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Establishing a start-up in Saudi Arabia: the Innosoft story

Riaz Ahmed Mohammed (Entrepreneurship Institute, King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia)
Mamon Horoub (Entrepreneurship Institute, King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia)
Husam Walwil (Entrepreneurship Institute, King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia)

Emerald Emerging Markets Case Studies

ISSN: 2045-0621

Publication date: 13 August 2019

Case summary

Subject Area

Entrepreneurship.

Learning outcomes

The learning outcomes are to explain the importance of passion in entrepreneurship, develop an understanding of the business model canvas and its elements, identify typical challenges faced by a startup (during early days and while growing), explain the role of seed fund and customer feedback for small business success and identify the appropriate hiring strategy for startups.

Case overview/synopsis

The case traces the journey of two Saudi under-graduate software engineering students, namely, Loai Labani and Riyadh Al-Tayib, who had a vision to establish the best information technology (IT) services company in Saudi Arabia. With no previous experience of establishing a company or working for a startup, coupled with the fact that the culture of entrepreneurship in Saudi Arabia is still in its ascendancy, they knew it would be challenging. Nevertheless, at the same time, they were convinced it would be totally up to them to do the hard work needed to propel their vision into reality. The case, after introducing the founders, talks about their respective backgrounds and how it complemented their goal/vision of establishing an IT services company. The case, with references from the literature, also throws light on the entrepreneurship culture in Saudi Arabia but the focus is the various challenges faced by the team in setting up their business and the strategies they used in dealing with the challenges. Some of the challenges discussed are securing early customers, initial financing to support startup, business model development, managing daily operations and hiring and marketing strategy. The case ends with another challenge faced by the founders, for the readers to think about the possible ways of dealing with the challenge at hand.

Complexity academic level

The case will be used for under-graduate level students.

Supplementary materials

Teaching Notes are available for educators only. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes.

Subject code

CSS 3: Entrepreneurship.

Keywords

Citation

Mohammed, R.A., Horoub, M. and Walwil, H. (2019), "Establishing a start-up in Saudi Arabia: the Innosoft story", Emerald Emerging Markets Case Studies, Vol. 9 No. 2. https://doi.org/10.1108/EEMCS-05-2017-0076

Publisher: Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

Introduction

It was the last week of December 2013 and for Loai and Riyadh, it felt like the year had passed in the blink of an eye. They were super-busy throughout the year, managing their IT-based startup company, Innosoft, they co-founded in 2011 in Khobar, Saudi Arabia. They were working on closing the financials for year 2013, which had proven to be a productive year for the duo, with their company taking giant strides through various accomplishments it had the previous year.

They had successfully managed to overcome some of the major challenges along the way, such as identifying the right business model for Innosoft, the initial financing of the company, managing the daily operations, re-thinking the hiring strategy. However, they were fully aware that success would bring with it, great deal of expectations and bigger challenges. The challenge going ahead for them, was to efficiently manage the day-to-day company operations, live up to the client expectations, hire the right talent and ensure they maintained positive brand-image for the company in Saudi Arabia.

The founders: their interests and attitude towards challenges

Loai Labani was always fascinated by the world of computers. As early as he could remember in school, he would spend most of his time trying to explore the field of computer technology. In 2002, in the beginning of his second year of high school, Loai started writing a book on computer troubleshooting titled “Study the Computer on the Weekend,” based on his own knowledge and understanding that he had gained doing his own research. Loai said, “The main purpose of writing the book was to help people who had minimal knowledge about computers, learn about common computer issues and problems and ways to troubleshoot them at home instead of taking it to a computer repair shop and incurring unnecessary expense”. After the schooling, it came as no surprise to his parents when he chose to pursue software engineering in his Bachelors, in 2009, at King Fahd University of Petroleum & Minerals (KFUPM), Saudi Arabia.

Riyadh al-Tayib, like his partner, had great interest in computers since his childhood. During his school days, every summer vacation, Riyadh would spend all his time playing text-based games on a DOS operating system. Riyadh recalled, “The whole idea of entering the right code to progress to next level in the game was very exciting for me”. His love for computers did not end there. Whenever he got the opportunity, he would also accompany his father (a computer engineer) to the various data centers where he worked. Riyadh had great enthusiasm and eagerness in trying to make sense of how the data centers worked. As expected, Riyadh too, chose to pursue his career in the field of software engineering. In 2010, he was enrolled in the Bachelors’ program in software engineering at King Fahd University of Petroleum & Minerals (KFUPM), Saudi Arabia.

