next startup hub?

This was originally published in January 2017, when I presented this to Economic Development Board as well as other influential players here in Bahrain, as a way for me to contribute my insight on how we could make Bahrain the next Silicon Valley Oasis. It’s nice to look back and see some of the changes that have taken place. While this was to provide my perspective for Bahrain, today, nearly every country is looking to become the next Silicon Valley and attract high growth startups. And thanks Paul, for the inspiration to write this.

This is not to discuss the fact that startups and venture capital investments can spur innovation create jobs and substantial wealth, or the need to highlight venture capital investments as a percentage of GDP as a metric, or even how venture backed companies are considered to be of higher quality than others. This is to highlight areas of improvement to build Bahrain as a global startup hub and should be considered from a practitioner’s point of view, not as a policy maker point of view. Headings in red, are specific areas where the EDB could work on.

In summary:

  1. Be Entrepreneur Friendly First
  2. Be Built For Success, Not Built To Avoid Failure
  3. Be Startup Community Builders

Think Very Long Term

Building a startup community takes time, and time means 20 years, 10 is a bare minimum. Why 20, because that’s one generation’s working life and around two business cycles. The rate of change will always be fast in the first few years, but will slow afterwards – the consistent application towards building the startup community will have to go beyond that dip. During the last 10 years, a succession plan needs to be in place so that the next generation can continue the effort.

Promote Entrepreneurs First

The leaders of the startup communities have to be entrepreneurs, everyone else is a feeder. Both leaders and feeders are important, but their roles are different. Leaders must have long term commitment (say 20 years) and be tireless evangelists, action takers, connectors, givers, putting the community before their self-interest and also nurturing others to become leaders. They are also gate keepers, and should make sure the gates are always open. Any startup hub will require a strong group of entrepreneurs who are visible, accessible and connected to each other as well as committed to the region being a great place to start and grow a company.

Engaging Entrepreneurial Stack Events

To increase the engagement level between all participants of the entrepreneurial stack (i.e. first time, second-generation, experienced, aspiring, investors, mentors, employees, service providers and anyone who wants to be involved) by conducting Meetups, Coffee Clubs, Startup Weekends, Startup Weeks, Accelerator / Incubator Workshops & Boot Camps, Challenges & Competitions (Hackathons), Office Hours, Happy Hours, Pitch Days & Conferences. Activities that are good at highlighting people doing good stuff, but don’t engage anyone in entrepreneurial activities, include Entrepreneurial Awards, Cocktail Parties, Panel Discussions, Open Houses, Networking Events.

Encourage Youth Entrepreneurship

Youth should not be an excuse, it should be the answer. Encourage leaders of tomorrow, mentor them, make room for them in the ecosystem. Universities are also great feeders, their biggest contribution being a steady stream of young, smart people. Universities should start thinking about creating courses on entrepreneurship and pushing students to starting up, running, fundraising and even selling a company as part of the first year curriculum. The experience they gain from that one year will be worth far more than the remaining three or four years they spend in the classroom, preparing them to be the future leaders and entrepreneurs.

Encourage Women Entrepreneurs

Bahrain is home to a large number of educated and qualified women, both local and foreign, who can contribute so much to the workforce and economy if given the chance to do so. In fact internationally, over the last 15 years, there has been an unprecedented growth in the number of women-owned startups as more women prefer the flexibility of their own startups to a corporate job.

Risk Aversion Culture

The two biggest inhibitors to startup communities, is risk aversion culture, and this generally falls into two categories – 1) fear of failure and 2) fear of rejection. People are generally afraid of investing time in a startup because they’re afraid there won’t be a payoff. Culture plays an important role here – but the ecosystem is also important. The question is whether the system is “built for success” or “built to avoid failure”. When you have a good, steady government job – why would you want to startup and take up the challenges & risks of starting up? Or would you like to build a reputation for trying stuff, collecting data, pivoting and improving? If the startup community wants to flourish – we have to eliminate the stigma with failure, and treat it with great respect. In fact, we should even celebrate it as the right of passage. Instead of chastising a failed entrepreneur, encourage them, as this will encourage others to take risk and continue the entrepreneurial journey. This will shift the culture around failure in a positive way.

Introduce Bankruptcy Code

Failing as mentioned earlier is part of the startup culture, the lack of a bankruptcy code means that it could take anywhere from 3-6 months to close a company, keeping stakeholders on the hold for that duration is not conducive to failing fast and moving on. In the absence of any current taxation system, this should not take more than 2 weeks.

