Bridging the missing middle of Gulf startup funding

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The Middle East is rapidly becoming a leading global centre for international capital, both as a destination and a source.

However, for regional companies, access to capital is often concentrated at opposite ends of the funding spectrum; there is plentiful early-stage private capital for startups on the one hand and deep, liquid public markets for mature, well-known companies on the other.

Such a “barbell” distribution of regional capital risks leaving an important gap: the availability of intermediate capital for maturing startups that are scaling rapidly and have achieved, or are close to achieving, profitability.

Such successful founder-led companies, not yet ready for an IPO, rely on flexible growth capital to support their continued business development.

Over recent years, we have witnessed the emergence of a vibrant startup scene across the Middle East. This has been supported by abundant indigenous venture capital, making pivotal early-stage investments.

Dubai is one of the fastest-growing startup destinations worldwide and ranks third among global cities for VC ecosystem growth, according to PitchBook. 

The majority of capital supporting regional startups is being sourced locally. In the first half of 2024, more than $400 million of early-stage funding went into VC investments in Saudi Arabia alone.

Two of the kingdom’s largest early-stage investors, Saudi Venture Capital and Saudi Technology Ventures, have put almost $4 billion into startups over recent years.

In the UAE, the Abu Dhabi-based investor Shorooq has similarly made $500 million in early-stage investments since its inception in 2017.

Greater participation in Middle East deals by international investors will give sources of regional capital greater confidence to invest

Such an exciting regional startup ecosystem is yielding impressive results. Entrepreneurship is thriving, and there is no shortage of success stories among the emerging cohort of young companies across the Middle East. 

The first wave of these early startups is now achieving critical mass: Talabat recently became the first UAE-born startup to IPO successfully, and Dubizzle and Tabby are also contemplating public listings.

In parallel with the growth in VC funding, regional public equity markets have been on an impressive trajectory. In the past month, the UAE’s stock exchanges passed $1 trillion in market capitalisation, more than five times their level in early 2020. 

Much of this increase has been fuelled by new issuance: the region has posted record IPO volumes over the past three years and is now seen as a bright spot in the global equity landscape.

Saudi Arabia’s Tadawul, the Dubai Financial Market and the Abu Dhabi Securities Exchange are among the most active primary equity markets in the world, with the magnitude of available capital illustrated by the impressive $37 billion of investor orders attracted by November’s IPO of the UAE-based hypermarket operator Lulu.

The missing middle

As regional investment opportunities multiply, there will be an increasing need for intermediate growth capital to support successful startups as they progress from early-stage financing to being candidates for the public markets.

To date, much of this “missing middle” has come from specialist international investors who are able to target local champions from a distance.

A recent example of this is Eyewa, the GCC’s largest optical retailer, which in the past month tapped global the growth capital investor General Atlantic to lead its series C funding round. 

Middle East sovereign wealth funds, collectively managing more than $4.5 trillion, have also been selectively active in this space, although most regional growth capital opportunities are too small to meet their investment criteria.

As more and more regional startups mature and the quantum of required growth capital increases, this bilateral approach will become less viable.

North America and Europe provide a compelling blueprint in this regard. In these geographies, a competitive – and intermediated – process for growth capital has developed, something we see also becoming the norm in the Middle East over time.

Best of both worlds

Wider and more efficient access to a broader universe of growth capital, sourced both from within the region and outside it, is pivotal to unlocking the next phase of development for the region’s most innovative and exciting emerging companies.

Connectivity to indigenous and extra-regional sources of intermediate capital is becoming ever more important. 

Maturing startups that can simultaneously tap regional and international funding will be able to leverage the complementary characteristics of both: a symbiosis of offshore domain expertise with local insight, and the resulting price tension that accrues.

Greater participation in Middle East deals by international investors will give sources of regional capital greater confidence to invest, and vice-versa.

Often, international investors can be wary of investing in a region without first seeing local conviction around opportunities, while local investors can be reticent without the reassurance that global endorsement provides.

To bring these parties together in the Middle East, intermediaries will need to combine best-in-class sector knowledge alongside strong relationships with both global and regional investors.

Such a joined-up approach to growth capital is an obvious win-win: regional startups will get enhanced access to the best international expertise, while international capital gains the opportunity to support the brightest regional entrepreneurs, taking confidence from the involvement of local investors.

This cross-fertilisation of international and regional capital will be critical to the Middle East’s economic future.

In achieving this, the opportunity is tremendous. Only by bringing together these complementary resources in imaginative ways will the region’s dynamic and growing cohort of maturing startups be able to reach their full potential, supporting and reaffirming the Middle East’s enviable position as a leading hub for global capital.

Andy Cairns is head of Middle East and Africa, capital markets, at the investment bank Houlihan Lokey