At KFUPM, Loai and Riyadh were also actively involved in various IT-related events and competitions through the “Computer College Student Club” established in 2010. They were the most popular members of the club, with Loai, known for his organizational and leadership qualities, and Riyadh for his technical knowledge and expertise. Riyadh remembered, “Each time there was an event at the club, Loai would design the event posters and would take the lead on promoting it among KFUPM students. I would work on setting up and managing the registration website for the event. This way, we complemented each other’s work”.

Both Riyadh and Loai loved dealing with challenges and it was evident from the work they did at Computer College Club, literally managing and running all the events that were happening at the Club. For them, each challenge was an opportunity to do something great and prove themselves. Riyadh cites an example, “One of the challenges was organizing the club events and focusing on our academic studies. We decided to plan our work systematically and focus on studies during the day and spend the night working on Club events. It was challenging since we had to be ready before the event, but it was exciting too.” Their healthy chemistry to complement each other’s work served as motivation for them to participate in the World Skills Competition in London 2011 (World Skills Competition, 2019), where they ended up winning the medal of excellence. Eventually, it was this very attitude of dealing with challenges that made them think about opening a business, even though they had no prior knowledge about it.

Entrepreneurship culture in Saudi Arabia

The first major challenge Loai and Riyadh faced was the uncertainty in getting the right kind of support and guidance for their business because Saudi Arabia was not known for its entrepreneurial activities. A study published in early 2011 showed there were two major factors holding entrepreneurship back in Saudi Arabia (O’Sullivan et al., 2011). First, the difficulty in setting up a business, particularly for smaller firms (this includes rigid labor laws, complex licensing processes etc.). Second, the public sector was expected to provide graduates with safe and well-paid jobs. Therefore, taking risk to set up a business became secondary when the alternative was a stable risk-free job with high salary. Another report, also mentioned that only 9 per cent of young people in the Gulf Region chose “opening a new business” as their top priority in life (AlMunajjed et al., 2011).

Because of the previously mentioned cultural beliefs, parents also did not encourage their children’s entrepreneurial aspirations, as they believed it involved a lot of risk and lacked self-esteem as compared to a government job, which gave stability for a lifetime. Loai said, “My family opposed the idea of opening a startup. Instead, they wanted me to get a secure job, get married and settle down”. It was no different in Riyadh’s case either. However, the families surprisingly did not force their standpoint, and left it up to the two of them to make their own career decisions.

With no prior experience of setting up a business, and knowing the road ahead would pose bigger challenges than convincing families, the duo decided to take the plunge and officially registered the company in late 2011 as Innosoft LLC (Limited Liability Company) (www.pwc.com, 2015).

The business model development

After registering the company, Loai and Riyadh worked to figure out an action plan for Innosoft. They visited few IT companies to understand how they functioned and get guidance. All the companies they visited suggested they develop a Business Model for their company that would make things clear and easy to understand, for them and for the potential investors (Osterwalder et al., 2010). However, since they were not familiar with business terminologies, such as value proposition, revenue streams, and key resources etc. (which are critical part of any business model) the process was a big challenge for them.

Luckily, for them, during this time, in early 2012, they came to know about the National Business Plan Competition, conducted to select the Best Business Plan/Business Model in Saudi Arabia. Loai recalled, “As part of this competition, all teams were given training and mentoring on developing Business Model (Business Model Canvas) for their respective business ideas, before the final presentations. It was a great opportunity for us to develop the Business Model for our company”.

The Innosoft business model was to offer eight IT-related services, namely, business process/content management, web design, application development, mobile app development, graphic design, networking setup and maintenance, enterprise solutions and consultation. Riyadh said, “Our plan was to offer these eight IT-based services for companies. It will be solely up to our customer to choose which of these services they want. It was purely project-based with a project deadline to meet, like a typical IT company” (Exhibit 1).

Initial financing for Innosoft

Another major challenge for any aspiring entrepreneur is to secure that first round of capital known as “seed fund,” which often comes from the entrepreneur’s network of family and friends. A study (Saddi and Soueid, 2011) by World Economic Forum (WEF) in 2011, states that the MENA region’s financial enablers are still in the nascent stage[1]. Some entrepreneurs might find a way to get funds from friends and family, but the region lacks the regulatory and legal framework required for the development of an early-stage financing industry.

