The bumpy VC ride continues, but hope is on the horizon

Emirates

The past two years have been polar opposites for the venture capital world.

In 2021 VC funding broke records, with $343 billion invested in the US – four times the amount it reached in 2016. In the Middle East and Africa $2.6 billion was invested – 136 percent more than 2020.

Last year was a period of reckoning for the industry, in a climate of economic volatility, inflation and high interest rates. Funding and dealmaking continued, but at a slower pace and at different valuations – a pattern that’s projected to continue in 2023.

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It’s likely that the next 12 to 24 months will continue to put pressure on company valuations and result in a slower pace of investment overall.

International investors are showing signs of being more reluctant with their capital, reserving it for follow-ons in their existing portfolio of companies or in later-stage deals at discounted prices.

As we speculate about this coming year, it’s more useful to think about the silver linings, one of which is the positive change that will meet us on the other side. The macro and market environment will continue to be tough, but will also create a generation of entrepreneurs who are robust, resilient and adaptable.

Volatility and uncertainty have always been a part of doing business and we believe that emerging markets will set an example of the post-downturn, entrepreneurial zest.

For investors this is exciting, and for founders it is an opportunity to strap in, focus inwards and reassess their business. 

The silver lining also lies in the consolidation that will continue as mergers and acquisitions allow smaller companies to extend their operating lifespan, while larger players emerge stronger by gaining market share, adding revenue streams and entering new markets using non-organic pathways.

Geopolitics, economic volatility and concerns about climate change have been predominant themes over the past decade, driving technologies that localise the systems of food production, supply chain and water and energy management.

We can expect to see growing investment in opportunities that create productivity gains in these sectors, be it harnessing new ways of developing domestic supplies, improving supply chains or increasing efficiency.

The numbers prove this. Amid slower overall investments in 2022, the industries that have fared well are healthcare, climatetech, energy and transportation, driven by tailwinds including high oil and food prices, and government policies to curb emissions. 

Four trends will dominate the investment landscape for the rest of 2023:

1 Middle Eastern and African economies will be front and centre in the global investment landscape. Since the region will be relatively insulated from global market turbulence, it will be of growing interest to international investors. 

2 Blockchain and Web3 are here to stay as the enabling tech of the future. In a response to growing deglobalisation sentiment, we are likely to see more and more companies in the region build on decentralised blockchain infrastructure. 

3 Since Cop27 a number of pledges have been made, and commitments given to funding tech companies advancing net zero – but there are little to no projects to fund. Excited by the opportunity, climatetech founders will proliferate, paving the way for innovation in the areas of energy, water, food and supply chains. 

These will be opportunities that come with their own international marketing exercises and the Middle East will be on the map again towards the end of the year when Cop28 takes place in Dubai.

4 After the focus on the E in ESG (environment, social, governance), investors will invite more focus on the G.

As we have seen at companies such as Twitter, governance in business and politics will continue to have a high profile. As a result, investors will likely take a dim view of businesses failing to maintain high standards.

Economic dislocations or corrections mean that 2023 will not pass quietly, but will provide considerable opportunities for those who work out where to look.

Medea Nocentini is senior partner at Global Ventures