Time to give some of that fintech funding to R&D

Reuters/Satish Kumar

The transformative power of technology, and in particular artificial intelligence (AI), has touched almost every sector globally, from healthcare to logistics. 

While many in the Middle East and North Africa (Mena) have embraced AI, we remain consumers of the technology, rather than its creator. 

For a while now, investment has focused on fintech – e-commerce and software-as-a-service startups – which typically offer investors lower risks and quick returns. 

By contrast, startups dealing in AI and ‘deeptech’ – complex technological challenges requiring lengthy periods of research and development – need significant upfront capital and longer timelines for returns. 

So far this year, AI and deeptech startups in Mena have raised $47.5 million, down from $47.9 million in 2023 according to data from Wamda. Compared to fintech, which so far this year has amassed $598 million in investment, the contrast is incredibly stark. 

So why is this the case? Why, when so many of the region’s governments are aiming to establish a knowledge-based society, are the startups that can contribute to this aim struggling to raise as much as other sectors?

Globally, startups in the AI space attract billions in funding. This is how we have ended up with a tool like Chat GPT, whose creator OpenAI has raised almost $18 billion to date. 

Some will argue that such startups do not exist in the Mena region. This notion is wrong. While the number of deeptech startups may be fewer compared to other parts of the world, it does not mean the region is devoid of them. 

This lack of R&D funding has resulted in some of the region’s most accomplished scientists going abroad

Billion-dollar ideas that address technological, societal and environmental concerns exist, particularly in universities like King Abdullah University of Science and Technology (Kaust) in Saudi Arabia and Khalifa University in the UAE, but many struggle to raise investment from the region’s VCs. 

In fact, at the recent Prototypes for Humanity event in Dubai, several ideas were showcased from Mena universities, offering solutions to grand problems facing humanity. The issue, according to the masterminds behind the event, is establishing and scaling their idea into a legitimate business.

One reason is the lack of specialised investors who have deeptech expertise. Another, more pertinent, issue is the wider structural and systemic challenges. The Mena region generally lacks a robust ecosystem for research and development (R&D). 

Data from the World Bank highlights the abysmal rate at which the region’s governments spend on R&D as percentage of their gross domestic product (GDP) – ranging from 0.04 percent in Iraq to 1.5 percent in the UAE.

Compared to countries like South Korea, which spends 4 percent of its GDP on R&D, it becomes clear why the region has become a consumer of technology rather than a pioneer of its development. 

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This lack of R&D funding has resulted in scarce commercialisation of research, and limited industry collaboration, which has contributed to the brain drain, where some of the region’s most accomplished scientists go abroad to further their research or work. This has a direct impact on the ability to innovate, a target for governments across Mena.

To bridge the gap, a multi-pronged approach is necessary. Governments need to increase their funding for R&D and create incentives for the private sector to invest in deeptech. 

Programmes like the UAE’s National Programme for Artificial Intelligence and the establishment of the Mohamed bin Zayed University of Artificial Intelligence are a step in the right direction, but they need to be complemented with initiatives that support the commercialisation of research and early-stage startups. 

Encouraging the formation of deeptech funds would also benefit the startups in the sector and encourage global expertise to the region. 

With greater investment, an environment with regulations friendly to startup development and innovation, and easier and more accessible means to patent and commercialise research, the Mena region can develop the capability to offer the rest of the world innovative solutions.

But it can only start with more R&D.

Triska Hamid is a writer focusing on technology and startups in the Middle East and an angel investor