Entrepreneurs in the Middle East and North Africa (MENA) are experiencing something of a renaissance. Where once stood a dusty startup landscape, largely ignored by the international investment community, a multitude of factors has turned the region into an oasis for innovation. While external influences have played a role, this is in large part due to government initiatives in the region that have, to different extents, built up infrastructure and incentives for entrepreneurs in the past two decades.
“We are entering a golden age for MENA startups,” Courtney Powell, Chief Operating Officer and Managing Partner, 500 Global says. “This golden age is the development of stability in the region, the opening of Saudi Arabia, the continued government intervention and support from the UAE, Qatar, Bahrain, Kuwait, etcetera.” 500 Global made its first investment into the region through a Jordanian company in 2012, launched its first regional fund in 2017, and is now on to its fourth fund in the Middle East.
“I think we’ve seen the entire evolution,” says Powell. “There’s a confluence of events that have occurred over the last four or five years.” Over the years, she’s watched the startup ecosystem grow, from regulations surrounding fintech to programs supporting startups, everywhere from Kuwait and Qatar to the UAE. “And then Saudi opens, and all of a sudden, the market size generally grew by 30 million plus people, and liquidity grew,” she adds. “It just solidified the fact that there was this region where everybody was pulling together to enable innovation to diversify away from oil.”
She explains that 500 Global held an internal study three years ago, called “The Rise of the Next”, to identify markets with high potential. It studied 30 countries and examined everything from expected GDP growth to youth population and digital penetration. The top 15 countries had a combined expected GDP growth that dwarfed the US and China, with countries from the MENA region recognized as top markets – more than 50% of its population is under the age of 25, with 72% internet penetration. Powell specifically points out high potential in Saudi Arabia, the UAE, and Egypt.
“This region is particularly insulated from some of the challenges that we’re seeing elsewhere.”
“We are entering a golden age for MENA startups,” Powell says. “This golden age is the development of stability in the region, the opening of Saudi Arabia, the continued government intervention and support across the region.”
Crunch time
Nearly $4 billion of venture investment poured into the MENA region in 2022, according to an estimate by Wamda, a platform that aims to accelerate entrepreneurship ecosystems in the region, which also has a venture capital (VC) unit. Startups in the UAE, Saudi Arabia and Egypt were the biggest winners, accounting for almost $3.5 billion of the total investments made in that period. While these are the biggest startup ecosystems in the region, opportunity and talent are spread across MENA, Powell says. Other countries in the region received a combined $468 million in funding in 2022, up nearly 37 percent from 2021. Algeria attracted $151 million, thanks to a $150 million round of funding for super app Yassir, which included investors such as Silicon Valley based Bond and accelerator Y Combinator. It was followed by Bahrain with $133 million, with fintech startup Rain taking $110 million in a Series B round.
Opportunities in Saudi Arabia are growing across sectors, as the kingdom seeks to decrease its economic reliance on oil. In the first quarter of 2023, Saudi Arabia reported $359 million in startup funding. “They seem to have the vision, the resources and the ambition to deploy into startups, into entrepreneurship, in a way that is almost unmatched around the world,” Powell adds. It’s not as simple as pouring money into the system – it’s about engendering entrepreneurship into the culture, she adds. “What excites us is their willingness to engage with us and others to help to construct an ecosystem that truly supports entrepreneurship. […] If they continue to support bringing other entrepreneurs from around the world, in addition to their own incredible talent, that’s a rising tide lifting all boats in the region.”
Yet this is a fluctuating market, and 2023 has seen a global capital crunch, leaving investors more critical of where and how they deploy their cash, and forcing startup founders to develop better products, with more resilient business models. “There has been a slowdown, however, I think this region is particularly insulated from some of the challenges that we’re seeing elsewhere in terms of liquidity,” Powell says. “That doesn’t mean there aren’t other challenges. I definitely think there still remain challenges for the region in terms of startups, but I think liquidity is one where fortunately, it is relatively better off than other regions right now.”
