The Gulf Cooperation Council (GCC) is a political and economic union of Saudi Arabia, United Arab Emirates (UAE), Oman, Bahrain, Kuwait and Qatar. The main economic objective since its formation in 1981 has been to foster private sector development by creating a common market, applying standardised regulations in trade and finance and allowing the free movement of people, goods and services. Although a single currency and single market is yet to be established the currencies of all GCC states apart from Kuwait are pegged to the USD. Jordan, bordering Saudi Arabia to the north and with close existing economic ties to the GCC, has been accepted into the union however a timetable for integration is yet to be announced.
The GCC combined controls around 30% of global oil reserves and 22% of global gas reserves yet the economic significance of oil and gas varies across member states. Saudi Arabia controls the largest oil reserves in the union accounting for 16% of the world's total. This is followed by Kuwait and UAE each controlling 6% Qatar 1.5% and Oman 0.2% whilst Bahrain has negligible oil reserves which are expected to be depleted within two decades. Oil accounts for between 60-90% of exports across the union and 30-50% of GDP. Qatar controls the largest gas reserves in the GCC accounting for 13% of the world's total followed by Saudi Arabia and UAE both controlling around 4%.
The GCC economies have enjoyed decades of strong and consistent economic growth supported by globalisation and high oil prices. This triggered massive spending on infrastructure, healthcare and education, resulting in high living standards. Public sector employment grew significantly as did incomes.
Bahrain having negligible oil reserves benefited from diversification, positioning itself as a gateway to Saudi Arabia and a financial hub for the region. However this crown was lost to the UAE following Dubai's rapid and sustained recovery from the global financial crisis.Diversification measures
The falling oil price has been accompanied by a rising young population so sustainable job creation is key to maintaining prosperity in the GCC. According to the International Monetary Fund, the GCC member states should diversify primarily through enhancements in education, incentives and competition.UAE
Comprised of seven Emirates the UAE has greatly diversified its economy since it was founded in 1971. Oil as a share of GDP has fallen from 90% to 30% and the government intends to reduce this further to 20% in the coming decade through a focus on innovation. The Emirate of Dubai is the most potent symbol of diversification with its 7* hotels, the world's largest man made harbour, the world's busiest airport, countless economic free zones and visa free entry for many nationalities. Dubai will host the next World Expo in 2020 and the government has been investing heavily in manufacturing and services ahead of this. Abu Dhabi, the capital city, is equally business friendly and has been successfully attracting overseas financial services companies to its new Abu Dhabi Global Market. The regulatory framework of the ADGM is in line with other global financial centres.Saudi Arabia
With oil making up around 45% of GDP and 90% of export earnings, economic diversification is vital if Saudi Arabia is to maintain economic prosperity. The kingdom has long recognised this and has taken measures to create jobs for its rapidly growing young population. Around 30% of Saudis are under the age of 14 whilst 75% are under the age of 30. The Saudi scholarship programme is the largest in the world sending over 200,000 students to study overseas, one third of whom are female. The vast majority of these government funded scholarships are in non-oil related sectors such as business, management, medicine and IT. Indeed IT is a natural fit for many Saudis- the population has the highest per capita YouTube usage rates in the world.
The recently announced Vision 2030 project centres on privatisation of state owned industry and a reduction in barriers to entry for businesses which currently face significant hurdles if they wish to operate in the country. Already the kingdom has begun construction on several economic megacities to attract innovation and competition, and to utilize the highly qualified workforce returning from overseas studies. World class univiersities such as the King Abdullah University of Science and Technology (KAUST) have been established- its laboratory facilities rank in the top 10 of all the world's universities.
