The new world of funding

The number of businesses setting up in Dubai continues to increase, but what all growing businesses need is finance, whether it is to fund research and development, hire new staff, enter new markets, or make acquisitions.

While some businesses can fund development from internal profits, many will need more money than internal resources can provide and this means they will need to seek finance from outside sources, if they are to achieve their ambitions.

But, in the past decade, there has been a surge in the routes that businesses can take to find finance. There are new forms of fundraising that have been developed, simultaneously with technological developments, and more businesses are turning to them to raise the cash they need, rather than the traditional routes.

Traditional funding

For many years, certain types of funding have been staples for businesses looking to grow. One of the oldest forms of financing is the bank loan. While there are many banks that will provide a loan, many SMEs find their applications are turned down. Research by Khalifa Fund found that 50–70% of funding applications made by SMEs are turned down by traditional banks. Just 4% of outstanding bank credit in the UAE is from loans to SMEs – the average in the MENA is 9.3%.

Another well-established method of raising funds is from venture capitalists (VC). These are funds set up specifically to invest in growing businesses. The idea is the VC provides cash in return for a stake in the business and a seat on the board of directors

However, the downside of VC investments is that they do take a stake in the business, and they will have an exit strategy planned years down the line.

Private equity financing is similar to VCs, although in Dubai, private investors invest directly in a business. They can still have an influence on strategy and will look to exit the business at some point down the line, either by the management buying them out or another investor taking their place.

Another common form of financing is an initial public offering (IPO) on a stock exchange. There are many stock exchanges around the world, and in Dubai there is the Dubai Financial Market and Nasdaq Dubai.

In an IPO, a company sells shares to institutional or individual investors. An investment bank usually underwrites the listing and arranges for the shares to be listed on a stock exchange.

Once a company’s shares are on a stock exchange, shares can be traded freely by investors and buyers. While this can raise large amounts of capital, floating is a costly and time-consuming process. In addition, share prices can go down as well as up, which can affect the value of the company. Listed companies also have certain obligations to disclose potentially sensitive information such as financial performance.

New forms of funding

While there are still many businesses that successfully raise funds through these traditional methods, there has been a shift in Dubai – and around the world – in recent years to other methods of financing. Here are some of the most promising ones:

Crowdfunding

One of the more popular ways to raise funds for startups with innovative ideas is through crowdfunding. Crowdfunding is a peer-to-peer network where an entrepreneur or business uses an online platform to fund a project or business through a ‘crowd’ of people. On the platform, people – be they friends, investors or people interested in the project or product in development – can pledge a certain amount to the business. This can be as large or small as the investor wants. Often, social media platforms such as Facebook and Twitter are used to publicise a crowdfunder. Businesses usually have a target for a crowdfunder, but if it is popular, they can end up raising more cash than they envisioned.

In March 2020, the UAE government approved the use of crowdfunding for public and private sector projects with UAE System from Crowdfunding Platform Operators. This put responsibility for regulating crowdfunding platform operators onto the Securities and Commodities Authority, and covers the technical aspects of regulating them, such as the rights of all parties.

In the UAE, platforms such as Beehive and Zoomaal have become popular in recent years.

Special Purpose Acquisition Company (SPAC)

SPACs are a new addition to the funding mix in Dubai. It was only in March 2022 that the first framework for forming and listing SPACs in the UAE was approved.

SPACs have grown in popularity around the world in recent years as an alternative to the traditional IPO.

A SPAC is a newly formed company – with no assets or business that it conducts – listed on a stock market for the purpose of buying a business from the proceeds of the IPO. SPACs are established by sponsors and founders which can include individuals, experienced investors or private equity companies. The SPAC raises money from investors on the back of the track record of its management. Once the SPAC is listed, it has to buy a business within a certain timeframe. If no business is acquired, funds are returned to the investors.

Initial coin offering (ICO)

While SPACs use traditional markets, a business will look to raise money with cryptocurrency in an ICO – sometimes also known as an initial token offering. In this case, crypto coins or tokens are sold to investors in exchange for a virtual currency such as bitcoin or fiat currency, such as gold.

The attraction of this to investors is that they hope the business will launch its product successfully, and the coins’/tokens’ value will increase as a result.

This method of fundraising has been controversial as it has attracted some fraudsters, although the authorities are tightening regulations around ICOs.

Blockchain tokenisation

Another cryptocurrency-based form of fundraising is through tokens. In simple terms, this is where a digital token is sold to an investor to raise funds for a specific purpose, which is detailed in the sale. The token represents financial assets such as bonds, or physical assets such as property or art on a blockchain network.

One of the advantages of tokens is that assets can be transferred from peer to peer without having to use intermediaries, as traditional share sales do. Their ease of use makes them an alternative to an IPO, which can be a lengthy and expensive process to undertake and is therefore often out of reach for startups and small- and medium-sized enterprises.

As with ICOs, regulations around tokens are being tightened up by authorities in Dubai to ensure their security.

Future of funding

These new decentralised methods of funding are set to grow even further in popularity in the coming years as more people become accepting of them. Dubai is one of the leading cities in the world for adoption of these alternative forms of financing, especially with the proliferation of tech businesses setting up in the emirate.

The ease of use of these methods, coupled with the efficiency of time, processes and costs, compared to more traditional means of funding, will ensure that entrepreneurs in fast-developing sectors will use these even more as they seek to raise quick funds.

However, there will still be a place for more traditional forms of financing in the future, although it may be that they have to adopt some of the features of the newer methods to stay relevant to a new generation of entrepreneurs.

But whatever the finance vehicle used, the old maxim still holds true – good businesses and ideas will always get the funding they need.