How can the Middle East become a better hub for tech startups?
Raviteja Dodda is the founder and CEO of US-based MoEngage, a customer engagement platform. Kunal Badiani, is the Middle East, Africa and Turkey head at MoEngage.
Call it a pandemic-induced surge in adoption or a gradual build-up, the popularity of remote work and the subsequent enrichment of the labour force in developing countries indicates the massive positive changes that technology brings.
From an oil-focused economy to a tech-driven one
Countries in the region are steadily working towards shedding the tag of a petrostate by foraying into tech-first industries. For example, the UAE is heavily investing in the tech industry for the first time in its 50-year history.
Spending the past 50 years developing ties with global economies and building trade and tourism, the country is pivoting its focus to healthtech, edtech, big data, and AI.
The healthtech sector has recently observed significant investments, with Altibbi and Okadoc emerging as the top-funded startups with total capital amounts of $52.5 million and $22.3 million raised, respectively.
Opportunities in the edtech sector are expected to soar, with analysts predicting that edtech expenditure in the region will rise by 75 per cent and surpass $7 billion in the coming years.
Startups in the region raised approximately $3.6 billion in total funding, a 13 per cent uptick compared to 2021, with UAE and Saudi Arabia raising $31.8 million and $31.7 million, respectively in December 2022.
The UAE’s plans to become a leading global tech hub are not just limited to appointing an artificial intelligence minister (becoming the first country to do so) but earning the highest share of investment in the region by H1 2021.
Initiatives like the government-sponsored Sharjah Research Technology and Innovation Park are responsible for driving projects ranging from agritech to AR/VR experiential centers, 3D construction, and innovation in mass transit.
Diversification was a key initiative from the government, having amassed enough wealth from the oil business to invest in different businesses. This diversified portfolio, combined with a relatively tax-free economy (UAE introducing corporate tax at 9 per cent on profits above Dh375,000), helped Mena countries attract the best talent pool, thus enabling new-age startups to mushroom.
Challenges startups face and overcoming them
Mena businesses and their tunnel vision surrounding region-wise problems are a big blocker to growth. Startups need to address issues for global audiences. Only some startups have done that, like Anghami and Careem. The Middle East comprises over 20 countries, and if startups focus only on three to four top-tier countries, that is a massive challenge and must be addressed.
Another challenge is the talent crunch. Companies want the best talent working on projects (which are still evolving), making it almost impossible to hire them, especially for a startup with limited investment. Also, given the macroeconomic climate, the fat compensation packages are swiftly shrinking, making good hires even more difficult.
The total funding secured by startups doubled to $864 million in Q1 2022. But fears of a global recession have negatively impacted late-stage venture opportunities resulting in a 72 per cent dip in month-on-month funding value.
The valuable startups are downsizing significantly. Based on unrealistic growth projections, the super-inflated valuations of these startups are to blame. It is time to focus on realistic outcomes and capital efficiency. However, it is easier said than done, as most startups burn capital with no concern for efficiency.
The VCs in the region need to ensure they do not have bloated companies in their portfolio. Downsizing will neither help in achieving capital efficiency nor correct issues like overhiring. It is all down to having a sound business model.
Despite being heavily fragmented (owing to the size and diverse population), there are startups across the region that address more or less the same issue. Consolidating such businesses (through mergers and acquisitions) into one super-startup can raise funds and create a team capable of long-term sustainable growth.
Some companies are already addressing these challenges by fostering regional and global ties, nurturing talent (offering more equity, flexible work culture, unlimited holidays, and other welfare programs), and becoming capital efficient.
Although capital crunches are the reality, securing funding is not an issue in today’s Gulf market, especially with the rise in investors in Saudi Arabia supporting these startups. There is still a lot of interest in high-growth startups if the plan has merit and the founders are credible.
The situation, however, should encourage founders to build resilient businesses with a backup plan led by organic growth. While the next few months will pose challenges, startups that solve fundamental problems and add value will continue to grow.
Harsh market conditions always drive innovation if companies rely on the core ideals of customer-centricity, sustainable growth and leading by innovation. On top of these core ideals, brands in Mena need to supplement their business by building comprehensive on-the-ground teams, driving efficient capital inflows, creating robust business pipelines, investing in mindful expansion, providing highly localised and contextual support, and developing a solid community of peers and experts.