There are various programmes aimed at encouraging entrepreneurship in a country where highly paid public sector jobs have dissuaded would-be entrepreneurs from taking the risk of setting up a business. Government backed venture capital funds are emerging to provide early stage funding where the banks have failed. US style business accelerators now exist around the kingdom offering seed capital and guidance to entrepreneurs. A recently introduced tax on real estate investment seeks to reduce the disproportionate reliance on the asset class and force investors to look at other areas of the economy.Qatar
The country of 2.2 million (only around 10% of which are citizens) has embarked on a $200bn spending programme, triggered partly by its hosting of the 2022 football world cup. Much of this is on infrastructure which it is hoped will attract tourism. The Qatar National Vision 2030 programme focuses on private sector involvement in areas including manufacturing and finance. The proceeds of the massive spending programme have already filtered down into the private economy with private sector loans growing substantially to finance real estate and services. Growth in the non-oil sector is more than compensating for falls in the oil price. The completion of a new high capacity airport has placed the country alongside the emirate of Dubai as a regional logistics hub.Kuwait
In 2015 Kuwait announced an infrastructure development plan upwards of $240bn to be implemented from 2015 to 2019. Only part of this plan focuses on the oil sector and unlike previous initiatives the private sector plays a crucial role through Public-Private Partnerships (PPPs). The PPP framework has been tried and tested in Europe, particularly in the UK over recent decades. So far around $40bn has been earmarked for utilities, housing and transportation, all to be led by the private sector.
Previous initiatives never gained traction as they were formulated during the days of high oil prices so complacency took hold. However this most recent plan is already becoming a reality. Several desalination and power generation projects have been rolled out and a large healthcare contract to build several hospitals and clinics using a PPP structure has been awarded. Most notable is the government's suspension of its controversial offset plan which was seen as a significant barrier to private sector involvement. Under this plan, foreign companies bidding for large scale projects were required to participate in local business ventures.Oman
Compared to other GCC states Oman has a relatively low cash surplus so timely diversification is essential. The country recently announced a 5 year $100bn economic plan to halve the economy's dependence on oil, seeking to introduce over 500 programmes to focus on mining, transport, manufacturing and tourism. The second phase of a planned 2,135km railway project was recently announced. Tourism has been steadily increasing over recent years. Like Kuwait, the plan relies heavily on Public-Private Partnerships (PPPs) although unlike Kuwait Oman has previous experience in implementing PPPs.
Like Saudi Arabia, Oman has a large young population so educational reforms are key to its diversification agenda. A focus on engineering, science and technology will help to industralise the economy. The level of female participation in the labour market is high for the region but the plan hopes to bring more women into the workplace.Bahrain
Measures to diversify Bahrain's economy were successfully implemented long before the decline in oil revenues. Oil and gas as a share of GDP has fallen to around 20%, equalling the contribution to GDP from financial services. Bahrain was the first GCC state to sign a bilateral free trade agreement with the US in 2005. Prior to the civil unrest in 2011 Bahrain was the regional financial hub but Dubai now enjoys this title. Manufacturing plays a key role in the economy and contributes almost as much to GDP as oil and financial services. The island state is a major global exporter of Aluminum products.
There have been distortions in the economy caused by state subsidies for meat and petrol but these are now being addressed as Bahrain seeks to eliminate its budget deficit within 5 years. Other measures to eliminate the deficit include mass privatisations, the restructuring of government departments and the freezing of state wages. Although oil is no longer the biggest contributor to the economy, the government seeks to further reduce Its role by promoting tourism and by reducing barriers in industry and services.
From wannabe film producers, artists and writers to budding entrepreneurs who believe their idea is the next big thing, crowdfunding is a welcome addition to a desperately narrow list of financing options for even the most viable of proposals. Crowdfunding involves the sourcing of pooled finance from a large crowd where each individual pledges relatively small sums. Some platforms facilitate pledges from as little as $100 whilst for others the minimum pledge is several thousand USD. Likewise the funding targets can vary greatly from a few hundred USD to $1million or more.
