Bright outlook but no more ‘growth at all costs’ for startups

RedSea

• Lower Mena funding expectations mean focus on short-term profitability
• Challenging for 12-18 months, but investment appetite will pick up
• Global Ventures new fund aiming at agtech, cleantech and energy tech

The challenging venture capital market means Mena startups are focusing on short-term profit rather than “growth at all costs”, according to a VC expert specialising in emerging markets.

Simon Sharp, partner at Global Ventures in Dubai, said that the lower funding expectations of founders has had an impact on valuations.

“That leads into the conversation that it is no longer growth at all costs – today there’s a real focus on the strength of your business model and profitability being achieved in the short term,” he told AGBI.

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Runaway inflation, climbing interest rates and market volatility in 2022 led to a slowdown in dealmaking and suppressed valuations which have continued into 2023.

“Valuations have decreased globally and we can’t carve the region out from that,” said Sharp. “You only have to look at some of the multiples that were being demanded a year ago versus where they are now.

“There’s normally a lag time between what happens in the US and Europe and when that filters through to the Middle East.”

Last year industry consensus was that Mena startup valuations were over-inflated and were not showing signs of correcting. As a result the region was seeing more exits, particularly in the UAE. 

In total, 57 Mena-based startups exited through M&As in 2022, a 30 percent increase from the previous year, according to data published last month by Wamda, the early-stage investment fund in the Middle East. 

The UAE accounted for the lion’s share of exits, followed by Egypt and Saudi Arabia, while the UAE was also home to the most active acquirers with 26 deals compared to 16 in 2021. 

Just three US companies bought regional startups last year, highlighting the withdrawal of global investors.

Global Ventures

Sharp said he expected it to be tough for the VC market over the next 12-18 months but that investment appetite will start picking up. 

“There’s lots of dry powder out there with VCs who have slowed down in the last six to nine months, and so we’re now expecting some of that to be invested in 2023 as everyone gets used to the environment around them, both regionally and globally.” 

Despite the current headwinds, Sharp said he was “hugely optimistic about the outlook for the regional VC landscape”.

“Even today we have anywhere between 300 to 400 opportunities coming across our desk every month so there’s a lot to look forward to.” 

Since 2020 Global Ventures has been involved in more than $1 billion of transactions. It will soon launch a new fund focused on sustainability themed investments, with a particular focus on agtech.

As a region, Menap (Middle East, North Africa and Pakistan) currently imports between 80-90 percent of the food it consumes. 

“The recent conversations at Gulfood were focused on indoor and vertical farming, and how food security concerns are pushing the boundaries,” Sharp said. 

“From our standpoint, agtech also extends to general supply chain disruption – whether you’re talking about last-mile logistics or drone deliveries, or dealing with inefficiencies that exist between businesses and suppliers.”

Global Ventures has previously invested in agtech companies including indoor farming firm RedSea and online marketplace Seafood Souq. 

“We’re also looking at cleantech and energy tech and understanding what that looks like from a Middle East and Africa perspective,” Sharp said. 

Wamda

According to Magnitt, the Mena region saw $3.15 billion of total funding in 2022, compared to $2.9 billion in 2021 and $1 billion in 2020.

Mena startups raised $3.94 billion in 2022 across 795 deals, a rise of 24 percent in investment value and a 22 percent increase in deal volume compared to 2021, according to Wamda’s 2022 annual review report.

Fintech remains the crown jewel, attracting $1.1 billion in investment, nearly double 2021’s figure and almost a third of the total amount raised last year.

The report also showed that the region’s VC landscape was dominated by the UAE, Saudi Arabia and Egypt, with the UAE seeing 250 deals worth $1.85 billion. 

Sharp noted that while the UAE remains the region’s VC hub, there is now a growing trend among Middle Eastern startups to expand within the region rather than looking to expand to Europe or the US to validate a product. 

Wamda