With no capital to kick-start the company, and no office from which to work, Loai and Riyadh started spreading the word about Innosoft through their network of friends and family and social media. They also visited various Business Parks and talked to multiple IT-companies in pursuit of attracting clients to support the initial funding of the company.

After three months, in April 2012, Innosoft acquired its first customer through Loai’s friend “Ashraf Al Gamal”. This customer, impressed by Loai and Riyadh’s passion for their startup, and the hard work they had put in to build the detailed business model, gave them the project of designing a website for him. He gave them a small fraction of the project amount so they could start work. This project was very important for the team, because if it were to be successful, it would serve as the first capital for Innosoft and would pave way for initial growth of the company.

Innosoft operations: the early days

Managing the daily operations of startup can get chaotic especially in the initial days (Young Upstarts, 2016). This is often the case because the founders are generally the only people in the company and have to take on multiple roles in the startup. This is where many founders give-up, as the entire process could get increasingly overwhelming for them to manage. Effective time management was the key to get through this turbulent phase. It was no different in Innosoft’s case. While working for their first customer, Riyadh and Loai had to literally manage everything from design, programing, sales, customer satisfaction, financials, legal, etc. Riyadh recalled, “My role was that of a Virtual Assistant handling sales, project management, programing, etc., whereas Loai was the CEO of the company, handling the UI (User Interface) design, project design and interface”.

At times, it would get extremely challenging, especially to juggle between academic studies and startup work. As a result, their academic grades suffered, but they ensured the website-project was not affected and managed to complete it on time.

This first successful project gave Innosoft its first capital. Since there was no official office from which to work, in July 2012, they decided to pump in all the money they earned into renting an office space (Exhibit 2) at Novotel Business Park, considered a very popular business hub in Dhahran, Saudi Arabia. Early supporters thought this was an unwise decision and criticized them for putting all the money into renting a small office space. However, they believed having an office, at a place like Novotel Business Park, was the right move, as it created a legitimate space from which to work and for potential customers to contact them. They did not pay themselves anything, nor did they hire anyone up until this point in time.

Initial response and business model revaluation

During the first four months at Novotel Business Park, Innosoft failed to secure any deal. Riyadh remembered, “This was a big setback for us, especially after having invested so much time, effort, and money into it”. They decided to re-visit their business model to identify where exactly they were going wrong and to see if they were truly offering something the customer would want and pay for.

While they were revising their business model, their first customer, who also happened to be their early adopter, came back to them asking for continued support for the initial project. Riyadh said, “This was a ‘eureka’ moment for us. We realized the customer might care more about having continued support after the service, than the service itself”. Later, the two decided to speak to other companies to get their feedback on what exactly they look for when they search for IT companies to manage their projects. They learned from this exercise that customers care more about the after-service, rather than the service, itself.

In November 2012, the Innosoft business model was modified to offer the eight services as a package based on number of service hours (Exhibit 3). For example, a client could choose 30/40/50 service hours per month and pay accordingly, every month. Innosoft would take care of all the eight services it offered. It was expected this new strategy would ensure a monthly stable income for the company based on the after-service provided to clients.

Company culture and hiring strategy

Hiring the right people is critical for the growth and success of any organization. However, for startups, it is even more challenging compared to an established organization, as it requires people who are willing to work after office hours and earn less than the market rates, because of the scarcity of resources available for a startup (SmartRecruiters Blog, 2014).

In late 2012, Loai and Riyadh decided to hire experienced people for Innosoft. Loai added, “Our thinking was that the knowledge and expertise of the experienced people could help the company grow bigger, better and faster”. However, this strategy failed, as the new hires were trying to control things, and were not as dedicated as they should be. This reflected on the performance of the company, as Innosoft only garnered four new clients in a span of six months. Not only was this disheartening for Loai and Riyadh, it also stretched the company financially.

Learning from this failure, in April 2013, they changed the hiring process and decided to hire people at lower positions. They encouraged and inspired them by providing a career path and training, so employees had an opportunity to work their way up the company ladder. Riyadh said, “This strategy ensured all employees felt they were an equal part of the company so they would have a sense of responsibility to contribute to company growth without any loss of dedication”. Through this change, they hoped to create a healthy company culture, which is vital for any organizations’ success.

