With each passing year, the Middle East and North Africa’s (Mena) entrepreneurship ecosystem develops and cements itself as a core pillar of the region’s economy and one of the main sources of job creation. Government plans across the region have elevated entrepreneurship and small to medium-sized enterprises (SME) as key drivers of economic growth, with governments allocating bigger budgets and establishing support organisations to aid the development of the sector. Last year saw the opening of Abu Dhabi’s Hub71, an incubator with an investment fund of $250 million, loosening of visa requirements for entrepreneurs in the UAE, Saudi Arabia and Bahrain where Amazon also launched its Amazon Web Services. This year, we’re likely to see the support for entrepreneurship continue, particularly from the private sector.
Some of the biggest investments came from the sovereign wealth funds (SWF) of the region. Saudi Arabia’s Public Investment Fund (PIF) and Abu Dhabi’s Mubadala led in funding startups based outside of the region. Over the coming few years, these SWF will look closer to home and begin supporting startups in the Middle East ecosystem. PIF announced a new vehicle worth $1 billion to invest in the region’s startups and SMEs, while several new funds and venture capital (VC) firms have emerged in Saudi Arabia. Mubadala, through its partnership with Hub71 has already made a start in investing locally.
But it is not just government-led investment that will spur this growth. Family offices will continue to find ways to be part of the startup scene. Driven by the younger generation of leaders at these entities, diversifying their portfolio away from traditional industries like real estate, has become more preferable as a strategy. Family offices will look seriously to startups for innovation for their portfolio, investing more strategically in funds and directly in startups to benefit their core business. Saudi Arabia’s family offices are likely to take the lead, particularly as angel investors in startups launched by entrepreneurs within their own network. In line with this, the traditional retail and commercial conglomerates will become more aggressive in their bid to digitise and innovate and will look to invest in tech companies or launch their own initiatives.
Valuations and Exits
As the funding available continues to grow, valuations of seed and Series A companies will continue to rise, perhaps unjustifiably. More early stage companies are receiving cheques worth over $1 million without launching their product or attaining a client base, but for startups beyond Series A, the path to profitability will be a serious question. Top line growth alone will no longer remain the story to sell, and cash burn will be probed. This is the ripple effect of the WeWork debacle, the charisma of founders will no longer be enough for the majority of VCs, instead, closer consideration of the balance sheet will drive investment decisions. Following Fetchr's near collapse, last mile logistics companies in particular, will be humbled in valuations and questioned on business model validation before claiming to disrupt incumbents.
While we are unlikely to have an exit the size of Uber’s acquisition of Careem for $3.1 billion, there will be a significant number exits as funds of the 2015 vintage mature and start preparing their companies to sell which could lead to some high-profile disappointments. Specifically in the e-commerce space, we will see mergers and acquisitions take place as competition between Amazon and Noon continue.
Areas of Growth
Alongside this, Chinese e-commerce players and investors will attempt to make more of an impression and establish a stronger presence in the region, alongside players in media and financial technology (fintech), bringing with them their own expertise and innovation. MSA Capital was the first Chinese VC to open up an office in the Middle East and will likely play a strong role in introducing its own portfolio of startups to the region’s markets and encourage investors from the Far East to take a closer look at Mena.
For startups looking beyond the Middle East, it will be the food tech space that will champion local innovation. UAE-based cloud kitchens company Kitopi has already expanded to London and New York, while new and exciting startups continue to emerge in virtual restaurant, home delivery and food services sectors.
In terms of pipeline, Saudi Arabia and Egypt will offer the most exciting startups and will continue to dominate headlines in the number of investments made. Egypt in particular will churn out more fintech startups focused on financial inclusion and will continue to solve for problems in its own ecosystem, particularly in transport.
This year will also be the year that electronic scooters will finally get the approval and ease of access in key cities across the region. What began as a frenzy for the market in Dubai in late 2018 and early 2019 was swiftly halted as the Roads and Transport Authority deemed them illegal. Now that Abu Dhabi has approved e-scooters, other cities with similar infrastructure will likely to follow suit.
But amid this bourgeoning growth, there remains plenty of challenges. The financial sector is in need of serious dialogue between the regulators, central banks, banks and fintech startups. Over the past year, efforts have been made in Bahrain, Egypt, Saudi and the UAE to establish fintech hubs, sandbox and regulatory labs, but fintech startups continue to struggle with no one set of regulations that apply across jurisdictions.
The political instability and ongoing protests in Lebanon have led to the unfortunate, premature demise of the Lebanese tech startups experiment. With daily disruptions to logistics, shuttering of banks and access to capital, Lebanese founders will look to relocate their startups elsewhere in the region, or will struggle to survive. It is a similar fate that has plagued Iraq’s embryonic startup sector, most of whom have relocated to the safer parts of the north in Kurdistan.