Late-stage funding tumbles for UAE tech startups

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• VCs shy away from high-stakes investment
• No late-stage funding reported in Q2
• Fintech, enterprise applications and health thrive

Late-stage funding for UAE technology startups has declined sharply in recent months as the region’s risk-averse venture capitalists shy away from larger, high-stakes investments.

The latest report by Indian market intelligence platform Tracxn showed only $25 million was allocated to late-stage startups in Q3 2023, a year-on-year drop of 75 percent.

It reflects investors’ growing inclination to favour a more measured strategy.

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“The drop we are seeing in funding over the last couple of months is not alarming if you factor in market cyclicality,” Ryaan Sharif, general manager of venture capital firm Flat6Labs UAE, told AGBI.

“We are seeing investors pull back on making large high-risk, high-reward bets and instead taking a meticulous approach to due diligence and investing more in late-stage rounds, where there is lower risk and higher long-term investment viability,” he said.

The recent decrease in overall investment can be correlated to this decline in late-stage funding, especially as the latter has much larger ticket sizes, according to Sharif. So even a small dip in the number of late-stage deals will result in a greater drop in the total monetary value.

The Tracxn report also found there was no late-stage funding reported in the whole second quarter of this year. 

Lucy Chow, general partner at the WBAF Angel Investment Fund, said the drop in funding was across all stages this year. She pointed out two key drivers: “Firstly, there has been a valuation reset. Many tech companies were overvalued. Secondly, in the past, there was a strong exit market. Unicorns have truly become a rarity now.” 

$112m raised for UAE tech startups

Tracxn’s report revealed that UAE tech startups secured $112 million during Q3 2023, a 23 percent decline from the $145 million raised in the previous quarter and a 49 percent drop compared to the same quarter in 2022.

Seed-stage funding, the initial surge of capital into the business with the help of family, friends and other angel investors, also fell. 

It stood at $26.6 million, down 57 percent on the previous quarter and 66 percent year on year. 

“Seed funding grew in the past because there were strong exits,” said Chow. “But why invest in seed if they are no longer an attractive asset? One way this is manifested is that startups are finding it extremely hard to raise follow-up funding. This does not bode well for the entire startup ecosystem for at least the next one or two years.”

Early-stage funding reached $60 million – a 28 percent decrease from Q2 2023 but 50 percent up on Q3 2022.

Fintech startups stay strong

Despite the funding dip, certain segments are thriving. Fintech, enterprise applications and healthtech emerged as the top-funded segments. 

Fintech startups secured $78 million during Q3, up 358 percent on the previous quarter but 12 percent down on Q3 2022. 

However, there have been no IPOs of UAE tech startups in 2023 and no unicorns emerged in the third quarter. 

Among the emirates, Dubai led the way, raising $82.7 million, 71 percent of the total.

Key investors in the region include Wamda Capital, 500 Global and Hub71. In seed-stage investment, Global Founders Capital, B&Y Venture Partners and Preface Ventures were the top players. For early-stage investments, SC Ventures, S3 Ventures and e& were the leading investors. Bankai Ventures took the top spot in the late-stage category.

Sharif believes the interest from regional venture capital firms reflects the sector’s growing maturity. “I am certain that as confidence in the economy returns, we will see investors get more bullish on their investments,” he said. 

“I would however caution startups that irrespective of changes in VC investment behaviour, being able to demonstrate a clear roadmap to profitability and sustainable growth is going to be ‘table stakes’.”