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The Evolution of MENA’s Venture Capital Landscape

2024-11-04 15:16 Investment & Finance Startups
MENA's venture capital market is at a transformative point, navigating global challenges while still attracting strong investor interest and demonstrating resilience. As the landscape evolves, this moment offers key insights into the future of venture investment in the region and its growth potential.

Key takeaways

  • Market Decline Due to External Factors: MENA's VC market contracted by 23% in 2023 and 13% in Q3 2024 following rapid growth from 2020 to 2022. This drop is tied to global economic challenges rather than internal market weaknesses;
  • Sings of a Rebound: In Q3 2024, investor participation rose 34%, while the overall deal count fell 6%, recovering significantly from an 18% drop as of H1 2024. MENA outperformed other emerging markets, signalling a potential rebound;
  • Early-Stage Investment Momentum: Smaller early-stage rounds jumped from 15% in 2020 to 45% in H1 2024, as high interest rates and geopolitical risks make larger, often late-stage deals less attractive;
  • Saudi Arabia is on the Rise: Saudi Arabia has overtaken the UAE in VC funding, fueled by strong government initiatives and sovereign funds. At the same time, the UAE still leads in deal count thanks to similar support;
  • Rise in M&A and Debt Financing: The decline in VC funding has increased demand for debt financing and fueled M&A activity, as more startups struggle to remain independent without adequate VC backing.

Market Size and Recent Performance

In 2023, MENA's VC sector saw a 23% drop in investment volume. However, the decline slowed in Q3 2024, with total funding down just 13% YoY, reaching $1.3 billion. While this reflects a cautious investment climate, there are clear signs of market resilience:
  1. High growth base: MENA’s VC market saw explosive growth from $704 million in 2019 to nearly $4 billion by 2022, driven by low interest rates and government measures in response to COVID-19. Despite the recent decline, the strong mid-term growth over the past five years softens its impact.
  2. Global context: The drop in MENA's VC market mirrors global trends, with venture financing down 38% in 2023 and 15% in Q3 2024, largely due to rising interest rates and geopolitical instability.
  3. Healthy investor numbers: Investor participation in MENA surged from 280 in 2020 to 426 in 2021 before falling to 397 in 2023. In Q3 2024, it rebounded with a 34% YoY rise, with foreign investors numbers rising by 69%. Local and international investors are now almost evenly split (49% vs. 51%), reflecting a mature local market and strong global interest.
  4. Healthy deal count: While MENA’s deal count dropped 6% in Q3 2024, this is minor compared to a 20% fall in 2023, and less severe than Africa’s and Southeast Asia's declines of 42% and 28%. This resilience also signals a potential rebound.

Despite the decline in total value, MENA has significantly outperformed SEA and Africa in investor participation and deal count

Despite the global downturn, MENA's VC landscape remains resilient, with the slowdown driven by macroeconomic factors rather than structural weaknesses. This resilience is evident in the slowing market decline, increased investor participation – especially from international players – and a more modest contraction in deal count compared to other emerging markets.

Country Breakdown

MENA’s VC market is highly centralized, with the Kingdom of Saudi Arabia (KSA), the UAE, and Egypt accounting for 94% of the total investment value and 83% of transactions in H1 2024. Interestingly, the financing landscape in these countries shows significant variation, reflecting different growth drivers and investment patterns across each market.
Saudi Arabia: Forging Ahead
In 2023, Saudi Arabia surpassed the UAE as MENA's top VC market, growing funding by 33% to $1.38 billion and continuing its lead into Q3 2024, accounting for 39% of the region’s VC activity. This surge was fueled by a record number of megadeals, totaling $879 million in 2023 and $130 million in 2024, the highest in MENA.
Reasons for the KSA Success:
  • Government-led initiatives: Under its Vision 2030 program, Saudi Arabia is pushing investments in high-value sectors to diversify its economy, attracting foreign capital, as evident in the Saudi Venture Capital Co's (SVC) $30 million investment in General Atlantic. Foreign participation grew 17 percentage points in H1 2024, reaching 28%.
  • Active sovereign funds: Sovereign institutions, such as SVC, Jada, Public Investment Fund (PIF), and its subsidiary Sanabil are key drivers of KSA’s VC growth. Thus, PIF, valued at $700 billion, has established a $1 billion “fund of funds” for VC firms.
Saudi Arabia's VC market growth is heavily reliant on government support, making it relatively less attractive to international investors. Despite the rise, foreign participation is still below the regional average, signaling the need for further efforts to draw more global capital.

