Middle East climate tech startups to be hot investment in 2023, but market still lags

To:

Al-Monitor Pro Members

From:

Samuel Wendel

Senior Market Research Analyst, Al-Monitor

Date:

Dec. 5, 2022

Bottom Line:

Despite rising venture funding for MENA’s startups in recent years, an area yet to generate broad interest from regional investors is climate tech — a label similar to cleantech that encompasses everything from carbon capture to electric airplanes. A handful of local startups — mostly focused on agricultural innovations — have received significant investments recently, but MENA’s climate tech space is nascent when compared to fintech or e-commerce. However, climate tech has been a bright spot in the United States, Europe and beyond in 2022. Amid a broader venture funding slowdown, climate tech startups raised a record $26.8 billion globally in the first half of 2022. The time looks ripe for MENA’s climate tech startups to boom too. Following Egypt’s COP27, climate issues are getting more exposure and the UAE’s upcoming COP28 should fuel momentum. There are positive signs too, like UAE solar power firm Yellow Door Energy announcing a $400 million equity raise in October 2022. That said, obstacles still complicate industry growth and MENA’s climate tech startups lag well behind markets like the United States when it comes to introducing new innovations such as carbon capture or electric vehicle charging infrastructure.

Background Facts:
  • Climate tech startups globally secured a record $26.8 billion in venture funding during the first half of 2022, and the sector is expected to raise over $40 billion for the full year, reports market intelligence firm HolonIQ. 
  • Sector companies secured several massive investments in Q3, including a $1 billion round raised by US electric vehicle charging startup TeraWatt. Meanwhile, global startup investments overall slumped in 2022: Q3 saw $74.5 billion in funding, down 34% from Q2, found analytics firm CB Insights. 
  • US climate tech got a huge boost in 2022 from the Inflation Reduction Act, a bill with $369 billion in funding for everything from electric vehicle tax breaks to carbon capture incentives.  
  • Many climate-focused venture firms launched in recent years in North America and Europe, like Lowercarbon Capital, which in 2022 revealed a $350 million fund aimed at carbon removal startups. 
  • By comparison, MENA has featured little investor activity around climate tech startups, despite significant regional vulnerabilities to climate change. According to startup data firm MAGNiTT, over the past five years, MENA has seen $484 million in capital directed toward sustainability solutions. UAE startups are the largest recipients, attracting $373 million across 29 deals.  
  • Israel is also an outlier. Investors injected a total of $5.2 billion into Israeli climate tech between 2018 and 2021, according to PLANETech, an Israeli nonprofit focused on climate change technologies. 
  • Major renewables projects are also common in MENA, with several of the world’s largest solar parks in the region. However, these projects have been the domain of larger companies, often global ones. Still, MENA has produced notable renewables companies, like Yellow Door Energy. Founded in 2015, it’s controlled by the private equity firm Actis.  
  • Agritech is a bright spot in MENA, with MAGNiTT recording over $250 million in funding for the sector in 2022. That aligns with a broader focus on food security: in 2021, the UAE pledged $1 billion to invest in climate-smart agriculture and food systems innovation as part of a global initiative.  
  • A notable startup here is Pure Harvest Smart Farms. Established in 2016, the UAE firm uses controlled environment agriculture technology to grow produce year-round in the Gulf. The company has raised over $380 million in funding, including a $180.5 million round in 2022
  • A 2021 regional investor survey conducted by the Abu Dhabi nonprofit Clean Energy Business Council found that 82% of respondents didn’t have any climate tech investments; however, 94% indicated they would consider such investments in the future. Top reasons respondents cited for avoiding climate tech were too few successful exits, scale problems, low confidence in the macroeconomy and a lack of investable opportunities, among others. 
  • MENA has lacked venture funds devoted to climate tech, but that’s changing. In 2022, two Egyptian angel investors launched the Climate Resilience Fund to invest in pre-seed startups addressing climate change. The fund aims to invest $25 million over the next two years, with a focus on Egypt. 
  • Programs supporting industry startups are cropping up. Hub71, an Abu Dhabi tech initiative backed by wealth fund Mubadala, partnered with Siemens Energy in September to support startups developing technologies addressing global climate change. This includes exploring investment opportunities.  
Alternative Scenarios:

Scenario 1: Venture funding for climate tech in MENA surges in 2023.

Following global trends and momentum around COP28, regional climate tech startups enjoy a funding wave across stages. This coincides with new sector-specific venture funds launching in MENA, paving the way for continued investments.  

Still, MENA’s startup ecosystem is just starting to mature overall and funding steadily declined through the first three quarters of 2022. That may continue into 2023, creating an especially challenging environment for climate tech companies (in part because plenty are capital-intensive projects that can require complex manufacturing, scaring off investors). 

Scenario 2: Bucking global trends, investors largely avoid MENA’s climate tech startups in 2023.

Global economic uncertainty hurts overall investment into MENA startups in 2023. That sees few regional venture funds show an appetite for homegrown climate tech (although they may target international opportunities) as the local sector is seen as too risky for general investors lacking domain knowledge. 

That said, although a huge wave of funding is unlikely across MENA, the industry is primed for progress in 2023. Interest in food security solutions is apparent, and the UAE is positioned to make moves around COP28, which could be instrumental in rallying investors to the cause. Simultaneously, other regional governments, sovereign wealth funds and corporate players have revealed climate-related objectives, which should benefit the sector. 

Conclusion - Most Likely Scenario:

MENA’s climate tech startups experience an investment uptick in 2023, concentrated in the Gulf, but sector activity remains sluggish in most countries. COP28 will likely see the UAE — alongside other regional countries — announce new initiatives and projects and funding for climate innovations, boosting investor confidence in the local market. That, combined with steady climate tech investments globally, may motivate more regional venture firms to consider the sector, while also pushing startup accelerators to launch local programs geared toward these innovations. Still, progress for homegrown climate tech startups will be uneven, with investors likely to continue focusing on food security solutions.  

Contributor Background:

Samuel Wendel is a senior market research analyst with Al-Monitor covering economic, tech and business trends across the Middle East. He has previously served as a journalist with Forbes Middle East and Wamda, where he reported on key industry developments spanning a range of sectors in the region.

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