Crowdfunding is broadly divided into three main categories: equity, debt and rewards. Each category caters to a different segment- equity for businesses, debt for businesses and individuals and rewards for small scale projects. There is a fourth category known as donation crowdfunding although this is too similar to existing charity fundraising techniques to warrant further explanation. Interestingly the pedestal for the New York Statue of Liberty was crowdfunded in what was one of the earlies examples of the practice. This followed a campaign launched by publisher Joseph Pulitzer in his newspaper The New York World since the City of New York refused to finance construction. The campaign raised $101,091 from over 160,000 donors.Equity Crowdfunding
Entrepreneurs looking to finance a start-up or early stage business can pitch their idea or existing business to a crowd of potential investors through an online equity crowdfunding platform. Different platforms practice different methods although methods are becoming standardised as the industry evolves. Generally a summary of the business coupled with a funding target and amount of equity on offer is included in the pitch, which is hosted on the platform for a fixed amount of time. Investors can make pledges through the platform in return for shares in the business if the funding target is met within a set time frame. The investors become shareholders in the business. If the funding target is not met pledges are refunded in full to investors although in some cases the entrepreneur is given the option to extend the life of the campaign if the target is near.
Only the most promising proposals are showcased on crowdfunding websites. An entrepreneur cannot simply register any proposal and expect to receive investment. The criteria is usually very strict resulting in more than 90% of all submissions being rejected before a funding round can commence. There are two reasons why most proposals are rejected: Firstly, equity crowdfunding platforms make their money by charging a success fee on funds raised in the event that the funding target is met. Therefore the platform will not get paid hosting second rate funding proposals. Secondly, if most funding proposals do not receive investment this will impact on the reputation of the platform, as will businesses which go on to fail after a successful funding round.
Equity crowdfunding received a big boost in the US in 2015 when the Securities Exchange Commission, the country's financial regulator, adopted rules permitting companies to offer and sell shares through crowdfunding websites. This was part of the wider JOBS (Jumpstart our businesses startups) act aimed at making it easier for start-ups and small businesses to raise funds whilst also providing investor protection. Other countries with strict securities laws require funding proposals to be filed with the appropriate authority to ensure some level of investor protection. The UK Financial Conduct Authority, Frances Authorite des Marches Financiers and the China Securities Regulatory Commission are state regulators from just a few leading economies to recognise equity crowdfunding.Debt crowdfunding
More commonly known as Peer-to-Peer (P2P) and Peer-to-Business (P2B) lending. P2P lending platforms allow individuals access to a pool of non-institutional lenders to seek various types of loans including mortgages, credit card re-financings and even student loans. The creditworthiness of the borrower along with the indicative interest rate is determined using electronic algorithms which are far quicker than methods used by conventional high street banks. A borrowers creditworthiness can be scored in minutes rather than days. The platform acts only to host borrowing proposals and facilitate transaction whilst it is down to the lenders to decide whether or not a borrower is deserving of credit.
Although the proposal is showcased with an indicative rate of interest determined by a computer algorithm, the actual rate of interest is market driven being determined by auction- a greater number of willing lenders drives the rate down and vice versa. Generally the rates of interest are more competitive than those offered by traditional banks and credit card lenders, particularly in countries which have high cost of credit. This does not mean that lenders suffer as a result of lower rates. P2P lending platforms have lower operating expenses than conventional high street banks so these savings are reflected in competitive returns for the lender. There are no expensive bricks and mortar offices to service as these businesses operate online.
P2B lending platforms operate on the same principle except the borrowers are businesses. In both instances the individual loans are made up of relatively small pledges from a crowd. The regulatory framework for debt crowdfunding is similar to that of equity crowdfunding, as is the fee structure.
