Debt financing is emerging as the new source of funding for startups in the UAE, as ventures are eager to keep away from venture and private capital due to worries of ‘painful down rounds’ in the current tough market environment, industry insiders said.
The challenging funding dynamics has also led to a slowdown in new startup launches in the country.
“More and more ventures are [of late] opting to stay out of raising capital, and instead focusing on turning profitable by cutting costs and tweaking business models. This is leading to the emergence of new models like debt financing,” Khaled Talhouni, Managing Partner at Nuwa Capital, a leading Middle East–based fund, told Arabian Business.
“The reason for this is that many companies raised capital at valuations that would now be considered above their comparables – meaning their valuations are higher than what the market would offer if they were to raise now,” he added.
Talhouni said founders are currently opting to avoid diluting equity or even choosing not to raise funds entirely to avoid ‘painful down rounds’ until the environment improves.
He said the funding worries have also impacted the startup ecosystem in the region in terms of new company launches.
“There is a small decline in the number of startups launched, but again the overall 10-year trajectory remains very, very positive,” Talhouni said.
Startup focus: Building sustainable businesses
The Nuwa Capital chief executive said it would be wise for startup founders in the region to focus on building sustainable and profitable businesses in the near term, as regional startups do not benefit from the depth of capital markets – private and public – available to the US and other developed markets.
“One interesting opportunity however is that as global funds and companies come to the region for fundraising, regional and local companies will benefit from meeting these more globally focused businesses and taking some learning from them,” he said.
Industry experts said the drying up of venture funding in the recent period in the region – as also globally – has impacted the startup sector, as a very large number of companies with questionable business models and unit economics were funded during the boom years of 2020-2022.
Untapped debt financing opportunity in MENAPT
Talhouni, however, said the Middle East region remains significantly under-penetrated for small firms and access to debt finance remains elusive.
“This presents an opportunity for private credit/venture debt built for innovation and tech companies,” Talhouni said.
He said the wider MENAPT opportunity, still relatively untapped, is quite significant as the region is home to approximately 1 billion population, with 70 percent under the age of 30 and 80 percent internet penetration.
Talhouni said to tap the emerging opportunity, Nuwa Capital has developed a network of venture partners who create unparalleled value for and deliver expertise in key operational areas that are dedicated to support the portfolio in the areas of technology, operations, logistics and recruitment.
“At Nuwa we’ve also been fortunate to attract capital from investment firms like Al Faisaliah Group and the Dubai Future District Fund, which align with our value-creation investment approach,” he said.
Talhouni said they are seeing a growing interest in their fund from across government entities, private sector, as well as family offices which increasingly want to diversify and play a role in the region’s innovation journey as the market matures.
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