VC firms ready for Mena investment rebound

Pexels/Karolina Grabowska

• Deals dropped 40% in 2023
• Saudi, UAE predicted to grow
• Investment appetite ‘strong as ever’

Venture capital companies expect investment activity in the Middle East and North Africa to rebound this year after a slump in 2023, with startups in Saudi Arabia and the United Arab Emirates likely again to dominate dealmaking.

In 2023 there were 517 VC deals in the Middle East, North Africa and Turkey. They raised a combined $1.9 billion, down 40 percent from 875 deals worth an aggregate $4.8 billion in 2022, the venture capital data provider PitchBook said.

Globally, VC investments had slowed before last year’s decline in the Mena region, which had bucked the broader industry trend partly thanks to the substantial backing of regional VC funds by government-related entities seeking to nurture their homegrown tech sectors.

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VC activity in Mena eventually ebbed as rising US interest rates, from near-zero to above 5 percent, provided alternative, higher yielding investment options such as bonds or savings accounts. Funds also paused as they sought additional backing from investors.

In addition, says Issa Aghabi, founder and managing director at Access Bridge Ventures, a Dubai-based VC firm that has invested $35 million in regional startups, many startups had already received sufficient funding and there were few newcomers to the market.

Aghabi, whose firm’s main investors are sovereign wealth funds, family offices and wealthy entrepreneurs, predicts that Mena VC investments will increase in 2024 versus 2023, accelerating in the second half of this year as funds that were “on the sidelines” return.

“People have done their first or second [fund] close and we're seeing a lot more deployment taking place,” Aghabi says. However, he says, VC firms are nonetheless more cautious and less willing to invest at such high projected earnings multiples as before.

His preferred sub-sectors within the tech industry this year are ecommerce, software-as-a-service, healthcare and education. “Saudi will continue to grow," he says. "The UAE will remain strong. Those are the two main markets, where 80 percent of the money will be spent.” 

Including debt financing, Saudi Arabia and the UAE accounted for 82 percent of Mena startup fundraising last year, according to data from Wamda, a VC company.

Talal Thabet, co-founder of Haltia.AI, a Dubai-based AI startup, says: “Raising funds presents a major challenge for tech startups in the UAE.”

Thabet says VCs in the UAE typically agree to invest at the pre-revenue stage, but demand a sizable 30 to 40 percent equity stake, "however, such terms may hinder future funding rounds, as excessive ownership dilution could impede the company's growth prospects," he says.

“While some VCs are great, others fall short of deserving the VC title.”

In 2023, 19 Mena VC funds closed, attracting $1.8 billion from investors, the second highest annual amount raised, PitchBook estimates. Nevertheless, that represents a steep decline from the $6.3 billion raised across 37 funds that closed in 2022.

Tamer Azer is a partner at Shorooq Partners, one of the region's major players, with $350 million of assets under management, which it invests mainly in Mena startups.

He says: “Last year, many regional VC firms were in their own fundraising cycles, and that fundraising may have been delayed given global uncertainty.

“There may have been additional due diligence as limited partners [fund investors] were deciding where to deploy funds to capture the opportunity, how much and how the global macro-outlook was likely to change. Generally, the market was more cautious last year.”

Azer predicts that deal volumes and aggregate transaction values will rebound later this year as GCC countries deepen efforts to diversify their economies away from oil and gas.

“The venture capital and technology industry are proving to be a very attractive and interesting sector for GCC countries for varying reasons,” Azer says. “The investment appetite among regional VC firms is as strong as ever.”