MENA startup ecosystem sees paradigm shift: Valuations and initial funding sizes drop

The region is also predicted to see a consolidation in the VC (venture capital) sector, with a drastic decline in the number of sub-scale funds under $50 million, paving the way for concentration of capital with the large and more successful funds.

“Such a [paradigm] shift in the funding sector dynamics will create a much more healthy environment both for founders and startups,” Khaled Talhouni, Managing Partner of Nuwa Capital – currently emerging as a leading player in early-stage venture funding in the region – told Arabian Business.

“Fundamentally, we see all the right dynamics to build for the long-term as the MENA VC investment is only 0.09 percent of its entire GDP, much lower compared to even India and China where VC investment stands at 1.21 percent and 0.74 percent of GDP.

“Current lower valuations make this an opportune time for VCs to step up their acts, especially in startups that are on a path to exponential growth,” Talhouni said.

He said his view is not just looking at the next 6-12 months, but in the next few years as the region has the potential to become home to businesses that can go from seed to exit with the right growth capital across stages.

“We see an overall increase of VC investment [in MENA] over the coming five years, as there remains a good amount of dry powder available in the market, and we can expect fund managers to begin to continue deploying in the region,” said the chief executive of Nuwa Capital, which announced five deals already this year for startups including Mascotte Health.

Real gap: Growth stage opportunity

Talhouni, however, said the real gap – and the huge opportunity for investors – is in the later stages of financing, specifically the growth stage at round sizes of $20 million and above.

“This is a ‘once in a generation’ opportunity to build long-term capital solutions for the region’s startups. This is because most funding in the region is focused on early-stage funding only,” he said.

“Also, I believe the region is at a tipping point, and due to the funding winter, there is an urgent need for investment firms to think longer term through a more diversified product,” Talhouni said.

According to data from CB Insights and industry sources, Series A, B, C deals declined by 5 percent, 39 percent and 50 percent respectively around the world in 2022.

Talhouni said growth and late-stage businesses in the region struggle because of the lack of domestic capital, and such companies raise capital either from a few sovereign funds or very rarely from international VCs.

“There are very few, if any, dedicated funds and/or platforms focused on investing at later-stage regional companies. If we need to build a truly flourishing ecosystem, local funding for later-stage startups must emerge rapidly,” he said.

The Nuwa Capital chief said the current ‘post-funding winter’ period offers a great opportunity for growth stage funding, as there is considerable focus by startup founders on reshaping business models towards efficiency and greater productivity.

“This has manifested itself in superior unit economics and a renewed focus on profitability or a path towards profitability,” Talhouni said.

Upbeat fund: UAE and Middle East

Talhouni said their fund is extremely upbeat about funding opportunities both in the UAE and the larger Middle East region going forward.

“We think the region is in the midst of a major transformation from state-led economies to more entrepreneurial and SME-driven economies. All of this is driven by government liberalisation, economic diversification and the emergence of new technologies that enable large-scale development, while effectively lowering the barriers for starting and scaling a business,” he said.

He said Nuwa’s early-stage fund is still around 60 percent under-deployed, and so is in a good position to take advantage of opportunities that emerge in the market.

“This means that we should be deploying in roughly 1-3 new companies each quarter for the coming 2 years. We also reserve roughly half that capital for follow-on financing in existing portfolio companies, as well as following on into future portfolios,” Talhouni said.

He said the fund also sees a large number of new opportunities in private label-driven retail and e-commerce.

“Other sectors that interest us are fintech overall, particularly those focused on enabling access to financial services both for firms and individuals, healthtech, and proptech,” he said.