Innosoft immediately started feeling the positive effects of this change. For example, employees began suggesting ways to improve the company. For instance, one of the new hires suggested Innosoft change the way it was marketing its services to the clients. Riyadh recalled, “One of our employees felt we were too technical when talking to potential clients about the services we offer and that we should adopt a simpler language that clients can easily understand”. Loai and Riyadh decided to include more marketing language than technical language and came up with a new brochure for the company in September 2013 (Exhibit 4).

These changes (business model revaluation, change in hiring and marketing strategies), worked positively for Innosoft, as it grew from four to eight employees and from four to an additional twenty-five clients, by the end of 2013.

What next for Innosoft?

Running a startup is a challenge that never ceases, even when the company is witnessing rapid growth (Timmons and Spinelli, 1994). Loai and Riyadh faced several challenges along the way such as securing seed fund, identifying the right services to be offered, hiring the right people etc., but some of the key strategic decisions such as new marketing strategy, new service bundling approach (package/hours), change in hiring strategy contributed to the growth and success of the company.

However, with rapid growth comes a lot of pressure and higher expectations, which can lead to chaos, disorganization, confusion and loss of control in a company. Since, Innosoft was witnessing a brisk increase in number of projects, the biggest challenge for Loai and Riyadh moving forward was to ensure timely completion of the projects and at the same time, build and maintain a positive brand image for the company, which are critical for the growth and sustainability of any startup business.

Note

1.

Middle East and North Africa Region [MENA].

References

World Skills Competition (2019), available at: www.worldskills.org (accessed 4 July 2019).

O’Sullivan, A., Rey, M.E. and Mendez, J.G. (2011), “Opportunities and challenges in the MENA region”, Arab world competitiveness report, 2012, pp. 42-67.

AlMunajjed, M., Sabbagh, K. and Insight, I.C. (2011), Youth in GCC Countries: meeting the Challenge, Booz & Company Inc.

www.pwc.com (2015), “Doing business in the kingdom of Saudi Arabia: a tax and legal guide”, available at: www.pwc.com/m1/en/tax/documents/doing-business-guides/doing-business-guide-ksa.pdf (accessed 4 July 2019).

Osterwalder, A., Pigneur, Y. and Clark, T. (2010), Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, Wiley, Hoboken, NJ.

Saddi, J. and Soueid, R. (2011), Accelerating Entrepreneurship in the Arab World, World Economic Forum, Davos.

SmartRecruiters Blog (2014), “50 Startup founders share their biggest hiring challenges”, available at: www.smartrecruiters.com/blog/50-startup-founders-share-their-biggest-hiring-challenges (accessed 4 July 2019).

Timmons, J.A. and Spinelli, S. (1994), New Venture Creation: Entrepreneurship for the 21st Century, Irwin, Burr Ridge, IL, Vol. 4.

Young Upstarts (2016), “Managing the operations of your startup”, available at: www.youngupstarts.com/2016/09/12/managing-the-operations-of-your-startup (accessed 4 July 2019).

Figures

Exhibit 1. Innosoft brochures illustrating the eight services offered in 2012

Figure E1

Exhibit 2. Innosoft First Office, Novotel Business Park, Khobar, Saudi Arabia

Plate E1

Exhibit 3. Revised Innosoft brochures in 2012 – based on no. of service hours

Figure E2

Exhibit 4. Revised Innosoft brochures – simple, easy-to-understand

Figure E3

Acknowledgements

The authors would like to extend their sincere thanks and gratitude to Ms. Gerry Yemen, Senior Researcher at University of Virginia Darden School of Business, Professor James G. Clawson, Johnson and Higgins Professor of Business Administration Emeritus at University of Virginia Darden School of Business and Dr.Jacquelyn Elliot, Consultant at Academic Leadership Center, Saudi Arabia, for their support and guidance in the fulfilment of this case study.

Disclaimer. This case is written solely for educational purposes and is not intended to represent successful or unsuccessful managerial decision-making. The authors may have disguised names; financial and other recognizable information to protect confidentiality.

Corresponding author

Riaz Ahmed Mohammed can be contacted at: riazahmed@kfupm.edu.sa

About the authors

Riaz Ahmed Mohammed is based at the Entrepreneurship Institute, King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.

Mamon Horoub is based at the Entrepreneurship Institute, King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.

Husam Walwil is based at the Entrepreneurship Institute, King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.

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