The pandemic has wreaked havoc on international markets, leaving start-up markets in some regions hard hit. However, the start-up scene in the Middle East, while not left untouched by coronavirus, has weathered the storm relatively well.
Philip Bahoshy, founder and CEO of MAGNiTT, the first venture data platform serving founders and investors in emerging markets, is looking ahead with optimism after a promising H1.
According to MAGNiTT’s most recent report, startups in the MENA region attracted more than $1.2bn in funding in H1 2021, a 64 percent year-on-year growth. The UAE secured the largest share of transactions, accounting for 26 percent of total deals in the region being valued at $755m.
Egypt ranked as a close second with 24 percent of the share and $166m in investment, followed by Saudi Arabia, which stood at 21 percent and $168m in investment as venture capital investments into the MENA region, as well as Pakistan and Turkey, increased to a record level, to $3.47bn, in the first half of the year. Together, the top three regional hubs, UAE, Egypt, and KSA, accrued 71 percent of capital deployed.
The difference between the UAE and Saudi Arabia went from 41 deals in 2020 as a whole, to just 11 deals in the first half of 2021, closing the gap between the top three markets.
Commenting on how the current status of the UAE and Saudi venture capital markets compare to the preceding year, Bahoshy says: “Last year was characterised as a risk-off environment for investors, where many focused on supporting their portfolio companies and opportunistic investment.
“We have since seen a global return of investment into venture capital as technology becomes an interesting asset class. We have seen more capital deployed than any previous year in the first six months in the UAE and KSA, driven by larger later-stage investment.”
Elevated performance in Saudi
While 2020 was a positive year for VC investment in the kingdom, 2021 was a year that showed record-breaking investment flows into Saudi startups.
The value of capital raised in the kingdom for H1 2021 accounted for 14 percent of MENA VC funding and 21 percent of the region’s VC transactions. The kingdom is elevating its position from third to second place in the region’s VC market.
Funding for startups in Saudi reached $168m in the first half of the year, signalling a record-setting growth of 65 percent compared to the same period last year. The $168m in start-up investments amounted to around 94 percent of the total value of investments in Saudi emerging ventures last year.
The MAGNiTT report affirmed that the kingdom is witnessing a growth in the volume and quality of start-up investments coupled with an increase in the number of VC funds and angel investor groups, as well as a number of new initiatives being launched lately to stimulate the sector in line with the Saudi Vision 2030.
Emerging sectors
In terms of industry deal activity, fintech led the way with $222m invested into the sector in H1 2021 across MENA, Pakistan and Turkey. The UAE and Saudi Arabia accounted for 60 percent of MENA funding into fintech during this time. Saudi investments in fintech start-ups surged 1,700 percent in the first half of 2021 compared to H1 2020.
Jorge Camarat, partner at Strategy& Middle East, says the industry is well placed to enjoy a period of substantial growth.
“Regional governments have spotted the opportunity and have introduced regulations to advance the fintech market,” Camarat says. “International companies have also taken note. This is likely to stimulate further investment and accelerate the development of the market.”
MENAP regional manager at Checkout.com, Mohammed Ali Yusuf, says: “As the MAGNiTT report shows, not only are the quantity of deals increasing, but so too are the value of these transactions. The economic headwinds and greater investment mark the signs of a buoyant tech scene. With the continued support of regulators, we expect to see MENA more broadly become a new centre of excellence for fintech globally.”
Checkout.com earlier this year led a $110m funding round for Saudi payments firm Tamara, one of the Middle East’s largest-ever start-ups. Proceeds of the series A capital raise, which included both equity and debt, will be used to bankroll Tamara’s expansion across the Gulf markets by the end of this year and then the rest of the Middle East.
“In powering many of the region’s largest and fastest-growing technology businesses, we’ve served as an enabler of the digital economy and supported its foundational growth. We are proud of our record-breaking lead investment of $110m in Tamara, Saudi’s leading ‘buy now pay later’ firm,” Yusuf adds.
While investor appetite shifted towards bigger opportunities in the fintech space, the food and beverages sector also thrived compared to previous years. “F&B also did exceedingly well in the two markets driven by large investments in Kitopi in the UAE and Foodics deal in KSA”, Bahoshy says.
MAGNiTT is the region’s first venture data platform serving founders and investors.
Growing international interest
The presence of international investors also appeared to grow in the region, with the region attracting the attention of a larger number of global VCs. Around 31 percent of MENA-based transactions were conducted by investors based outside of the region in H1, 2021, a 4 percent increase on 2020. This was primarily driven by a maturing ecosystem, which has led to a number of VC firms setting up regional offices and deploying capital into these start-ups.
In the UAE, 42 percent of investors backing the country’s start-ups were based outside the region. “Despite Covid-19, we saw continued interest from international investors and new funds investing in MENA-based start-ups. As MAGNiTT further expands into emerging venture markets, we expect to see increased cross-pollination across markets like Turkey and Pakistan, as well as increased international interest in MENA,” says Bahoshy.
Challenges and outlooks
While the overall investment figures have surged, there was a dip in deals secured by early-stage start-ups, says Bahoshy. “KSA managed to reduce the gap in transactions between itself and the UAE. We can expect to see this gap further reduce by end of year, as government policies and initiatives to drive VC investment and accelerator programmes return in both geographies.
“MENA could exceed the number of exits recorded in 2020; 17 exits in 2020 compared to 15 in the full year of 2021. Nine of the 15 exits so far were announced by UAE- and KSA-based start-ups. Finally, we expect capital to reach new records, more than $2bn.”
In terms of what needs to be done to ensure sustained regional start-up growth, Bahoshy says that there are three key areas that require attention. “Firstly, reducing the cost of set-up and cost of doing business to ensure that founders continue to be attracted to building technology based companies,” he says.
“Secondly, ensuring access to new markets by removing barriers to entry for scaling companies into new geographies. Thirdly, encouraging the free transfer of talent which is the key ingredient to the growth of successful tech companies.”
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