What awaits startup exits in Mena?
Looking back, the year 2021 was hard to emulate. After the pandemic-induced funding boom seen in 2021 and the first few months of 2022, high inflation and rising interest rates have widely spooked investors, resulting in a significant cool-off in funding and subsequent fall in startup valuations.
Funding-wise, 2022 was a year of a mixed bag as far as the startup ecosystem is concerned. Startups based in the Middle East and North Africa (Mena) raised $3.94 billion in 2022, a rise of 24 per cent increase on the year prior.
Region-wide, late-stage funding activity has been hardest hit due to falling public stocks, with startups opting for drastic measures such as layoffs, salary cuts and scaling down operations. But, startups at the earlier stages of funding also suffer a sharp blow.
"Valuations have definitely come down. There's been a valuation adjustment, as the strength is now with the investors in terms of valuation rather than the startups," says Tariq El-Titi, a startup venture specialist at Janus Ventures.
“It's become much harder to raise for pre-Seed and Seed ventures since the middle of last year to date. I see that there’s a growing concern even among startups that have already raised the pre-Seed or Seed round. They tried to raise rounds last year to prepare for what they felt was going to be a difficult period in 2023, with most of them trying to have enough liquidity to be able to see themselves through to 2024 and see how things play out,” he adds.
With equity funding becoming tougher and many founders experiencing fatigue, there is an increased desire to exit. Last year, merger and acquisition (M&A) activity saw a slight bump, with the momentum expected to continue into 2023 as consolidation will begin to take hold.
According to the Wamda Research Lab, a total of 57 Mena-based startups exited through M&As in 2022, a 30 per cent increase from the previous year. A further 11 Mena-based startups announced acquisitions of international startups, up from eight in 2021.
"Everyone is looking very positively towards opportunities in M&A. I think this is really the best time for consolidation. As a VC, working to consolidate different markets and sectors is such a strong thing to focus on right now," says Hasan Haidar, founder and managing director of Plus Venture Capital.
Geography-wise, as the recipient of the maximum funding last year, the UAE clocked in the most exits with 23 homegrown startups getting acquired, followed by Egypt where 14 startups got acquired. Saudi Arabia saw eight startups exiting. E-commerce, including B2B e-commerce platforms, fintech and foodtech dominated in terms of sector exits.
The UAE was also home to the most active acquirers with 26 deals, followed by KSA (15) and Egypt (10). When compared to 2021, UAE companies acquired 16 startups, Saudi Arabia acquired only four while US-based companies acquired seven regional startups. Last year, just three US companies acquired regional startups, highlighting the withdrawal of global investors.
Smaller ecosystems also saw an uptick in M&A activity, including Iraq, Kuwait, Jordan and Qatar.
Varying market conditions
The overall M&A activity in the Mena region remains largely subdued, which is primarily down to the fact that the early-stage deals are the ones that dominate the funding landscape as the ecosystem is still young and beginning to mature. This is in addition to the fact that some founders may put unrealistic price tags on their ventures, ultimately making them non lucrative propositions for an exit.
Still, the relative spurt in the M&A activity seen last year came as the result of higher capital inflow into the region and the rise in late-stage funding, with startups scouting smaller businesses to expand their geographic presence, complement their product offering and bolster their tech talent.
Examples include Saudi Arabia’s Foodics acquiring Jordan-based POSRocket, Jahez's $172.9 million acquisition of Saudi compatriot The Chefz, Kuwait-based Floward's acquisition of Mubkhar and Jadwa Investment's acquisition of Dabdoob, which looks to to ramp up its presence in the Saudi market.
“In the region, the older school companies are not really that familiar with how to acquire startups. There's a learning curve locally that needs to be done. We're not seeing a lot of local companies or corporations buying earlier startups or anything like that. And the reason why that happens a lot more in the US and India and other markets is that some of these companies that are doing the M&As were startups themselves like Cisco, Google or Facebook. They were making value with that path of acquiring other startups,” says Haider.
"Yet, we are starting to see that shift happening. We are starting to see startups getting to the stage and level of size where they're not startups anymore, they can start acquiring others themselves. It's just an evolution of the ecosystem," he adds.
Haidar expects more consolidation in crowded niche sectors where incumbents snap up competitors and focus more on inorganic growth.
“There were a lot of startups that sprouted up in different parts of our region such as Saudi Arabia, Bahrain and Kuwait in the past couple of years and they are all doing the same thing. None of those markets are big enough for them to sustain themselves until they become big companies. So, mergers between geographies with companies that are doing the same thing, rather than going in and competing, make a lot of sense.”
Examples of this trend include Egypt’s Appetito, which acquired Tunisia-based Lamma in June 2022 to increase its presence in Morocco, Tunisia and West Africa, and then later last year it announced a merger with Saudi Arabia-based counterpart Jumlaty.
Acquisitions in the region reflect the general funding patterns. Last year saw a dwindling pace of global investments flowing into the region; thus, there have been very few transactions taking place where international companies acquired regional startups.
While the current economic volatility plays the most part in scaring global investors away, another factor to consider is that a lot of products in the region are developed with a localised approach with a non-existent global appeal, which can make global investors a bit skittish, argues Mohamed Masry, founder of Egyptian AI startup Tactful AI.
“If there's a foreigner investor looking to expand to the region, they would definitely buy an existing company with existing operations. But if they are looking to buy a technology that can be deployed to other markets beyond the region, localisation of [the product market fit] remains a huge barrier in the way of getting regional startups acquired. Going forward, there will be startups cracking that glass ceiling," he says. "Moreover, there are still some region-specific complications related to investment laws that can make investors wary.”
In May last year, Tactful AI was acquired by Belgium-based Dstny Group. The deal has enabled Dstny to benefit from the startup's AI capabilities while helping Tactful AI reach a wider clientele across Europe.
"From the buyer's perspective, there was a synergy in terms of product vision that accelerated the decision. We both look to build a technology with a fresh view on how AI is used in customer engagement. They have a strong vision of the product and its future," Masry adds. "The progress made with our product in terms of technology and team is going to cut short years of research and development (R&D) effort from the side of the buyer. It was an easy choice for Dstny to acquire us as opposed to recreating all this from scratch."
Another big highlight of M&A activity last year has been the increased appetite of startups to scale across borders by acquiring similar-sized counterparts in global markets including Europe, US and Africa.
As many as 11 startups have purchased global businesses in 2022, with Turkey-based startups, in particular, being popular targets for regional startups.
The count excludes SWVL's acquisition of Volt Lines and Zeelo, which were revoked in January 2023.