Analysis

MENA startup funding poised to recover in second half of 2022

July 29, 2022, 11:17 AM

Shoe, Footwear, Clothing — Flat6Labs was the most active investor in the MENA region last year

Region affected by global slowdown in H1
Dubai’s 1,000 metaverse companies contribute $500m to economy

Last year was a standout for Middle East and North African startups in which many notable records were broken, including the largest funding round to date and the highest number of deals.

The total amount of investment raised by regional startups was pushed to $2.8 billion across 639 deals.

This constituted a quadrupling of investment, with roughly half the capital being raised by startups in the UAE – $1.46 billion across 196 deals.

The emirate secured its spot once again as the Middle East’s most active startup hub, according to data compiled by Wamda, the largest early-stage investment fund in the Middle East.

This success has continued into 2022. MENA startups raised $1.68 billion in the first half of the year – 46 percent higher than compared to the same period in 2021 – says a report published by startup data platform MAGNiTT.

Notably, startups in the UAE accounted for 27.3 percent of all deals closed across MENA, and 34.4 percent of all funding raised so far in 2022.

Putting on the brakes

However, while the startup ecosystem observed a two percent year-on-year increase in total transactions, MENA-based startups closed 12 percent fewer deals in H1 2022 than in the second half of last year.

This was driven by a general decline in venture capital (VC) activity over Q2 2022.

The MENA region has not been immune from the recent global slowdown in VC funding for startups, with May proving to be the lowest funding month so far this year.

Wamda reports that MENA regional startups raised $176 million across 42 deals in May. While this was up 62.7 percent year-on-year, it was down 40 percent compared to April and was the lowest fundraising month this year.

Despite this, experts are predicting it will rebound quickly in the second half of the year.

“May was a difficult month but we, as I imagine the majority of the VCs, will not stop investing in startups,” Ryaan Sharif, general manager of Flat6Labs UAE, a Cairo-headquartered venture capital firm, told AGBI.

“The month of June was an excellent month for the MENA region with 66 deals closed worth $324 million.

“The UAE’s contribution was $278 million – signifying a 57 percent increase in deal volume and 84 percent increase in deal value month-on-month.”

Sharif expects this positive sentiment will continue into the second half of the year, with both regional accelerators and VC funds committed to making investments.

However, he notes that investors might briefly pause to see if there’s any recalibration in valuations of businesses.

“We have seen companies come to the realisation that they need to be more realistic with their valuation expectations, especially in terms of where they are with traction and the size of markets that they are operating within,” added Sharif.

“The next few quarters should dictate this valuation correction and the VCs will play a pivotal role in making it.

“Valuations will adjust, but this does not mean we will not deploy capital.”

Winter funding chill

Flat6Labs was ranked as the most active investor last year, owing to the 59 startups that graduated from its programmes and raised investment.

It also has total assets under management valued at more than $85 million, on behalf of around 25 institutions across the MENA region.

However, other industry experts are more circumspect about the speed of the market’s adjustment and believe appetite will remain subdued until the year’s end.

“The funding winter that has descended on the tech investment space, while sudden, is not unexpected,” Prashant Gulati, a Dubai-based angel and early stage investor in startups and young companies across India, Middle East and the US, said.

“On a positive note, the lack of investment interest today only means that there will be deployment pressure in the next few quarters, because money needs to work to give returns.

“There is consensus that the rebound will begin, maybe slowly, by the end of 2022.

“It may be limited to a smaller segment of companies that can prove they have a clear path to profitability and growth. MENA investments will generally follow a similar trend.”

Face, Person, Human — This month, Dubai’s crown prince Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum announced a strategy to harness the future growth of the metaverse in a bid to boost its economy by $4 billion by 2030

Metaverse bounce back

In the meantime, the Dubai government shows no sign of slowing down on its ambitious plans to further embrace technology advancements.

It is now seeking to make itself a global hub for Web 3.0 technologies including the metaverse, blockchain and NFTs.

On July 18 it announced a strategy to harness the future growth of the metaverse in a bid to boost its economy by $4 billion by 2030. The strategy includes a fivefold increase in the number of metaverse and blockchain companies, as well as creating 40,000 jobs in the sector.

Dubai currently has 1,000 companies working in the metaverse sector. It already contributes $500 million to the national economy, according to the emirate’s crown prince Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, who announced the new initiative on Twitter.

“While people are still looking at such immersive technologies with some uncertainty, Dubai has gone ahead and started putting the necessary pillars in place,” said Gulati.

“The setting up of VARA (Virtual Assets Regulatory Authority), and the proposed regulations governing the metaverse and the virtual environment is a great example of it leading from the front foot and proving itself as a global hub of technical innovation.”