Banking & Finance

Further slowdown before a rebound, says UAE VC firm

December 1, 2022, 4:00 PM

Gulf VC funds — The large Saudi market is expected to attract VC funds

Mena startup VC investment deals dropped 4.7% in 2022
Further slowdown expected before momentum returns
Recovery fuelled by opportunities to hedge cash against inflation

Following years of rapid growth, the Gulf’s venture capital (VC) ecosystem has slowed down, in line with global trends.

But the region’s underlying strengths and appetite for VC deals mean it will pick back up again late next year, experts from Apex Group have told AGBI.

“Up until about three months ago, we were still seeing lots of growth, but I think it’s become evident over the last three months, maybe four, that funds are starting to struggle to attract investors,” said Dubai-based Glyn Gibbs, head of business development for the Middle East and North Africa (Mena).

“There’s so much uncertainty. Fund managers are having to work harder to attract the funds in.”

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

Gibbs predicted a further slowdown in the coming months, but he believed things would eventually improve: “The start of 2023 may be slow, but I think the weight of money in the region and the optimism and the entrepreneurial spirit that’s here means that will quickly go behind us.

“We’ll get back some momentum. Investment opportunities will be there.”

Part of this recovery, he said, will be fuelled by the opportunities the Gulf presents to hedge cash against inflation.

“The money’s got to work somewhere. You can put it in a bank account, and what’re you going to get? Three or four percent? That’s not how you keep above inflation. You’ve got to invest in equities,” he said.

“If you want bigger returns, it’s got to be venture capital,” he added.

According to the International Monetary Fund’s latest Regional Economic Outlook report, the GCC inflation rate is expected to rise to 3.3 percent in 2022 and hit 2.3 percent in 2023. This is far lower than places like the European Union, where average inflation is currently hovering around 9 percent.

Gibbs said he’s already heard from one fund, with a large Saudi Arabian backer, that pulled back from a major investment after its Saudi partner “hit pause”.

After the slowdown and a tough winter for much of the world, he expects the Gulf’s venture capital sector to pick back from Q2 or Q3 next year — “by then, we’ll have better clarity and insight on the interest rate environment”.

Bhaskar Dasgupta, non-executive director at Apex Group Boards, said the three most important markets in the Gulf are Dubai, Abu Dhabi, and Saudi Arabia.

Dubai and Abu Dhabi developed their startup and venture capital ecosystems first and have benefitted from having an advanced startup ecosystem, boasting the right mix of regulation, incubators, data protection, active companies, talent, education and more.

Dasgupta said Saudi Arabia’s biggest advantage is that it is a very large market.

“Because of its size, even if there are some inefficiencies in the regulatory landscape, you will still have funds going there simply because the funds are better and there’s lots of liquidity.”

Data compiled by Wamda, the largest early-stage investment fund in the Middle East, found that funding for Mena startups in October amounted to $646 million across 69 deals, pushing the total for the first 10 months of this year to around $3 billion spread across 551 deals.

In October, the UAE was the dominant market, raising $460 million across 24 deals, with cleantech firm Yellow Door Energy accounting for the mammoth share of this with a fundraising last month of $400 million.

Egypt was second with $113 million raised across 18 deals, while Saudi Arabian startups raised $70 million across 12 deals.

The Yellow Door Energy deal saw cleantech become the dominant sector, but fintech was still the top player in terms of volume of deals, generating $70 million across 16 deals in October, with neobanks and open banking startups the main attractions.

Dasgupta said: “Fintech is the perennial favourite, because exits are easy. Banks and other financial institutions are happy to buy these fintechs or their technology. It’s easy to monitor and monetise. That’s why fintechs are a favourite in this part of the world and globally.”

He continued: “Adding to that, there are obviously huge inefficiencies in the logistics and e-commerce space,” which presents a key opportunity for startups and investors.

Dasgupta added that agritech and edtech both received a boost out of necessity because of the coronavirus pandemic, and the latter, in particular, benefits from the UAE’s uniquely international and mixed demographic.

“The UAE is a brilliant place to launch edtech — you’ve got 90-100 nationalities of substantial size. It’s a great place to test out edtech mechanisms in a controlled environment.”

The slowdown in the Gulf in recent months is reflective of global trends. KPMG reported that VC funding fell to a six-quarter low in the second quarter of 2022.

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

However, speaking in October, 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 may 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.

Dubai-based Lucy Chow, general partner at the World Business Angels Investment Forum Angel Investment Fund, said that the recent Gitex Global exhibition in Dubai showed that international VCs were also still eyeing the Mena region.

“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 $1 million and $1.5 million. I am certain there are many larger VCs wanting to do the same. I am not confident these deals will take place before the end of the year,” she added.