Lenders usually are not charged to use the platform- instead a success fee is are charged to borrowers who raise funds along with in some cases a fee to register the proposal with the website.Rewards based crowdfunding
Ideal for financing community projects and favoured by artisans, rewards based crowdfunding is the longest established method of crowdfunding given the absence of a requirement for regulatory approval. Instead of becoming a shareholder or creditor the pledger is rewarded with an item relating to the underlying project. An author may choose to reward their donors with an early copy of the book being financed whilst a musician may offer an album copy. This method of crowdfunding is more closely aligned with traditional charity than finance as the true reward is the sense of satisfaction in helping an individual to get their project off the ground.Ease of diversification
One lesson of the recent global financial crisis is that investors must diversify to reduce risk. Investing in equity and debt crowdfunding proposals carries great risks because startups have a high failure rate and loans issued via P2P lending platforms are seldom secured against the assets of the borrower. Investors should never allocate a large proportion of their capital to individual crowdfunded businesses, nor should they invest most of their savings in one asset class. Shares in crowdfunded businesses should make up part of a wider diversified portfolio so as to limit exposure and downside risk.
Fortunately from a fee perspective there are no costs associated with holding a diversified portfolio of shares and debt in private crowdfunded businesses. Unlike when buying shares in public companies such as those listed on a stock exchange, an investor does not have to pay a transaction fee to invest through a crowdfunding platform. The legal and administrative fees are almost always paid by the company receiving the funding, leaving the investor free to commit small amounts of capital to a large range of businesses. In public markets investors can diversify without paying multiple fees by purchasing an index tracker or investing their money with a discretionary fund manager however this leaves the investor with no control over which companies are held in the portfolio.
If the company is successful, exits can take anywhere from 3 – 7 years and usually occur through a buy-out by a larger company or an Initial Public Offering (IPO) where the company issues shares on a stock exchange. This reiterates the importance of diversification across various asset classes. However secondary markets for crowdfunded securities are starting to emerge so for the first time existing investors will be able to list their shares for sale however these markets are expected to remain illiquid.
From seed stage all the way to growth there are various methods of financing a business, each with advantages and disadvantages. Choosing the correct financing structure is essential although entrepreneurs are not always aware of the options on the table, never mind the benefits or dangers associated with them. The most common forms of financing are equity, debt and convertibles. All are well established having been offered by banks, venture capital firms and friends and family for many years. Following rapid developments in the financial technology (FinTech) sector these structures are now used in crowdfunding by removing banks, friends and family, and to some extent venture capital firms from the equation.
This is the preferred option for start-ups and early stage businesses, and not just because business loans at this stage of a business's life are practically impossible to come by. Offering a percentage of a business in return for equity means an entrepreneur does not have to service regular loan repayments. For new businesses without a track record or assets against which a loan can be secured, the cost of credit, I.e. the rate of interest on loan repayments, is astronomical. Unsecured loans in businesses without a track record are considered extremely risky and this is reflected in the amount of interest charged by the lender.
For early stage businesses whose cash flow is unpredictable this is an essential factor. Not only is there a significant chance that a business would default on its debt repayments, there is also a significant chance that in attempting to service repayments the business would fail. Cashflow at the early stage can be used far more effectively as investment. The product or service may be viable but if an early stage business suffering from underinvestment, failure is a certainty.
From the perspective of the investor, equity has the greatest upside potential in the event that the business is successful. The stake held by the investor will become more valuable if the valuation of the business increases, not accounting for further stock issuance in future funding rounds and consequential dilution. Compare this to a creditor receiving predetermined repayments regardless of the underlying valuation.
From the perspective of the entrepreneur, equity financing brings with it potential non-financial benefits, particularly at the seed stage. Angel investors often contribute more than just capital to an entrepreneur. Guidance and contacts are invaluable to a start-up, especially when finding the right accountancy firm or legal counsel which can make up the bulk of outgoings depending on the nature of the business.Advantages
Investor is incentivised to help the business
Angel investors provide non-financial assistance
No need to service regular loan repayments
No need to repay investor if the business fails
Gives the company a substantiated valuationDisadvantages
Time consuming and expensive to structure
Requirement for shareholder consensus on important matters
Continued involvement of shareholdersFor existing businesses
Equity financing is less common for existing businesses with assets and reliable cash flow. Shareholders who may have invested at the seed stage are reluctant to have their percentage stakes diluted by the company issuing shares new investors, when the business can instead use assets and reliable cash flow to obtain a loan at reasonable terms. If the company is seeking a stock market listing through an initial public offering (IPO), where shares are made available to the public for the first time, there can be some benefits. A stock market IPO gives existing investors the opportunity to sell their shares to new investors in the business. Without an IPO the existing investors would have to rely on the company being taken over if they were to have a realistic chance of exiting their investments, assuming the difficulty of finding a buyer at a reasonable price in what is an illiquid asset class.
