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Middle East startups navigate funding crunch as global venture slump deepens
Al-Monitor Pro Members
Samuel Wendel
Senior Market Research Analyst, Al-Monitor
July 26, 2023
A once hot venture market for Middle East startups is cooling amid an enduring global investment slump, creating a funding crunch that will further squeeze companies in coming months. Startups in the Middle East and North Africa (MENA) raised roughly $4 billion last year, a record total for the region, but Q2 of 2023 saw venture funding slump to levels not seen since 2020. Plus, three mega rounds alone accounted for roughly 50% of MENA’s venture funding in H1 2023. Still, there are relative bright spots — namely Saudi Arabia — and there is dry powder in the region. Gulf wealth funds are also flush with cash and courting exposure to tech globally. However, investors are largely sitting on the sidelines currently, a trend that could reshape the next era of growth in MENA’s digital economy.
- MENA startups raised about $1.1 billion in venture funding in the first half of 2023, a roughly 41% decline from H1 2022, according to Dubai startup data firm MAGNiTT. When including debt and other non-venture funding, MENA startups raised about $1.6 billion across 231 deals during H1, according to Wamda, a 16% funding dip from H2 2022 and roughly a 20% decline from H1 2022. (Note, the above data sets don’t include Israel, but Al-Monitor PRO covered this topic recently.)
- More broadly, global venture funding reached $144 billion during H1 2023, a 51% decline from H1 2022 and a 10% decline from H2 2022, according to Crunchbase. This has unfolded amid ongoing market turbulence, highlighted by the March 2023 collapse of Silicon Valley Bank, which rocked the startup world.
- Although US tech stocks have rallied in 2023 and AI is attracting funding, high interest rates and ongoing economic recession risks continue impacting investor sentiment and the tech IPO market remains largely dormant (although the Gulf’s ongoing IPO boom has produced some rare tech listings).
- Crucially, Q2 saw investment activity sag significantly in MENA: overall funding was down 56% quarter-on-quarter and deal count fell by 30%, per Wamda. Q2 was the lowest quarter for MENA venture funding since 2020, reports MAGNiTT, while deal count dropped to 2017 levels. For context, global venture funding in Q2 fell 18% quarter over quarter, Crunchbase reports.
- Difficulty finding capital is boosting debt funding. Per Wamda, MENA startups raised $644 million in debt funding during H1, up nearly 160% over last year, a trend fueled by a few large fintech companies.
- Mega rounds — those over $100 million — are also increasingly influencing funding totals. MENA saw three mega equity rounds in H1, all in February: Floward and Nana, two Saudi Arabia-based e-commerce companies, raised $156 million and $133 million, respectively, while Egyptian fintech superapp MNT-Halan announced $260 million in equity financing alongside additional debt funding.
- Those three deals captured about half of all regional venture funding during H1. Huge rounds comprise an ever-larger share of overall investment: Wamda reports that mega rounds accounted for 34% of total funding in H1 2023, up from 23% in H1 2022 and 10% in H1 2021.
- Saudi Arabia leads the region in venture funding in 2023 at $446 million in H1, according to MAGNiTT. That was a 27% drop in value compared to H1 2022, but also saw it surpass the UAE, where funding fell 66%. However, Saudi’s H1 2023 funding totals were also boosted by Floward and Nana’s mega rounds.
- This comes after the UAE led the region in startup investment in 2022 at $1.85 billion, per Wamda, while Saudi Arabian startups raised about $1 billion and Egyptian counterparts secured $736 million.
- Amid a severe economic crisis, Egypt is seeing investment activity plummet: the country recorded only 25 investment deals during Q1, down 61.5% from the previous year, according to the government. Although those deals netted $427 million, over 90% of that came from MNT-Halan. Notably, in June 2023 the Egyptian government announced a five-year tax exemption plan for startups.
- MAGNiTT data suggests that valuations have declined across the board, with later stage companies hardest hit. In some cases, valuations have returned to pre-pandemic levels.
- There are signs that key regional tech players will target these attractive valuations, such as UAE telecom e& injecting $400 million into Careem alongside acquiring startups. Meanwhile, Wamda tracked 24 total exits in MENA during H1 2023, down from 34 during H1 2022.
- Although the number of investors active in the market is declining, new regional funds continue emerging. For instance, in June 2023 new surfaced that Silicon Valley-based tech investor Plug and Play is raising a $100 million fund for Saudi startups. The new fund is scheduled to launch by January 2024, with Plug and Play contributing up to 10% of the total, with Saudi funds and family offices providing the rest.
- In February 2023, Bloomberg reported that eWTP Arabia Capital, a VC fund backed by Saudi’s Public Investment Fund (PIF) and Alibaba Group, was close to raising a $1 billion fund for tech startups in Asia and the Middle East.
- Meanwhile, tech investors from the US and China are eagerly seeking cash from Gulf sovereign wealth funds in 2023. Gulf investors are also increasingly making their presence felt in US tech: Sanabil Investments, a PIF subsidiary, began publishing its venture investments on its website in April 2023, revealing far more exposure to Silicon Valley than previously known.
Scenario 1: Investment activity stabilizes in the Gulf
After bottoming out in Q2, the funding slump eases in Saudi Arabia and the UAE, with strong government support and resources helping the ecosystem outlast the broader downturn.
This is already somewhat the case, although it’s still unclear how far investors will retreat. Even Saudi Arabia hasn’t completely defied the downturn despite strong momentum around startups recently.
Scenario 2: Exit activity increases in H2
Mergers and acquisitions rise in MENA as valuations drop further and startups struggle to raise capital. For instance, major corporates like telecoms snap up more startups. Meanwhile, startup investors also start limiting losses by offloading stakes in distressed assets.
That said, so far falling valuations haven’t increased exit activity as some expected and the region still features few mature companies capable of pursuing IPOs. A prolonged slump could change this, but for now it appears many companies and investors are playing wait and see.
This funding crunch likely hasn’t reached bottom, setting up a challenging second half of 2023 — particularly in Egypt. Alongside some failures, companies will settle for more down rounds. Newly announced venture funds could also struggle to secure backers, failing to launch as scheduled. Mega rounds may pump up funding totals in coming quarters, but MENA also hasn’t seen a major deal since February. More broadly, the outlook for global startup investment remains murky and MENA typically lags trends in more mature markets. Yet, durations of market cycles are hard to predict and a market like Saudi could easily quickly deliver a dealmaking turnaround once conditions improve. Plus, some perspective: surging valuations among regional startups weren’t sustainable and investment remains above pre-pandemic levels. This moment of austerity should produce more battle-tested winners positioned to thrive as MENA’s digital economy grows in coming years.
Samuel Wendel is a senior market research analyst with Al-Monitor covering economic, tech and business trends across the Middle East. He has previously served as a journalist with Forbes Middle East and Wamda, where he reported on key industry developments spanning a range of sectors in the region.
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