Reduce Reliance On Government

While governments are well intentioned, especially around creating jobs and revenue sources, they do not have an understanding of the pressures faced by entrepreneurs. The government’s role should be that of a feeder and facilitator. Another skin deep problem, is that people in government generally don’t have entrepreneurial backgrounds and as a result, don’t really understand startups. Not to mention the government vocabulary (global, macroeconomic, innovation, economic development, control, policy) is markedly different from the entrepreneurial vocabulary ( lean, startup, product, people, market fit, impact, action). Governments are generally slower than entrepreneurs and on a longer time horizon, if it takes on a leadership role, it will stifle the entrepreneurs progress, who have to be nimble and respond to market dynamics. The two operate on different models, Entrepreneurship thrives on a network model, Governments thrive on a hierarchical model – both completely different in the way they operate. Whenever the startup community relies on the government to be a leader, things may not go along well. Government plays an important role in creating a business friendly ecosystem and environment. Any government policy that stimulates interaction between participants and ensures regulatory stability for 10-20 years should be considered a success.

Pass Flexible Labor Laws (Hiring & Firing)

It’s generally been observed that countries with more restrictive labor protection laws have less venture capital investments, because investors and entrepreneurs cannot react as flexibly as required. As a startup progresses, from product development (where they need more engineers), to scaling (where they need more marketers) – it is only natural to see employee churn. Even during acquisitions, some employees will be made redundant. If companies are required by law to retain workers or pay separation packages, investors and founders will be less willing to risk starting up. This may be culturally difficult aspect to accept, but it is one worth keeping in mind.

Relax Visa Regulations

One of the biggest reasons for the success of Silicon Valley in the US is the H1B visa, also affectionately called the Genius Visa where local talent is not available, immigrants came in, often crossing huge chasms to become legally allowed to work in the country. These non-immigrant visas allow foreigners to work for specific company for a maximum of 6 years (with grace periods of up to 60 days between visas). This is similar to Bahrain’s current Company Sponsored ‘Work Visa’ (with grace period of 30 days). However, a Green Card – which is a non-immigrant permanent resident (not citizenship) of unlimited duration will enable foreigners, who have fulfilled all legal requirements to continue in the country indefinitely. This allows foreigners to work in different companies, sharing the expertise with various companies, i.e. taking up more than one job. And if possible, forming a company under an Investor Visa.

When there are limitations to the foreign ownership level for companies, investors will keep away. Encouraging highly skilled foreign talent to make Bahrain their home will help achieve its startup hub ambitions. These talented foreign individuals have created industries, not just jobs. This is because entrepreneurship doesn’t follow geographic boundaries.

Today technology startups are easier to start and scale, and in some cases remotely operated across various geographies.

Understand that no one country has a monopoly on startups today. Hubs are being created everywhere, wherever the path of least resistance permits them to startup. Nothing stops a company from expanding into any other GCC country or outside the Middle East for that matter.

[Update: Following Dubai’s lead, the 10 Year Visa will be introduced, as the government is now drafting the legislation behind it]

Currently, startups are finding it difficult to approach a legal firm for advice / help with setting up. This is because the number of legal firms in Bahrain is limited. Through an informal survey with many entrepreneurs, it appears there are no legal firms that can provide affordable legal services. For startup hubs to flourish, there needs to be an integrated, affordable and accessible legal, accounting, insurance, consulting and real estate related services available. This can be achieved if more international legal firms are allowed to set up in Bahrain.

Encourage Quality Local & International VCs to Set Up Base

While the country has a well developed private equity environment, the country needs to develop locally as well as attract international venture capital fund managers that cut across stages, geographies, sectors, and cultures. Once the startup community thrives, the venture capitalists will start focusing on the country and will fly in droves. That’s the nature of the beast – venture capitalists are generally lean & local structures, and unless there are a good pool of startups (dealflow) to choose from, they won’t make it their priority. There always be an imbalance between supply & demand for capital. Those who say there’s not enough capital – should understand, there is never enough capital. The more venture capitalists that set up in Bahrain will bridge investors with startups. For this venture capitalist friendly regulation needs to be in place.

Institute Venture Capital Friendly Regulation

Currently, there are no local laws for venture capital investing, so only off-shore funds are possible. The very structure of venture capital partnership is governed by law – particularly a robust legal framework for on-shore venture capital as well as later stage investments. If a startup fails, the investors will lose the money they have invested, but disgruntled stakeholders will not be able to pursue the investors for further damages. With losses limited to invested capital, the possible gains from a successful enterprise look attractive. An LP structure ensures, that there’s a restricted lifespan meaning at some point, the general partners will have to wind up the fund, exit the positions and return the money (or at least some of it). Furthermore, the introduction of A & B class of shares will prove to be beneficial in the long run for both control and ownership issues. Effective and efficient legal system as well as exit avenues via public market listings, strategic buyers, private equity firms both local and international will definitely have an impact.

