MENA startup valuations take a hit as funding tightens

• Startup investment deals dropped 4.7% to 466 this year
• Cairo-based VC firm expects resurgence in last quarter of year 
• US and UK investors more active in region than local funders

Funding for startups in the Middle East and North Africa (MENA) has continued to decline this year, in line with global trends, but industry experts remain optimistic that the end of the year will see a resurgence.

The tightening of cash has also meant investors are looking for increasingly bigger stakes, resulting in startup valuations in the region seeing a correction downwards.

Research firm Magnitt reported the number of startup investment deals in the MENA region dropped 4.7 percent to 466 in the first nine months of 2022, with the total value down 20 percent to $2.3 billion.

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Data compiled by Wamda, the largest early-stage investment fund in the Middle East, also showed that in September MENA startups raised $173 million across 51 deals, a 54 percent month-on-month slump in investment value.

One large deal, Saudi Arabia-based truck aggregator TruKKer’s $100m from Investcorp, accounted for the mammoth share of financing.

This reflected global trends, where KPMG reported that venture capital (VC) funding fell to a six-quarter low in the second quarter of 2022.

Research company GlobalData also reported that in the US there was a total of 5,705 VC funding deals worth $123.1bn during the first half of 2022, with total funding value down 21.7 percent and volume down 19 percent.

“The region always lags in terms of the global financial markets by about four to six months,” said Dubai-based Heather Henyon, founding partner of Mindshift Capital, which invests in women-led, early-stage tech companies in the Middle East and further afield.

“We have seen a slowdown in venture and funding since the interest rates were increased by the Fed in correlation with the rise of inflation.

“Valuations and pricing came down in the US before the summer. MENA is feeling the impact now and is course correcting.”

She added: “We have been spending more time on diligence before investing in new companies and ensuring that our portfolio companies are adequately funded to survive.”

Ryaan Sharif, UAE general manager at Flat6Labs, a Cairo-headquartered VC firm and one of the most active in the region, said he believed the last quarter of the year will see a resurgence.

“I think a lot of people forget that, during the last quarter [Q3], a lot of the VCs actually weren’t investing just because they hadn’t planned to run investment committees until October, November time, which is not something that is openly stated in a lot of reports,” he said at the company’s latest Demo Day during GITEX Global in Dubai last week.

The Demo Day showcased 10 of the latest startups to join Flat6Labs’ seed programme in the UAE.

“I think now what you’ll see leading up to the end of the year is more deployment happening,” he said.

Dubai-based Lucy Chow, general partner at the World Business Angels Investment Forum (WBAF) Angel Investment Fund, said global market pressure was having an impact in the region.

“VCs are reticent simply because they are holding back on the size of cheques they are willing to write,” she said. “They are still looking for deals, but I think the numbers in 2021 were significant because of the size of the cheques.

“While there were a few ‘mega rounds’ this year, we are back to where investors are looking to fund pre-seed, seed and Series A deals.” 

The majority of investors in the MENA region are still based locally, with Egyptian VCs the most active, but Wamda found that in September 20 of the 51 deals secured funding from overseas.

American investors were the most active in the region, followed by those from the UK.

Power shifting to investors

Chow said that GITEX Global showed there was still optimism among foreign VCs about the MENA region.

“GITEX has brought in dealmakers from outside the region. Many are in town. For example, I met with one who is leaving the region feeling they will fund early-stage MENA based startups and take them to Europe to scale. 

“Tickets would be between $1m and $1.5m. However, I am certain there are many larger VCs wanting to do the same. I am not confident these deals will take place before end the end of the year,” she said.

Flat6Labs’ Sharif also observed that valuations for startups have also gone down, as investors look to take a bigger slice before handing over cheques.

“The power is kind of shifting into more of the investors’ hand, in terms of dictating the terms, where before inherently there was more of a feeling of like FOMO [fear of missing out] between the VCs, where they were actually edging each other on to actually escalate valuations. 

“Now I feel that it’s the other way around. The roles have reversed a little bit, where the VCs have a lot more power against some of the startups, in terms of dictating what the terms should be. And now we’re at a point where we’re actually seeing a bit of a correction and that goes across the board.”

Wamda also highlighted the fact that startups founded by men won the bulk of the investment, with startups founded by women securing 0.03 percent of funding in September. This was the lowest monthly percentage so far this year, but Henyon was focusing on the positive.

“Women-led companies are often better positioned for these kinds of downward economic cycles since they are generally more capital efficient and do not expect billion-dollar valuations or overfunded IPOs,” she said.