IPOs also serve as a useful marketing tool. A company listing its shares on the stock market is straight away introduced to a new group of potential customers. Details of the company will be circulated in financial publications and the business will regularly be assessed by potential investors. However an IPO brings with it added disclosure requirements. The intricate financial details of the company must be published regularly to comply with stock exchange regulations. All of a sudden the company along with the actions of its management is open to potential public criticism whilst the financial costs of meeting disclosure requirements can be relatively burdensome for a small business.Advantages
No need to repay investor if the business fails
Gives the company a substantiated valuation
Effective marketing in the case of an IPO
Exit opportunity for earlier investorsDisadvantages
Requirement for shareholder consensus on important matters
Disclosure requirements in the case of an IPO
Continued involvement of shareholders
Halfway between debt and equity, a convertible note gives the issuer the opportunity to convert the debt into equity at a predetermined discount at a later funding round or if certain targets are met, for example if sales reach a certain figure. This is ideal in circumstances where no party can determine the existing valuation of the business- an acute problem for start-ups with no track record or established product or service. The interest is usually paid in-kind, meaning it is factored into the conversion ratio, or is accrued, meaning it is paid in a lump sum upon maturity. Either way the entrepreneur is freed from the burden of regular payments at the most sensitive phase in the life of the business.
From the perspective of the entrepreneur, convertible debt is cheaper and quicker to issue than equity. The time between sourcing an investor and receiving the funds is lower, as is the legal bill. The proceeds of interest from a convertible note can be used to increase the valuation of the company in future funding rounds.Advantages
Interest is usually accrued or paid in-kind
Relatively quick and easy to structure
No need to agree on valuation
Interest can boost valuation instead of being deductible
Limited interference from lender
Dilution is delayedDisadvantages
Loan must be repaid or converted into equity
For existing businesses
As a company grows in size there are more factors to consider when determining how to raise capital. Companies which have issued equity on a public market may consider convertible debt for future funding needs if there is weakness in the share price. A low share price makes issuing new equity more difficult so the proceeds of a share sale would be limited. Interest rates are another key factor in determining how to raise capital. Convertible debt becomes more appealing compared to equity in a low interest rate environment because the costs are comparatively low.
Large corporations may choose to issue convertible securities alongside equity on public markets as part of a wider funding programme. When funding targets run into hundreds of millions of dollars it is essential to appeal to as wide an investor audience as possible. Investors have varying risk appetites and product preferences so convertible debt issued alongside equity caters for such diversity.
Whether sourced from a bank, friend, family member or venture capitalist, the main appeal of a business loan is that the level of ownership in a business is not diluted. Assuming payments are satisfied and the terms of the loan are not breached, the borrower has no involvement with the company once the loan is repaid along with interest. There is no danger of the borrower giving away too much, too soon unlike in seed stage equity financing where investors usually demand significant stakes in the company to reflect the heightened risk.
