We decided to step outside the Silicon Valley bubble and explore an extremely interesting and active (from an investment and startup perspective) part of the world: The Middle East and North Africa (MENA).
Why, you might ask? Well, the reasons are pretty simple. First, I have a personal connection to the region having studied the Near East and lived in Jordan after college. And let’s be honest, there is practically little to no coverage about the region from our POV and what’s there is largely (if only) on Israel, which has a burgeoning tech scene.
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Another interesting point worth making before we dive into the data and a prompt for exploring the region: MENA encompasses a large population of individuals, many of whom (generally) read and write the same language (Arabic) and speak or understand multiple dialects. We won’t get into the fine points of how Iran does and doesn’t fit into this paradigm, or that the Arab world is also very ethnically, linguistically, and culturally diverse, but this overall point makes the diversity behind the deals that much more interesting.
The Funding Landscape
Our data suggest that the region has experienced steady growth in the number of deals over the past five years. And we aren’t the only ones noting that activity.
Deal volume increased by 80 percent from 2015 and 3 percent from 2017 to 366 deals in 2018, according to an annual VC report by Dubai-based Magnitt, a Crunchbase-like data startup which provides venture capital information for startups based in the Arab world 1.
Further, total capital invested in the region reached an estimated $793 million2, according to Magnitt, with more than 80 percent of the total deal volume being directed toward seed and early-stage startups.
Of course, the MENA startup scene hasn’t completely stayed out of the spotlight. Two startups, in particular, come to mind and also represent a large chunk of the funding that was directed toward MENA startups, as seen in the chart above.
Dubai-based ride-hailing startup Careem, has attracted attention in U.S. tech media recently because of reported rumors that the company is in acquisition talks with its U.S.-based counterpart Uber. (Notably, these rumors have resurfaced multiple times over the past year.) The company has managed to pick up more than $750 million from investors which include China-based Didi Chuxing, Kingdom Holding Company, Rakuten, and others. Most recently, the company scored a $200 million round in October 2018.
Souq, another company based in Dubai, raised eyebrows when it was acquired by Amazon for $580 million in 2017. The e-commerce company raised a known total of $460 million before the acquisition, including a $275 million round in February 2016 led by the prolific U.S.-based Tiger Global Management.
Funding Through A Geographical Lens
Notably, both of the companies mentioned above are based in Dubai in the United Arab Emirates (UAE). Taking a look at the geographical split of investments into the MENA region, that’s a bit of a trend.
Magnitt reported that 30 percent of deals in the MENA region went to companies based in the UAE in 2018. You may be thinking that’s unsurprising, given the country’s reputation of wealth. However, a full 22 percent of the deals made in the region were for startups based in Egypt followed by Lebanon at 10 percent and Jordan at 8 percent, according to Magnitt.
Crunchbase News spoke with Philip Bahoshy, founder and CEO of Magnitt and Hasan Haidar, general partner at 500 Startups MENA for a more nuanced understanding of activity in different parts of the region.
According to Bahoshy, the UAE is an attractive place for investment because successful founders in the country are generally seasoned business people like consultants and executives with extensive connections and a deep understanding of both the bureaucratic challenges of scaling and the industries they are addressing. Not to mention, entrepreneurship was embraced in the UAE much earlier because of the existing ecosystem.
“It’s also a hotbed for B2B startups because you have many of the largest corporates in the region already located here. From a B2B perspective, it’s a perfect testing ground because you have people with high digital penetration as well as higher willingness to spend,” Bahoshy explained.
According to Haidar, other Gulf countries are increasing efforts to attract more entrepreneurship and investment in their countries as well. For example, Haidar believes Kuwait is an “under-told” story in the region, adding that it is home to excellent business people and a relatively high number of exits per capita compared to other markets in the region. Kuwait is the only market that has consistently, over the last three years, had at least one exit above a $100 million valuation, he added. Those deals include food delivery companies Talabat, which was acquired by Germany-based Rocket Internet for $170 million in February 2015, and Carriage, which was acquired by Germany-based Delivery Hero in 2017 for about $100 million.
