The start-up ecosystem in the Middle East and North Africa (MENA) region is fast emerging as a strong contender for venture capital (VC) investments from around the world, with the financial technology (fintech) sector becoming the lead sector for funding preference, according to a leading sector expert.
A potent mix of underdeveloped financial and banking systems, capital deprived small and medium businesses, nascent electronic payment systems and increasing vulnerability to climate shocks in many countries in the region is generating strong entrepreneurship with commercially viable solutions and attracting huge investment interest in the region.
“MENA’s start-up ecosystem is showing strong momentum, delivering record tech start-up funding events of late and dozens of new institutions investing in the region,” Alicia Sornson, program and partnerships manager for MENA at Village Capital, a leading global impact-driven and seed-stage acceleration and investment organisation, told Arabian Business.
“A full-cycle ecosystem is being born [in the region], with [investor] exits also being realised,” said the senior executive of the Washington DC-headquartered organisation, whose investment arm VilCap has made investments in about 110 start-ups.
Sornson said even governments in the region were also taking note and beginning to invest in fund-of-funds, as well as introducing regulatory reforms to encourage and develop the start-up system in their respective countries.
Incidentally, Village Capital, in partnership with the International Financial Corporation (IFC), have scheduled two acceleration-cum-funding events between June and August for 21 selected start-ups from across the region, including four each from Palestine and Jordan.
“We are constantly impressed by the vitality and ingenuity of the start-ups we encounter in ecosystems outside of the usual suspect [countries] in the region,” Sornson said.
Alicia Sornson, program and partnerships manager for MENA at Village Capital.
Besides extending $20,000 funding each to the top two start-ups in each cohort, the Village Capital-IFC programme is also meant to prepare the participating start-ups to raise funding from other investors post-program.
Sornson said fintech has become the most active sector for start-up investment in MENA in view of the serious lag in development in the financial and banking sector in many countries in the region.
“The need is real: MENA has the largest number of unbanked globally. Fewer than one in five adults in MENA hold bank accounts. Electronic payments are still nascent and 85 percent of all transactions are still cash based. Only five percent of banking opportunities cater to SMBs (small and medium businesses).
“There is a $260 villion lending gap in MENA,” Sornson said, pointing out the huge potential for commercially viable start-ups to thrive in the ecosystem.
Sornson said while much of the media coverage around fintech start-ups has focused on digital payments and e-commerce, Village Capital was seeing growth capital-worthy – and attracting – tech that is addressing other pressing challenges for the underserved populations in the region.
“That includes helping low-and-middle-income people open their first bank account, find a loan to start a small business, improve their financial literacy or build their nest egg for retirement,” Sornson said.
Venture capital funding in the MENA region increased by 12 percent from 2020 in the first half of this year, registering a half-yearly and quarterly record high level of capital distributed, according to Magnitt’s H1 2021 MENA Venture Report.
The region’s investments tripled between Q3 2020 and Q2 2021, while its transactions increased by 23 percent, the report said.
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