The dynamics of the startup ecosystem have changed over time, says Ryaan Sharif, General Manager of Flat6Labs, an Abu Dhabi-based seed stage VC and acceleration program. “We lived for about three years in a founder market, where they could go to market-making demands – they knew that there was a lot of capital ready to be deployed and could play VCs against one another by demanding higher valuation.” No longer. As startup valuations have recalibrated in the US and in Europe, that sentiment has trickled into MENA, with valuations based on fundamentals. Startup founders are being asked tougher questions, Sharif says, and money is deployed in stages, attached to specific performance indicators.
“There’s a hesitancy to start deploying money without deeper due diligence and insight,” he adds. Where previously VCs were competing to invest in just a handful of companies, they made quicker decisions, making judgment calls without doing their due diligence about the project. “Now, I think everybody from a VC perspective has pulled the brakes a little bit, giving them more time to make better-educated guesses on whether these companies are going to be successful.” It’s a sign of a maturing market, where VCs have a wealth of startups to choose from, but is also indicative of tighter capital availability.
That caution has seeped into the first quarter of 2023, Magnitt writes in a report, and it’s exacerbated by the failure of banks such as Silicon Valley Bank. While MENA venture investments reached $818 million in the first quarter of 2023, it was spread across less than half the number of transactions from the same period in 2022. Excluding mega deals (worth $100 million and above), $269 million was deployed, the lowest since 2020. The mega deals were closed by MNT-Halan, Floward and Nana, three startups in growth stages.
Starting up
The MENA startup ecosystem will continue to evolve – formally, it’s only a couple of decades old. In 2000, only six VCs were based in the UAE, which had just opened the Dubai International Financial Center, and Dubai Internet City with an eye on developing a more sophisticated tech ecosystem. That year, the US had 1,700 VC funds making investments worth $119 billion. By 2010, there were 31 venture capital funds in the UAE, at the start of a pivotal decade for the UAE startup ecosystem.
Investment activity in the UAE was spurred by the growing local ecosystem, but also increasing interest from international investors, as global investment funds took note of the region as an area of opportunity – a sentiment that has only grown with time. “[We’re] now starting to see a change in viewpoint on the Middle East from global investors,” Powell says. “There’s a lot more openness in coming to visit the Middle East to look at startups, and I’m really happy to see more and more global investors coming here, starting to think about it as a real destination.”
Building that reputation takes time and concerted effort from local governments to create a robust ecosystem, opening up to foreign investment, improving regulatory environments, allocating capital and incentivizing both entrepreneurs and investors. “People forget that the US had significant government intervention for 50 years prior to there being any sort of startup ecosystem,” Powell says. A major factor in that evolution was the development of deep tech, technologies that are not for end-users, but rather address scientific or engineering problems.
She outlines four layers in a startup ecosystem: Copycats, or clone startups, where a startup repurposes an existing idea; local innovations that address specific market needs; new consumer-facing innovation; and deep tech, which Powell calls “the most important phase”. In the MENA region, she notes that clones and localizations have some prevalence in the market, and more commercial and enterprise innovations are growing in the region, but “we’re still pretty far on the deep tech side.”
The mix of startups in the landscape is generally defined by the needs of the market, the gaps that founders identify and, in this region, government intervention. Financial technology (fintech) is currently dominating the MENA region, with $2.25 billion of funding spread across 351 deals in 2022, according to Magnitt. The combination of a young, tech-savvy population with a large amount of people without access to banking means that fintech presents a major opportunity. The unbanked population varies across the region, with 90% of the UAE population having either formal or semi-formal banking in 2022, compared to 35% in Egypt. Buy now, pay later apps are flourishing in the region, as well as online payment platforms, investment apps and crypto-exchange platforms. MNT-Halan, an Egypt-based fintech super app, raised $400 million in equity and debt financing from global and regional investors in February 2023, at a valuation of $1 billion.
Artificial intelligence (AI), while still relatively nascent, is an area with high potential, and is beginning to creep into an increasing number of startups, Powell notes. It also has a major role to play in deep tech, as its efficiency and seemingly limitless areas of influence could provide solutions to ongoing challenges in the region. Proteinea, an Egyptian startup, is an AI platform that combines deep learning models with biological automation to design and produce protein, with the ultimate goal of mitigating life-threatening diseases. In May 2022, it was accepted into the King Abdullah University of Science and Technology (KAUST) program, Destination Deep Tech, which aims to help these startups expand their reach and further develop their technologies.
