The Middle East’s booming venture capital market

The venture capital market may have plummeted last year, but the Middle East and Africa (MENA) has witnessed a flurry of activity as deals dry up in other parts of the world. After a record-shattering 2021, the world entered a parallel universe of investor caution last year amid a slowing global economy, geopolitical tensions and steep valuation resets that fuelled mass layoffs across the tech industry.

The story is different in the Middle East – home to some of the world’s biggest sovereign wealth funds – where investors are flush with cash from last year’s oil boom. Similarly, GCC countries have done well thus far in supporting small and medium-sized enterprises (SMEs), a sector that is central to governments’ economic diversification and job creation strategies.

MAGNiTT, a Dubai-based research firm, said that though there was a decline in funding and deals in the last quarter of 2022, the latest data shows sustained levels of funding and a steady number of transactions in the Middle East, Africa, Pakistan and Turkiye (MEAPT) region.

Dealmaking in the Middle East is being led by the UAE, which accounted for nearly 50 per cent of the total venture funding between 2018 and 2022. S&P Global attributed the growth in venture funding in the Middle East to the growing technology adoption and the shift from high dependence on oil revenues, which is creating investment opportunities and attracting global venture capital firms to the region.

The Middle East is emerging as a bright spot for venture capital investments, as the regional outlook looks promising driven by robust oil prices, fiscal surpluses from hydrocarbon receipts and ongoing economic diversification programmes.

Signalling a positive outlook, thanks to the region’s growing appetite for innovative technologies, the fintech sector is expected to retain the lion’s share of venture capital investments going into 2023.

What is driving growth?

State support for startups and entrepreneurs is driving the establishment of venture hubs in some Middle Eastern countries such as the UAE, the biggest beneficiary of venture funding over
the last four years. Egypt, Jordan and Saudi Arabia have followed the same strategy and they are second, third and fourth respectively.

Last year was one of the best for emerging venture markets, with funding exceeding $7bn in a row, even as markets such as Southeast Asia struggled with tight liquidity due to high-interest rates – part of central banks’ broader strategies to bring inflation down to sustainable levels.

Despite the turbulence in the emerging markets, MENA-based startups attracted significant interest from investors as funding levels crossed the $3bn mark led by a 72 per cent increase in funding for Saudi Arabian firms and an increase in transactions that were closed in Egypt.

Countries such as the UAE and Saudi Arabia have recognised the importance of venture debt and building on those achievements in the GCC, hence the region will remain a vibrant player in the global venture capital market. “There is substantial evidence that accelerators, incubators, corporate innovators and government-led initiatives play an essential role in the growth of companies,” said PwC.

Government-led initiatives such as Abu Dhabi’s Hub71, Dubai’s Dtec and DIFC Fintech have therefore bolstered the growth of the venture capital industry in the region. State-sponsored events such as Biban, Saudi Arabia’s largest startup and entrepreneurship conference, are equally contributing to the growth of MENA’s venture capital ecosystem by connecting ideas with capital.

The MENA region’s tech-savvy population of Gen Z, Millennials and Gen X coupled with its high smartphone penetration rate makes the region a fertile ground for digital solutions. The increased adoption of e-commerce and fintech solutions over the years has accelerated the growth of the startup ecosystems as investors are attracted by success stories from home-grown companies such as Careem, Souq.com, Swvl and music streaming platform Anghami.

Indian consultancy firm Redseer projected that MENA’s digital economy will hit $100bn by 2023, up from around $45bn in 2020, as the “robust enabling logistics coupled with strong regulatory backing will propel sectors such as e-tail, travel, edtech, fintech and healthtech.

“Fintech continues to dominate venture investments with $332m, 61 per cent of total venture debt funding, raised between 2018 and 2022, followed by e-commerce, transport and logistics, enterprise software and healthcare.”

The shape of things to come

While concerns over high interest rates and a looming recession have impacted global venture investments, the MENA region is an increasingly attractive emerging market. State investors including Public Investment Fund and Mubadala Investment Company have ploughed millions of dollars into startup firms to drive economic diversification and create employment for the region’s youthful population.

Local venture capital firms such as Wamda, Middle East Venture Capital, Saudi-based STV and Sharooq Partners are also bullish about the outlook and they are on the lookout for deals as they seek to grow the Middle East’s Silicon Valley.

Regional financial hubs such as Dubai International Financial Center and King Abdullah Financial District have emerged as favoured destinations for venture capital firms that are being drawn by the ease of doing business.

Global venture capital firms have been trooping into the region to tap into its growth opportunities. YCombinator, Sequoia Capital and Techstars are among the global venture capital firms that have opened their doors for business in the region in recent years.

Startups and SMEs need funding to grow and Middle Eastern countries are facilitating the growth of a sustainable venture capital industry. The confluence of the region’s digitally connected population, state-backed structural reforms and the abundance of liquid capital have created the ideal conditions for a thriving venture capital ecosystem.