In the first half of 2024, startups in the Middle East and North Africa (MENA) raised a total of $768 million. This figure represents a significant year-on-year (YoY) decline of 34%, which has largely been attributed to the absence of megarounds—funding rounds worth more than $100 million. According to a recent report by Dubai-based financial analysis firm MAGNiTT, the lack of such substantial funding rounds has notably impacted the overall investment landscape in the region.

The Shift in Investment Patterns
Decline in Megarounds
In contrast to the first half of 2023, which saw five megarounds, the first six months of 2024 witnessed only one such investment. Saudi e-commerce company Salla secured a $130 million pre-initial public offering (IPO) investment in March, standing out as the sole significant deal in this category. This sharp decline in large-scale investments is primarily attributed to a shift in focus from late-stage to early-stage funding.

Rise in Early-Stage Investments
Despite the overall drop in funding, MENA has reported an increase in early-stage investment rounds and investor participation. According to MAGNiTT, early-stage rounds ranging from $1 million to $5 million have tripled, rising from 15% in 2020 to 45% in the first half of 2024. This trend signifies a growing interest among investors in nurturing startups during their nascent stages, potentially offering higher returns over the long term.

The increase in early-stage investments has coincided with a 30% YoY growth in the number of investors participating in MENA’s startup ecosystem. This surge in interest at the early stages suggests a strategic shift among investors, who are now seeking to diversify their portfolios by betting on startups with high growth potential.

Factors Influencing Investment Trends
Impact of Interest Rates
The fluctuations in interest rates over the past few years have had a profound impact on venture capital (VC) funding patterns. During the coronavirus pandemic in 2020 and 2021, interest rates dropped to 0%, leading to a flood of liquidity in the market. This environment spurred a surge in venture capital investments as investors sought higher returns in the absence of attractive traditional investment options.

However, by the end of 2021, as interest rates began to rebound, investors started gravitating towards more traditional assets like fixed deposits, real estate, and the stock market, which had reached record highs. This shift reduced the allure of venture capital, especially at the late stage, where investments are riskier and typically involve larger sums.

Strategic Nature of Early-Stage Investments
MAGNiTT CEO Philip Bahoshy noted that the higher expectations for venture capital returns, particularly at the late stage, have led to a more cautious approach among investors. Late-stage investments, which often involve hundreds of millions of dollars, are perceived as riskier, especially in the current economic climate. In contrast, early-stage investments, though still risky, require smaller capital outlays and offer a longer time horizon for potential returns.

This strategic shift towards early-stage investments aligns with the broader global trend of declining venture capital investments, while also highlighting some positive signals for the MENA region. Bahoshy emphasized that the MENA region is at an inflection point in VC activity, with moderate growth expected in the coming quarters, driven by continued international interest and government support.

Regional Performance
Saudi Arabia and UAE Leading the Pack
Among the MENA countries, Saudi Arabia and the United Arab Emirates (UAE) have emerged as the frontrunners in terms of VC funding and deal flow. Saudi Arabia reported the highest amount of VC funding in the first half of the year, with $412 million, albeit a 7% decrease from the same period in 2023. On the other hand, the UAE saw an 11% increase in the number of transactions closed, totaling 83 deals.

Bahoshy explained that while Saudi Arabia leads in terms of funding amount, the UAE excels in the number of transactions closed. This disparity is driven by the different investment dynamics in the two countries. Saudi Arabia’s late-stage investment activity is bolstered by initiatives like the Saudi Venture Capital Company (SVC) and Jada, which continue to support significant funding rounds. In contrast, the UAE has a more vibrant early-stage investment scene, although it has not seen any mega deals for nearly four quarters.

Emerging Markets: Qatar’s Potential
In February 2024, Qatar launched a Fund of Funds program aimed at attracting more venture capital. However, Bahoshy noted that the funds had not yet been deployed and are unlikely to impact Qatar’s funding figures for at least a year or two. Additionally, Qatar’s smaller market size compared to Saudi Arabia and the UAE makes it less attractive for international companies looking to establish regional headquarters, which in turn affects its ability to attract significant investment.

Looking Ahead: Future Prospects and Challenges
Positive Signals and Government Support
Despite the current slowdown in funding, there are several positive signals for the MENA startup ecosystem. The report by MAGNiTT suggests that the region is poised for moderate growth in VC activity, supported by ongoing international interest and government initiatives. These factors are expected to drive positive growth in the second half of 2024 and into early 2025.

Government support plays a crucial role in fostering a conducive environment for startups. Various MENA countries have introduced policies and initiatives to encourage entrepreneurship and innovation. For instance, Saudi Arabia’s Vision 2030 and the UAE’s National Innovation Strategy aim to diversify their economies and reduce reliance on oil revenues by promoting sectors like technology and finance.

Challenges and Uncertainties
However, the MENA startup ecosystem still faces several challenges. The geopolitical landscape in the region can be unpredictable, potentially impacting investor confidence and economic stability. Additionally, the global economic environment, including interest rate movements and inflationary pressures, can influence the availability of venture capital and investor sentiment.

Another challenge is the need for a more robust support infrastructure for startups. While funding is crucial, startups also require access to mentorship, skilled talent, and market opportunities. Strengthening these support systems can help startups navigate the initial challenges and scale their businesses more effectively.

The Role of International Investors
International investors play a significant role in the MENA startup ecosystem. Their involvement not only brings in capital but also introduces global best practices, networks, and expertise. The continued interest of international investors in the region is a positive indicator of the potential for growth and development.

However, attracting and retaining international investors requires maintaining a stable and transparent regulatory environment. Ensuring ease of doing business, protecting intellectual property rights, and providing clear exit opportunities are critical factors that can enhance the attractiveness of the MENA region for international investors.

The first half of 2024 has been a mixed bag for the MENA startup ecosystem. While the overall funding levels have declined, particularly due to the lack of megarounds, there has been a noticeable shift towards early-stage investments. This strategic shift, coupled with a growing number of investors and government support, indicates that the MENA region is at a critical juncture in its venture capital activity.

The future prospects for MENA startups appear promising, with moderate growth expected in the coming quarters. However, navigating the challenges and uncertainties will require a concerted effort from all stakeholders, including governments, investors, and startups themselves. By fostering a supportive environment and leveraging international interest, the MENA region can continue to build a vibrant and resilient startup ecosystem that drives innovation and economic growth

By Admin

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