Agriculture technology (agritech) is another major area of opportunity for the MENA region, out of necessity, as food security and water scarcity drive innovation in the space. Pure Harvest Smart Farms, a technology-enabled agribusiness startup, has raised a reported $387 million in total funding as of 2022, making it the most funded startup in the region. Another regional success story in this space is Red Sea, an agritech company that grows food using salt water, in harsh environments.
RedSea is also part of a relatively recent movement in the region, where original ideas and technologies developed in MENA countries grows into other parts of the world. “It’s a critical phase for the region,” Powell says. “I don’t know that you necessarily need a startup to expand in the US like you did 10 years ago. There are big enough emerging markets now where you can have a great listing, a great company utilizing one of the regional exchanges.” She sees Pakistan, North Africa, and Southeast Asia as the three key corridors where GCC startups are likely to expand, because they are similar markets that can be cobbled into a larger market.
ILLUSTRATION: Nadia Méndez/WIRED Middle East
Boys’ club
A report by Wamda notes that in 2022, of the near $4 billion raised by MENA startups, only $51 million (1.3 percent) went to companies founded by women, across 62 deals. Teams with founders of different genders raised $168 million (4.7 percent), with $3.7 billion (94 percent) going to companies founded solely by men. Sophie Doireau, CEO for the Middle East, India, and Africa at Cartier, says that it is critical that women are encouraged to start their own businesses. “Women have a sensibility that is different and complementary to men,” she says. “Why would we avoid the ideas of half the population? We know that these small and medium enterprises are the impact drivers in all our communities.”
“Saudi Arabia has the vision, resources and ambition to deploy into startups in a way that is almost unmatched…”
The Cartier Women’s Initiative is an international entrepreneurship program which selects female entrepreneurs from around the globe to win a cash prize, as well as mentorship and growth opportunities, run annually since 2006. Doireau notes that women who start businesses often face self-doubt and lack confidence in themselves. It’s vital for women to have a network of female entrepreneurs, as well as mentors to turn to for advice. “A crucial objective is to create a network for these ladies,” Doireau says. “Most of the time, they have nobody to talk to, they would love to have a mentor.”
Receiving advice and insight from people with more experience provides a significant boost to budding entrepreneurs. Other than a lack of access to funds, Doireau has observed that another obstacle women face is scaling their business – she notes that they often develop a business but do not know how to expand it. Sharif, General Manager of Flat6Labs, says that the make-up of the team at the core of startup is critical, and plays a major role in deciding which startups he accepts. “It’s what the team brings together, because you might have one that is technically gifted, yet you might have another one that is excellent in business development, sales, and they complement each other,” he says. Yet, according to Wamda, of the 62 female-founded startups that received funding in 2022, 48 were solo founders.
By definition, the startup ecosystem is an evolving, fast-paced world. Saudi Technology Ventures (STV) wrote in an outlook report that “the region can output 45 unicorns by 2030”, up from seven, as of writing. STV highlights fintech and ecommerce as two key sectors that can be disrupted, followed by logistics and real estate.
“The acceleration of the economic and technological ecosystem is driven by a growing talent pool, tech infrastructure, consumer adoption, as well as broad macroeconomic and regulatory reforms,” the report notes. Globally, most regions have seen a technology giant emerge, becoming ubiquitous and growing its offering – China’s Tencent, Amazon in the US, and India’s Jio are easy examples. There is a gap in the MENA region for such a titan to materialize. “In only 5 years, technology companies took over the top ranking of US stock market,” the report adds. “There is no reason why the technology sector on Tadawul [the Saudi exchange] cannot become as relevant as it is today in more developed markets.”
While the current macroeconomic landscape presents challenges, and startups will have to adjust to different standards (and valuations), there is plenty to look forward to for founders based in the MENA region, and investors interested in the region. “I think it’s going to take us another year, or a year and a half to get back to the good times of higher valuations,” Sharif says. “As with every capsule market, you have booms and troughs. We’re just going through that right now in the GCC.”
Source: wired.me
