After two years of ongoing uncertainty, the investor hesitancy that defined the beginning of the pandemic has dissipated entirely, as startups in the Middle East and North Africa (Mena) raised close to $3 billion in 2021, a record-breaking amount for the region. We expect this trend to continue this year with more deals and larger cheque sizes (particularly in the Series B and C stages) as the region’s ecosystem matures and valuations soar. Pre-pandemic, early stage valuations hovered around the $5 million mark, today it stands at around $10-15 million for seed stage startups.
Startups have proven their tenacity and their necessity in the digital era and those with money are taking greater notice. Recently, we have seen more family offices take an interest in VC funds, this will continue this year, alongside family businesses and corporates engaging more with startups, whether via direct investments, partnerships or venture-building. High-net-worth-individuals in the region who want to diversify their portfolios and increase their exposure to technology are likely to become “super angels” or establish single LP funds, shunning the traditional VCs to assume greater control of their investments. These individuals will have core areas of focus and provide startups with “smart money” and valuable networks and expertise in their field.
Sovereign wealth funds (SWF) will also turn their attention to the region. Over the past few years, they have become active investors in global VC funds and startups, but this year will see greater interest in the region’s offerings. Leading this charge will be Saudi Arabia’s PIF and Abu Dhabi’s Mubadala, ADQ and Abu Dhabi Growth Fund (ADG). Both PIF and Mubadala accounted for the largest contributors to Softbank’s first Vision Fund, which was fully deployed without a single investment in the Middle East and North Africa. In fact, several global startups that benefited from this fund eventually expanded to the Middle East, competing with the region’s local players. But the tide has turned somewhat with the Japanese VC’s second fund, which led two mega-rounds in the Middle East last year – Kitopi’s $415 million Series C round and Unifonic’s $125 million Series B.
Such large rounds, backed by big international investors, will become more common this year. Sequoia Capital has established a presence in Dubai and is now considering investments in the region after investing in Egyptian fintech Telda. With two of the biggest names in VC taking an interest in Mena, we can expect other international investors to make their way here, slowly but surely.
This level of investment, larger rounds and rapid growth of the startup sector will create more unicorns in the region, while some valuations will no doubt be over-inflated, others will be well-deserved. We can expect at least three unicorns to emerge this year, most likely in the UAE and Saudi Arabia, whose governments have made concerted efforts to create unicorns in their own markets. The UAE launched the Entrepreneurial Nation Initiative which seeks to establish 20 unicorns by 2031, while Saudi Arabia’s STV is looking to raise a $1 billion fund to nurture and fuel the creation of more unicorns in the region.
Saudi Arabia has also made strides in finding alternative financing options for startups. It is pushing its secondary capital market, Nomu, as of late. We have already witnessed Jahez launch its initial public offering (IPO) on the Nomu, raising in excess of $400 million with PIF-owned Elm set to list 30 per cent of its shares this year. After the buzz around SPACs last year, IPOs are likely to become a more attractive exit route for startups, which retains capital in the region and allows startups to remain independent. An excellent example is Egypt’s Fawry, which continues its positive impact on the country after listing on the Egyptian Exchange back in 2019 and today enjoys a market capitalisation of over $1 billion. But before the region’s stock exchanges can entice startups to list, there are many liquidity and regulatory hurdles that need to be resolved first.
For most startups however, the more likely exit route will remain an acquisition, typically by a global player. We are likely to see more mergers and acquisitions in the region from international companies who want to tap into the region. We have already seen US-based cloud kitchen Reef Technologies (another Softbank-backed startup) acquire UAE-based iKcon while the Sweden-based Stillfront acquired Jordan gaming startup Jawaker for $205 million.
Last year we highlighted Saudi Arabia as the market to watch as startup activity flourished in the kingdom. Regulators, particularly in the fintech sector in the country have demonstrated a willingness to work with startups and with an open banking policy framework in the pipeline, it has the potential to become the regional hub for fintech in the not-too-distant future. This will have a ripple effect across the region as other markets try to keep pace with the ever-evolving fintech landscape. The digitisation of the past two years will continue and the banking and finance sector will not be able to escape it. The success of neobanks and other fintech startups across the world highlights the potential of fintech if regulations are eased in Mena, while also helping to curb the high rates of financial exclusion.
As consumers become more comfortable with handling their banking and financial transactions online, we are likely to see more widespread interest in online trading and in cryptocurrencies. This year will see crypto become more mainstream in the Middle East, especially after the meteoric rise of Bitcoin and the large rounds raised by several crypto-exchange startups in the region, including BitOasis.
In the same way that cryptocurrencies decentralise finance, Web 3.0, which is built on blockchain technology, will decentralise the internet. This will provide users greater control over their data, which today sits in the hands of a small number of internet giants like Google, Amazon and Facebook. While the region is unlikely to play a significant role in the development of Web 3.0, we will see startups emerge in this space while regulators will have to figure out what their role might be, if any.
Finally, superapps will become more widely used in the region, starting with Careem. Providing users several goods and services on one platform offers a level of efficiency and ease that consumers today demand and require. In the past year, Careem’s strategy of offering everything from food delivery to money transfer, saw a 2.5x spike in the number of customers using multiple services on its platform. There are several other superapps in the region and more are likely to emerge, some focusing on a niche, others providing a wider variety of services in a bid to capture a larger share of the market. These superapps will all provide offline retailers the opportunity to access a captive online audience while making use of the platform’s delivery and fintech solutions to sell their goods online.