The terms of a business loan are easier to understand than equity and the legal process of obtaining credit is faster and less costly. The entrepreneur doesn’t have to require the consensus of the borrower when making important decisions on the running of a business whereas equity investors have voting rights and can influence the decision making process. A business loan may be considered at the seed stage if the funding requirement is moderate with affordable repayments.Advantages
Ownership not diluted
Limited interference from lender
Relatively quick and easy to structureDisadvantages
Difficult to obtain
Collateral and guarantor required
High interest rates for start-ups
Loan must be repaid regardless of the outcome of the business
Interest repayments an ineffective use of start-up funds
Indifference from the lender as to whether or not the business succeeds
No assistance beyond providing creditFor existing businesses
For existing businesses with reliable cash flow and assets against which a loan can be secured, debt financing is an attractive proposition provided the rate of interest demanded by the lender is not excessive. For businesses who have existing shareholders the issue of dilution becomes more acute, making debt an attractive proposition.Advantages
Ownership not diluted
No interference from lenderDisadvantages
Loan must be repaid regardless of the outcome of the business
Angel investors, often referred to as 'business angels', are individuals who provide finance to start-up businesses usually ranging from $20,000 to $100,000 or more in exchange for equity or convertible notes, I.e. they become shareholders in the venture or they issue a loan that can be transferred to equity. Traditionally these individuals consist of friends and family members and are the only glimmer of hope for a budding entrepreneur given the lack of alternative sources of financing. Banks across the world are notorious for not lending to start-ups at the seed stage, instead preferring to lend to growth stage businesses which already have a proven product or service.
This problem has become more acute following the recent global financial crisis and the regulatory backlash that followed, requiring banks to increase their ratio of deposits to loans and to derisk generally. Assuming most of the worlds 7.4 billion population do not have wealthy friends or family, access to seed capital is severely restricted regardless of the commercial viability of a new idea. Suffice to say human potential is being wasted at an astronomical rate and the ideas that do make it to market are driven as much by access to capital as they are by quality.
Fortunately the early stage financing infrastructure is undergoing a revolution driven largely by technological innovations. An increasing number of angel investors have no prior relationship with the entrepreneurs who they are investing in. Angel investors are less friends and family acting out of charity and more professional investors hunting far and wide for the next big opportunity. Entrepreneurs can showcase their ideas to pools of angel investors on specialist websites such as angel networks and crowdfunding platforms. Often these investors provide additional non-financial resources such as strategic guidance and mentoring which are vital to any start-up and less likely available from traditional friends and family investors.
Angel investing has its origins in the US. The term is derived from 'Theatre Angels' referring to individuals who financed theatre productions in Manhattan's Broadway, but became associated with early stage investing in the 1970s. The mass privatisations and deregulation that led to an explosion in equity finance during the 1980s increased investor appetite for start-up equity. During this time angel investors began to form informal angel networks but the phenomenon didn’t gain momentum internationally until the onset of the global financial crisis in 2008.
The US now has around 300,000 active angel investors and recent changes in regulation could push this figure into the millions- estimates suggest there could be as many as 10 million accredited households in the country. High profile success stories like Facebook, Uber, Zynga, PayPal and WhatsApp have propelled the industry to new highs. Angel networks and similar organisations are becoming more sophisticated in the way they approach potential investments, often requiring more information than a high street bank manager evaluating a business loan request.
Typically an entrepreneur is expected to present a pitch deck outlining the following when initially approaching an angel investor or network:
The legalities surrounding angel investments are also becoming more sophisticated. Thorough due diligence is conducted prior to any investment and as part of this process potential investors expect a comprehensive set of legal documentation to be prepared by a counsel on behalf of the company seeking funds. Such documentation can include company articles of association, incorporation certificate, organisational board resolutions, stock option plans for employees and bylaws.
Once due diligence is carried out and in order to facilitate the investment transaction the company is likely required to have in place the following: Amended articles of association, subscription agreement, securities law filings for the relevant jurisdiction, board / shareholder resolutions approving the funding round and a convertible note agreement if this is the type of security being issued instead of shares. If the company is issuing convertible notes instead of equity, the terms to be negotiated include the following:
Angel investing is a medium to long term exercise and carries significant risk. Most start-ups fail within two years so the chance of incurring losses is high. If a start-up is successful it can typically take from 3-7 years before an investor is able to exit their stake. Exits are in the form of a takeover or an Initial Public Offering (IPO) however there is a growing secondary market where investors may be able to exit their stake.