[Update: A GP/LP law has been introduced. However, there are some areas of improvement within the legislation for it to be utilized effectively]

Incentivize Corporate Venture Capital

Specifically large companies should be encouraged / incentivized to allocate budgets (say 1% of cash and cash equivalent) to startups. This will unlock a huge amount of cash sitting idle & under-deployed in the banks into productive activity and assets.

Inappropriate Accounting Treatment

Currently, auditors based in the country do not have experience in venture capital, and bogged down by IFRS interpretations. They treat venture capital and private equity firms like holding companies, and thereby use accounting standards and valuation methodologies that are not suited for venture capital.

Unlock Office Space

Bahrain has plenty of commercial office space locked up, unrented – by allowing multiple companies to incorporate without any restriction of office space will help unlock the value in these properties – generating returns for both the owners and lessees. Here’s how – when you’re a two or three person startup, you can make do with a spare bedroom, coffee shops, co-working spaces, but the moment you start growing and get to 10 people, you are now looking for larger spaces. Rapid growth also means, you’ll rapidly run out of space – and while remote working is starting to gain traction – teams like to meet up in person to create a sense of community and fellowship.

Build People & Communities, Not Buildings

Investors have always favoured real estate because of of rental yields. Incentivizing talent development and encouraging interaction will create more value than real estate in the long term. Majority of the listed companies, an example of wealth creation – are not real estate companies, but those with people. Deep talent pool for all levels, if not home grown, they should be welcomed from outside. If you want to continuously attract companies, there needs to be a community that fosters interaction, involvement and inclusion.

Creating a community of givers and not takers is what makes startup communities flourish. If people are always trying to be helpful to anyone i.e. “how can I help?”, without expecting anything or going around with a “what’s in it for me” attitude – the community will flourish. But if over time, the relationship is one way (e.g. I’m giving, but getting nothing) – then the givers will back off on their level of giving. Takers or getters will ultimately generate a bad reputation, as someone who only looks out for themselves. Embrace diversity and be open to it, different cultures, different ideas, different perspectives – those are the seeds of innovation. Regular meetups, after parties, get-togethers – all go hand-in-hand. Community is at the heart of a startup community.

The Bahrain Advantage

One thing to consider, given the central location of Bahrain as the heart of the gulf are the sectors which could be built up, for instance fintech, marine and tourism. Bahrain has certain advantages such as state of the art communication infrastructure (three competing telecom players, plus data warehousing players), low cost of living and starting up – probably the lowest in the GCC (this provides the startup with a greater runway, by reducing their burn rate, increasing their odds at success) and a multi-cultural environment – over 40 nationalities from all over the world, have made Bahrain their home. An educated, English speaking population, closely knit cultural and social environment exists. And all this supported by a stable government unlike other countries, where elections are held causing greater uncertainty, causing the ruling party to take cyclical and sometimes populist views (usually before next election) as against long term sustainable development views of 20+ years.

[Update: Bahrain did venture into the Fintech Space, and has been actively promoting it, with the FinTech Bay]

Coordinate GCC Wide Collaboration

When Bahrain does become a global startup hub, it should not fall into the trap of a zero-sum game, where it believes that Bahrain wins at the expense of Dubai or any other GCC state. Other governments will try initiatives to attract startups from Bahrain, very often emerging with “we are the best” branding. Entrepreneurship will never be saturated, so taking a network approach and connecting with neighbouring countries is good for the eco-system. For example, a person based in Bahrain should be able to travel to any GCC country with visa-on-arrival. For every entrepreneur that is based in Bahrain and travels to any other country, he/she will be talking to at least 100 companies in one year, mentioning they’re headquartered or incorporated in Bahrain is another way of putting the country on the map without any advertising / branding budgets.

Concluding Words

Startups will, like it or not, create a parallel universe of activity.

Governments are going to do whatever they are going to do around startups, entrepreneurship and economic development. Developing a strategy that will stand the test of time will not be sufficient with just a bird’s eye view, it will require being in the field, boots-on-the-ground, at the grassroots level understanding the practical difficulties being faced by entrepreneurs. We don’t need to be Silicon Valley, but we can be Silicon Oasis – a place of hope in the deserts of the Middle East, where startups will come from far and wide to refresh themselves from the clear springs of an encouraging government and country and then continue on their entrepreneurial journey.