Investors go lukewarm on startups but Riyadh is red hot

Tabby

Expectations for venture capital funding were tepid going into 2023. Rising inflation and interest rates, combined with a global economic slowdown, resulted in noticeable investor hesitancy.

As fighting in Ukraine persisted and consumer spending started to drop, VCs in the region focused more of their funds on propping up their portfolio companies than seeking out startups. 

The $4 billion raised by startups across the Middle East and North Africa in 2023 represented modest growth of 1.7 percent year on year, but this belies a more dismal reality for the Mena region.

Close to half of this came from debt financing, which tripled last year to $1.77 billion. Discounting this debt, the total investment raised by startups amounted to $2.25 billion, a drop of almost 35 percent. 

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Surprisingly, the country that suffered the worst decline was the UAE, in which investment levels dropped by almost 65 percent (without debt).

Egypt did not fare well either, with investment dropping by almost 40 percent year on year (without debt) while the number of transactions halved. Increasingly, Egyptian startups are now opting to relocate to Saudi Arabia in a bid to survive and gain access to investor capital. 

The Saudi exception

Amid the gloom, however, there was good growth in Saudi Arabia. It is luring top startups such as the UAE-founded buy-now-pay-later company Tabby, which has set up its headquarters in the kingdom ahead of a planned IPO.

Funding in the oil-rich state increased by 48 percent (without debt) to $1.26 billion and has more than doubled since 2021. Saudi investors have become the most active in the region. Well-funded startups in the kingdom have become the much-needed acquirers of others in the rest of the region. 

Saudi Arabia is expected to maintain this growth, especially if oil prices rise. The government has shown a strong commitment to enabling founders and cultivating startups, enacting laws and regulations to make it easier to set up companies.

As the region’s biggest economy, it has an unmatched pulling power for companies looking to scale beyond the smaller markets of the Middle East.

The knock-on effect is likely to be that governments elsewhere in the region move to attract talent and nurture their own startups. But few have the coffers to compete, especially now that Saudi Arabia is becoming a more open society, providing the comforts more readily associated with places such as Dubai and Abu Dhabi.  

Take caution

It would be wise to have a cautious approach this year generally, given the rising regional tensions as a result of the war in Gaza.

Global investors – particularly those from the US, who make up the bulk of international participants in the region – are likely to be more reluctant to enter a part of the world that they view as a monolith. 

When capital becomes more difficult to access, debt financing rises and this trend is likely to continue this year.

It is something that ought to worry the market because rising levels of debt, combined with growing interest rates, can weaken startups.

In ecosystems as small as the Middle East that can have a profound impact on the entire landscape.

Triska Hamid is editorial director at Wamda, a Mena ecosystem enabler based in Dubai