Saudi startup funding tumbles as era of cheap money ends

January 8, 2025, 9:31 AM

Commentators say Middle East investors have remained active, despite the overall drop in venture capital funding

Venture capital down 44%
Saudi Arabia still No 1 in Mena
UAE’s number of deals was 188

Funding for startups in Saudi Arabia dropped 44 percent to $750 million last year, the sharpest decline in the Middle East and North Africa, according to data analyst Magnitt.

Across Mena, venture capital was down 29 percent to just under $2 billion, reflecting global trends of high interest rates and investor caution.

Saudi Arabia was the region’s leader for funding value, Magnitt said, but late-stage dealmaking – a significant driver of growth – was noticeably absent.

The UAE’s funding total dropped by 8 percent in 2024, to $613 million. The Emirates still led the region in deal count with 188 transactions – a 9 percent rise on 2023.

“The decline broadly has been led by the removal of cheap money, which led to overvaluations and too much rubbish in startup portfolios,” said Bhaskar Dasgupta, chairman of the board at financial services provider Apex Middle East & India.

“Cheap money isn’t coming back any time soon. VCs are going to continue to see a shakeout – too many funds chasing too few investor dollars,” he told AGBI.

Dasgupta sees potential for some risk-taking to return during Donald Trump’s second term in the White House, particularly in ecommerce, fintech, healthtech and virtual assets.

However, he cautioned that venture capital businesses would need to play “a longer game” over the next two to three years and expand their capital-raising strategies.

Capital markets analyst PitchBook has pointed to a worldwide decline in VC fundraising in 2024. US investor participation fell particularly sharply, with the number of active investors 38 percent lower than in 2023.

Magnitt reports that VC exits fell by almost one-third to 27 in Mena last year as initial public offering ambitions faltered and merger activity slowed.

“In this region, VCs feel the impact more due to limited M&A activity,” said Prashant Gulati, an angel investor based in Dubai.

“They are feeling the pinch when trying to raise funds and are not able to convince limited partners that they will be able to return the fund in time [because exit opportunities are reducing].

"Startups are unduly valued and the rush to build unicorns is driving up expectations – not value.”

As late-stage deals vanished, investors switched their focus to early-stage startups, with 47 percent of Mena investments falling in the $1 million to $5 million range.

“The shift to early-stage investments suggests a cautious approach,” said Hasnae Taleb, managing partner at Mintiply Capital.

“This could drive a stronger focus on sustainable growth and profitability for startups, rather than quick expansion.”

Dasgupta echoed this sentiment, saying he had “derisked” by moving away from seed-stage startups to investing in revenue-generating businesses, even at the early stage.

Ecommerce was the sector that attracted most venture funding across the Middle East, Magnitt found.

Dasgupta said the sector remains a favourite in emerging markets thanks to “inefficiencies in the consumer goods sector, from payments to logistics to market places”.

He added that the US tariffs expected this year could boost ecommerce further as companies move production away from China to “Trump-favoured nations such as Saudi Arabia and the UAE”.

Taleb said strong consumer demand and simpler regulatory frameworks probably pushed ecommerce ahead of fintech in the Middle East, adding that she sees growth opportunities in both sectors.

Despite the overall downturn in funding, local investors have remained active.

“The majority of capital supporting regional startups comes from homegrown VCs like Saudi Venture Capital, Saudi Technology Ventures and Shorooq Partners,” said Lucy Chow, general partner at the World Business Angels Investment Forum and an AGBI columnist.

Saudi electronics startup Zension Technologies has just received funding from Aramco's VC arm Wa'ed Ventures. Its co-founder Khalid Saiduddin said: "For very early-stage startups it's still very active with VCs taking healthy risk, but for larger, later-stage rounds, the challenge is to show a pathway to profitability."

This is a global trend, he added, and although "the bar is higher than in previous years", regional investors remain "supportive of homegrown tech".

Philip Bahoshy, CEO of Magnitt, said he anticipates interest rate cuts will begin boosting capital availability within the next six to nine months, paving the way for a stronger funding environment in 2025.

But Dasgupta warned that inflation was still an issue and pointed to the uncertainty around Trump’s macroeconomic policy.

He expects VCs to adopt more targeted strategies, focusing on revenue-generating startups and reducing exposure to high-risk ventures.

“Just saying ‘deep tech’ or ‘AI’ won’t cut it any more,” he said.