Issa Aghabi is the co-founder and managing partner of UAE-based VC, Access Bridge Ventures
Things over the past six to nine months have slowed down, not just in terms of investment activity, but in the number of startups seeking investment. We could in part put this down to the Eid breaks and now the summer, but the issue of a good pipeline precedes that.
We still receive a lot of deals, but the level of innovation leaves us wanting. Marketplaces, SaaS and fintech dominate, all offering something that is slightly different to the next startup that mails us their pitch deck.
Since the outbreak of the war in Ukraine, the global economic climate has deteriorated, and the effects are now coming to the Middle East region. Growth has slowed, uncertainty remains and investor appetite is diminishing.
Investment in the first half of 2023 dropped 20 per cent to $1.6 billion when compared to the same period last year. The number of deals halved in the same period, with the biggest drop seen in Egypt, where there was a 70 per cent decline in the number of deals although the value of investments remained steady with a 9 per cent decline.
The impact of the global chaos has affected the regional startup ecosystem, albeit with varying degrees of severity. The worst affected is Egypt, with its currency devalued, inflation through the roof and startup investment dwindling.
From a pipeline perspective however, Egypt remains a decent market, but it is all over the place, there is a lot of uncertainty, both political and financial. Like most investors, we want to invest in these promising startups in Egypt, but the wider market conditions in the country have made us vigilant. Perhaps this is why more and more startups in Egypt are relocating to Saudi Arabia, where there is still money.
Historically Saudi Arabia has been an investor driven market. There was far more money than pipeline, but now things are shifting and the market is normalising to one that is driven more by the startups. While there are still a lot of funds, deployment has slowed down, investors seem less eager to close deals at inflated valuations anymore. They are taking their time now, and no longer investing based on a pitch deck alone, or hype or the fear of missing out. They are doing their due diligence and when you do the due diligence, you spot the gaps and this is leading to a correction across the region. So even when you do find amazing entrepreneurs, their ability to close a round takes a longer time. This is a good thing. The Saudi startup ecosystem is moving beyond overvaluing startups. It is maturing and in the process weeding out the weaker companies. We are still extremely bullish when it comes to Saudi Arabia since there is a lot of positive government support and intervention, it is still an underserved market and on that basis, remains an attractive market for both investors and for startups to expand to.
In the past couple of years, startups in the region managed to raise a lot of money, particularly from regional investors, simply because it was available. They budgeted their fundraises for 18 months and now these startups are returning back to the investors, trying to raise again disadvantaged from the lack of foresight of how the economic climate would play out. Few will have met those ambitious valuations they had peddled in their last rounds and we are now seeing an increasing number of downrounds, flat rounds and in certain cases, we are seeing innovative deal structures from startups that have come to their senses and are pitching realistic valuations. This is a trend that has been playing out all over the world, not just the region. It took a little longer to reach our region as the startups here have been so well-funded in the past couple of years.
The UAE remains a very strong hub, with great opportunities and continuous postive governmental interventions, but we still do not see as many new companies as we have in the past. In the most advanced market in the region, we are yet not seeing innovative use cases for AI, for healthtech or edtech. Instead, the market is saturated with marketplaces, SaaS and fintech. This is a similar case across the region, everyone is on the hunt for innovative, homegrown solutions. While we are seeing a positive increase in this regard, it is not back to where it was before.
It is not all miserable. Recessions and tough economic climates result in more redundancies, which for the ambitious few, becomes the catalyst to launch their own startups. This is the scenario we saw playing out in the last global recession, which gave way to some of the most successful tech startups we have seen to date. For investors, it is a case of holding out, we are slowly starting to see some great startups come our way, those that raised 12-18 months ago who have returned with better terms and new entrepreneurs who have started something after quitting their corporate jobs or being made redundant in the recent swathes of tech layoffs and startup failures. It will feel like the ecosystem is retracting, as we will no doubt see more failures, but consider it a form of pruning, a way to allow the best startups to survive and thrive.