Start-ups are increasingly springing up across the Middle East, but they are also increasingly conducting business via offshore havens.
Doing business offshore in places like the Cayman Islands and the British Virgin Islands (BVI) helps allay investors’ common worries. For example, many investors are concerned about the court system in the Middle East, the opaqueness of the regulations, and the unpredictability of enforcement.
A Jordanian example
An example of the difficulty that start-ups can face in the Middle East can be seen with Careem’s entry into Jordan. Last year, along with Uber, the Emirati driving service launched in the region.
Initially welcomed with open arms by consumers looking for an alternative to the country’s often dangerous and service-poor taxis, within months both companies were banned. Despite this, during the time that Careem struggled to stay in business, investors remained unperturbed. This is because Careem is registered in the BVI, and therefore investors are insulated from ramifications.
The founder of Anijad, a major e-booking platform based in the Middle East, confirms that many investors are insistent about offshore registration. Eman Hylooz said: “Investors require it. Being more stable… makes the investors relieved.
Start-up challenges in the Middle East
There has been mounting attention placed on start-ups in the Middle East over recent years. In 2016, for example, at least $815 million was pumped into investments across the region, according to data from Wamda.
The reasons behind the upsurge in entrepreneurial investment are the same as in any other start-up hub across the developed world. The region has an excess of young people, constantly increasing access to faster technology and an increase in consumers wanting to carry out business and personal transactions of all kinds online. It’s the perfect recipe for an explosion of tech start-ups.
In a region that traditionally depends on oil-based business, the new tech hubs offer diversification, job opportunities and potential for high levels of growth.
Start-ups need relative stability
Other countries in the region have fallen behind in this area, following the ‘Arab Spring’ of 2011. However, Jordan has managed to maintain the stability needed to build up its start-up scene. So much so that it’s in third place behind the impressively buoyant tech hubs of Abu Dhabi and Dubai.
Tech start-ups and entrepreneurs in Jordan have historically struggled with regulations that were designed for brick-and-mortar companies. For example, laws can force small start-ups to rent office space rather than allowing them to work from home.
It wasn’t until 2009 that registering offshore became popular as a strategic choice to avoid these regulations. There was a release of millions of pounds to invest across the region after Maktoob, the Arabic web portal, was sold to Yahoo for $164 million.
Discovering that too much red tape and too many restrictions inhibited local investments, investors turned to offshore. They agreed to pump money into the region only if the company registers elsewhere. Over the last five year, this has become the most popular start-up investment strategy in the Middle East.
Further difficulties down the line
Investors are further put off from registering in the Middle East due to the difficulty of closing a company down. There is no specific bankruptcy law in Jordan, so defaulted loans are a long, drawn out process.
Many developed countries offer regulation that’s more user friendly, in addition to reliable court systems. This again encourages registering in other countries. For example, Delaware in the US is enticing to investors thanks to the easy registration process for businesses. The BVI tends to edge out the US as first choice due to the latter’s complex tax system.
Bringing companies home
Some Middle Eastern countries are sufficiently disturbed by the increase in offshore registration that they have begun launching initiatives aimed at pulling companies back home.
For example, Jordan introduced a 0% tax rate for some online-only companies in return for Middle Eastern registration. The initiative has had mixed results as start-ups follow the rules to obtain the tax break in the early stages of set-up and then move abroad.
Lebanon also tried to keep start-ups local when it announced a $400 million funding boost from the central bank for entrepreneurs. However, this made investment far more complicated in the country, increasing valuations and leading investors to get less for their money.