UAE: Facing Competition
Overshadowed by the KSA’s success, the UAE remains a crucial market in the region, demonstrating a solid performance across several metrics.
Key highlights:
  • Market resilience: Overall funding dropped by 18% to $380 million in Q3 2024, a slower decline compared to the 46% drop in 2023. Conversely, the UAE saw a 12% rise in deal count, maintaining its top spot in the region.
  • Rising investor interest: Investor participation surged by 58% in H1 2024, the highest in MENA, with foreign investors making up 58% of the total – up from 25% in 2020.
  • Smaller deal volumes: No megadeals were recorded in nearly two years, and SEED and Series A valuations fell sharply in H1 2024, reflecting investor caution.
The absence of megadeals and declining valuations indicate a shift toward smaller investments in the UAE. However, the rise in investor participation and deal numbers showcases its resilience. With a strong entrepreneurial ecosystem, free zones like the Dubai International Financial Centre, and solid regulatory frameworks, the UAE has significant growth potential, especially if interest rates ease.
Egypt: Mixed Performance
After a record-breaking 2022 with $517 million in funding, Egypt's VC market dropped 30% in 2023 and saw a 75% YoY decline in H1 2024, reaching $86 million. However, a $157.5 million megadeal in Q3 2024 improved the outlook.
Key highlights:
  • Securing significance: As of H1 2024, Egypt remained MENA's third most funded country, representing 11% of the region's total funding.
  • Local investors on the rise: Investor numbers grew by 7%, with local investors surging 82% YoY, showing strong domestic support.
Despite funding challenges, Egypt's startup ecosystem remains resilient. The rise in local investors and steady deal activity reflect confidence in the market, hinting at a potential recovery as the country diversifies its investment landscape.

Major Trends

Smaller Deals, More Investors
MENA's VC market is increasingly shifting toward smaller deals due to high interest rates and global instability. Early-stage rounds ($1M-$5M) surged from 15% in 2020 to 45% in H1 2024, with SEED and Series A deals rising 40% in the UAE and 36% in Egypt in Q3 2024. Excluding megadeals, total funding grew 7% YoY, underscoring strong interest in smaller rounds and overall market resilience. Meanwhile, megadeals contributed just $288 million of the $1.37 billion total, making them the primary driver of the overall funding decline. With investor participation on the rise, it is clear that more players are focusing on smaller deals, further reflecting confidence in early-stage startups.
The Rise in M&A
Despite the region’s resilience, a sharp decline in VC funding has driven a rise in M&A opportunities, as many cash-strapped startups are more open to acquisitions. International investors, looking to expand or consolidate market share, are leading this activity. In H1 2024, MENA saw 155 M&A deals – a 13% increase – with the UAE and Saudi Arabia accounting for 61% of domestic activity with 94 deals.
Fintech: Shrinking Funds, Steady Dominance
MENA's fintech sector saw a sharp funding decline in H1 2024, dropping 59% YoY to $186M, mainly due to the absence of megadeals. Yet, Saudi Arabia stood out with a 360% surge, driven by two significant early-stage deals, while the UAE and Egypt suffered steep declines of 36% and 87%, respectively. Despite these challenges, non-megadeal funding rose 31% YoY in Q3 2024, keeping fintech in a dominant position, contributing 37% of the region's total funding. Fintech's pivotal role in financial inclusion and digital transformation continues to solidify its importance in MENA’s economy.
The Surge of Debt Financing
The decline in VC funding in 2023 has driven startups to increasingly rely on debt financing. Venture debt surged to a record $757 million in 2023, a 50-fold increase since 2020, as startups seek to maintain growth and avoid equity dilution. Longer fundraising cycles and macroeconomic pressures have made non-dilutive, flexible financing essential for navigating tough economic conditions while preserving ownership.
Is MENA worth investing in?
MENA's venture capital market is showing clear signs of resilience, with a growing investor base and steady deal flow pointing to strong future potential. As the global economic landscape stabilizes, expectations of lower interest rates and reduced capital costs could pave the way for larger deals to return, boosting the region’s attractiveness to international investors. For those looking to capitalize on MENA’s emerging opportunities, now is a strategic time to engage. With its entrepreneurial ecosystem, government support, and an increasingly diverse investor pool, the region is well-positioned to maintain its momentum and further solidify its standing as an attractive investment destination in the years ahead.

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