A reality check looms for Middle East's tech startups 

To:

Al-Monitor Pro Members

From:

Samuel Wendel

Senior Market Research Analyst, Al-Monitor

Date:

Nov. 9, 2022

Bottom Line:

After years of promising growth, MENA’s startups appear set to experience a course correction amid a broader global investment slowdown. Regional venture investment totals sagged notably in Q3 and are likely to continue falling against a backdrop of economic headwinds. Crucially, red flags are flying in Egypt as key startups struggle most notably Capiter, a B2B e-commerce platform now embroiled in scandal after burning through $33 million in funding in barely a year. It’s a sign that regional startups need to prioritize profitability and fundamentals over aggressive growth as operating conditions worsen. Still, startups in Saudi Arabia and the United Arab Emirates are enjoying significant support, and the sector has matured enough across MENA that it should avoid a catastrophic collapse.

Background Facts:
  • Q3 of 2022 saw MENA startups raise $512 million in venture funding, a 40% drop from Q2 and the lowest amount raised since Q1 of 2021, according to Dubai startup data firm MAGNiTT.
  • This comes after regional startups raised a record total of $1.8 billion during the first half of 2022, up 46% compared to the same period in 2021, again according to MAGNiTT. After venture funding surged to a record high of $2.6 billion in MENA in 2021, this year could also bring a new high; however, investments have fallen each quarter and dismal Q3 results point to a lackluster finish to the year.
  • This pullback slightly lags investment trends seen globally, as venture funding began slowing dramatically worldwide in Q2, falling 26% quarter-over-quarter to total $120 billion, according to US startup data firm Crunchbase.
  • Egypt in particular is showing signs of vulnerability. Alongside the news that Capiter was unraveling, which broke in September, key tech firms have been slashing jobs and cutting costs in Egypt. That includes transit company Swvl, one of MENA’s most celebrated startups.
  • This comes as venture funding in Egypt for Q3 dropped 43% quarter-on-quarter, with the total raised standing at $81 million. For comparison, in Q3 of 2021, Egyptian startups raised $276 million, according to MAGNiTT.
  • Dubai-headquartered Swvl, originally launched in Cairo in 2017, is experiencing this pullback very publicly: The startup debuted on Nasdaq via a SPAC in early 2022 only to see its shares plunge from $9.95 to about $0.43 recently.
  • There are bright spots. Venture funding in Saudi Arabia increased 93% year-on-year to reach $818 million across the first three quarters of 2022, reports MAGNiTT. Meanwhile, Saudi state entities earlier this year announced billions in investments in the metaverse, blockchains and other futuristic technology.
  • New funds also continue to arrive. In October, Cairo’s Algebra Ventures announced it had raised $100 million for a new fund, while Dubai telecom giant e& (formerly Etisalat Group) also announced a new $250 million venture fund.
  • Significant funding rounds are still coming together too. In November, the on-demand services platform Yassir, originally launched in Algeria in 2017, announced it raised $150 million. In Egypt, fintech platform MoneyFellows also announced a $31 million round in late October.
Alternative Scenarios:

Scenario 1: Startup investment activity in MENA stabilizes in 2023. Despite challenges, ongoing support for startups in Gulf countries, particularly Saudi Arabia, could sustain investor confidence in the region and prop up MENA’s tech ecosystem overall.

Still, it’s too early to tell how far regional startup investors will pull back. Startups in the UAE and Saudi Arabia look positioned to defy broader trends, but entrepreneurs in many MENA markets already face worsening conditions. For them, an investment downturn could cause lasting damage.

Scenario 2: MENA’s startup bubble bursts as investors flee the market en masse. Despite progress, the region’s startup sector is still relatively nascent. The boom times have seen soaring valuations and startups aggressively pursuing growth at the expense of profitability, setting up many for failure as funding dwindles. Investors could sour on the market if more prominent startups like Capiter fizzle and saddle their backers with significant losses, kicking off a sector death spiral amid broader economic challenges.

Yet this seems unlikely. Startups in the UAE and Saudi Arabia still enjoy plenty of support and new funds continue launching. That dry powder will help many local startups survive a downturn in the near term. Plus, MENA now has several successful homegrown tech firms, like Careem, which serve as proof points that will help keep investors engaged.

Conclusion - Most Likely Scenario:

MENA’s startup ecosystem faces a serious reality check but doesn’t collapse. Unlike Silicon Valley, where investors are cooling on overhyped things like crypto, many startups in MENA are tackling basic issues around finance, e-commerce and transportation. These startups must adapt to a challenging operating and fundraising environment as regional venture investment totals are likely to continue falling into 2023, but even a recession won’t significantly impact many regional opportunities long term. Expect more notable casualties like Capiter as other free-spending startups hit the wall. Some so-called “tourist capital” will likely flee the market, but MENA also now features more sophisticated startup investors who will stick through tough times (although there’s clearly a need for better due diligence and governance). Regional venture firms may struggle to raise new funds if there’s a prolonged market slump, but those with dry powder should see a downturn as an opportunity to invest at a steep discount into startups with sound fundamentals.

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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