Beyond Kuwait, Saudi Arabia is also becoming more influential, at least at the seed stage, in Haidar’s view. This partially stems from a shift in the cultural dynamic surrounding “entrepreneurship,” which used to have somewhat of a negative connotation. Now, he said, there is a push in the Saudi market to support high potential entrepreneurs.
“Almost half of our batch in this program are startups from Saudi. We had no preferential treatment towards them. It’s just how the how the program and selection process emerged,” Haidar explained.
Bahrain is also taking a more open approach than other countries to grow its tech scene. It’s inviting entrepreneurs from anywhere to the country, where it’s 40 to 50 percent cheaper to set up a startup than in the UAE and where there’s a huge local population that is well-educated and speaks English, Haidar said.
But where seasoned business people run the show and the cost of importing talent and setting up a startup weighs heavy on the minds of entrepreneurs in the Gulf, in Egypt it’s a different situation.
The cost of living in Egypt is much much lower, talent does not have to be imported, the population is huge, and the country is ripe with problems that need to be solved. It also has young, educated technical talent tenacious enough to solve them.
Egypt’s startups have ranged in industry from fintech to food. Last year, Crunchbase News covered a startup called SWVL, which is aiming to disrupt the public transportation system in Egypt, after it raised an $8 million Series A. The company went on to raise a $30 million Series B from investors in November. Wuzzuf is another notable early stage company which has attracted $8 million for its job site and recruiting platform.
On the other hand, Egypt does face challenges. Although the market in Egypt may be 100 million strong, the purchasing power in the country is lower compared to other, wealthier countries. That means, working within the country may not be the golden ticket for Egyptian startups. They may have to think (even) bigger to reach high revenue growth.
With reported growth in funding activity in the young MENA startup market, the logical question is: where is the funding coming from, and will funding continue to be available?
Venture As An Asset Class In The MENA Region
More than 155 institutions invested in MENA-based startups in 2018, with a 5 percent growth in that number from 2017, according to Magnitt’s data. That includes a number of family offices, corporate venture capital groups, and traditional venture firms, Bahoshy said.
“There’s momentum from governments across the whole of the regional focusing on entrepreneurship as being a solution to diversification of the economy,” Bahoshy said. Haidar echoed that sentiment, saying that Bahrain is an example of governmental efforts on the fund end.
“They’re trying to build every strata of the ecosystem very carefully and with great strategy,” he said.
In Egypt’s case a number of regionally-based Egyptian funds have invested and promoted investment in the region, along with multiple accelerator programs which are IMF and World Bank-backed, Bahoshy said.
500 Startups is one of the most active funds in the Middle East, having invested in more than 100 startups since entering the region in 2016 and creating a regionally-focused fund in 2017. Other active investors in the region include Middle East Investment Partners (MEVP), Wamda Capital, and the accelerator Flat6Labs.
Still, both Bahoshy and Haidar are aware of the challenges both in fundraising, and the lack of regional funds.
“There has been slightly more activity, but there’s still not a lot. There’s only a handful of LPs that are investing in VC. So that as an asset class in the MENA region is very hard to fundraise for–not just for us, but for all of the funds in the region,” Haidar said.
Until the sovereign funds start “really digging in” and being supportive players of the regional ecosystem, it may remain difficult, Haider said. Notably, Saudi Arabia’s sovereign wealth fund contributed $45 billion to Softbank’s Vision Fund, but that money isn’t being directed toward regional startups.
“We need 10x the number of funds, and in order to do that the LPs need to be active in the market,” he said. Not to mention, investors from outside of the region would boost the opportunities as well.
However, it’s still early for the Middle East and North Africa. As e-commerce, logistics, and fintech companies gain more traction in the region and as it matures and realizes more exits, the venture capital and tech world may continue to gain momentum. VC is a long-term game, and the Middle East is no exception.
Countries considered to be in the MENA region in this analysis include Algeria, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, and Yemen. Israel is excluded in this analysis because the relatively very active funding market would skew the overall data. We also exclude Iran and Israel, as we rely heavily on Magnitt’s data which does so also.
Illustration Credit: Li-Anne Dias