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Forget the gloom, startup funding will bounce back

Money appears to have dried up for new businesses but it is unlikely to stay that way as venture capitalists loosen their purse strings Creative Commons
Money appears to have dried up for new businesses but it is unlikely to stay that way as venture capitalists loosen their purse strings

The global slowdown in venture capital funding for startups has spread to the Middle East and North Africa (Mena), with May proving to be lowest month so far this year.

But local experts believe that while new trends are emerging within the sector, it will rebound quickly in the second half of the year.

Global venture capital funding in May reached $39 billion, according to data from California-based Crunchbase.

May was the first month in over a year when total monthly funding dropped below $40 billion. It was down 14 percent month-on-month and down 20 percent compared to May 2021.

Similarly, in the Mena region, startups raised $176 million across 42 deals in May, according to data compiled by Wamda, the largest early-stage investment fund in the Middle East.

While this was up 62.7 percent year-on-year, it was down 40 percent compared to April and the lowest month this year.

“The slowdown on the investments in the private market may be caused by the fact that decision makers are actively observing right now how recent events on the global markets have affected the public markets, including the drop in stock prices and the cryptocurrency crash,” Ryaan Sharif, UAE general manager at Flat6Labs, a Cairo-headquartered venture capital firm, told AGBI.

“I think there’s an element of sentiment where they want to sit back and observe, which has been going on, by the way, in Europe, [and] in the US in the last quarter.

“It’s only catching up in the GCC in this quarter. But I don’t think that there will be an overall slowdown in venture capital investments going into quarter three and quarter four.”

Cash ploughed into early stagers

Dubai-based Lucy Chow, general partner at the World Business Angels Investment Forum (WBAF) Angel Investment Fund said she was surprised by the 40 percent month-on-month decline in May but does not believe it is a cause for concern.

“I don’t believe this is a harbinger of continued bad news,” she said.

“Over the past two years, Covid changed the funding landscape. Less money went into early stages but bigger cheques were written for companies that were further along.

“This is one reason for the decline, as investors are now starting to back early-stage companies again.”

Chow noted there would be more investment into seed funding, meaning a smaller total pool of money each month overall. “I see this as a silver lining,” she said.

“Perhaps we will see a new trend: less money overall being invested but the overall number of startups that get funded, rising.”

Bianca Gracias, managing partner at Abu Dhabi-based legal firm Crimson Legal, which specialises in advising investors, startups and entrepreneurs, agreed there was now more of a focus on early seed funding.

“In advising investors we do not really see funds tightening, but investors just being more conscientious about where their money is being invested,” Gracias said.

“We are seeing that they all want the startups to be revenue-generating, whereas earlier they would invest even at idea-stage or prior to POC (proof of concept).”

Flat6Labs manages seed funds with total assets under management valued at more than $85 million, on behalf of around 25 institutions across the Mena region.

Sharif disagrees that there is more of a focus on early-stage funding. “I don’t agree,” he said. “There is more investment happening further up the funnel and there’s actually not enough access to capital at a seed stage.”

SmartCrowd, a real estate crowdfunding platform in Dubai which allows users to buy a fractional share of a rental property, has seen its user base grow 100 percent quarter-on-quarter and this month raised $3 million in bridge funding to finance its expansion plans in Saudi Arabia and Pakistan.

Siddiq Farid, co-founder and CEO of SmartCrowd, said the Mena region should benefit from the global slowdown.

“Our economies are growing both in terms of economic activity, as well as population,” he said.

“The region is well capitalised and liquidity is still there. That said, fundamentally sound businesses should not have a hard time raising capital.

“However those starting new ventures with unproven business models might find it more difficult.”

Flat6Labs’ Sharif said regional venture capital funds were still active and eager to invest. “I really think that we all have commitments to our LPs [Limited Partners],” he added.

“I don’t think that we’re going to stop making investments because we have to provide a financial return to them.

“There might be a slight press on the brakes to see if there’s any recalibration in valuations for some of these companies.”

The Mena region remains an attractive market for overseas funds. The Wamda report found that while investors from the UAE still dominate, foreign investors participated in half of the funding rounds in May, with US-based investors participating in nine, or a fifth, of all deals.