The region saw record new investment last year as social distancing drove more of the population to adopt digital solutions. Now, global investors are getting interested.
Arab entrepreneurship has been on a hot streak. Against the backdrop of the Covid-19 pandemic, startups based in the Middle East North Africa (MENA) region attracted a record $1 billion of investment in 2020, a 13% increase from the previous year, according to data from Magnitt, a Dubai-based entrepreneurs’ network.
“It was very much a year of two halves,” says Philip Bahoshy, CEO and founder of Magnitt. “Fundraising takes, on average, nine to 12 months, so at the beginning of 2020, even when the pandemic hit, we still saw large capital deployed in transactions that were probably in discussion since 2019.”
Major deals included Dubai-based digital-property portal EMPG’s $150 million Series E venture capital offering; $60 million for cloud kitchen service Kitopi, also in the United Arab Emirates (UAE); a $40 million Series D for Egyptian health-care platform Vezeeta; and $36.5 million for Saudi Arabia’s food-delivery mobile application, Jahez.
The total number of deals dropped, however, from 573 in 2019 to 496 last year. More money is deployed in fewer but bigger deals, indicating that investors are happy to follow up on maturing companies, but have less appetite for newcomers. The average ticket size last year was $2.1 million, as the number of $500,000-plus deals grew 52% while the share of preseed investment dropped from 46% of all investments to only 28%.
During the second half of 2020, the number of transactions hit a historic low as investors absorbed the shock of the pandemic and reviewed their strategies—but it is picking up again. As in other parts of the world, the MENA region saw new technology adoption soar under the effect of lockdowns and social distancing. Digital tools have become a part of most everyday needs such as eating, paying for goods and socializing, making companies that offer technology addressing these needs attractive.
Three markets stand out in volume and dynamic. The UAE still received the lion’s share of investments last year, with 56% of funding and 26% of deals. The second spot went to Egypt, the region’s biggest market with a population of over 100 million, which attracted 17% of funding and 24% of deals. In third place was Saudi Arabia, with the region’s fastest-growing economy receiving 15% of funding and 18% of deals. Bahrain also had a record year in 2020, reporting a 200% increase in funding.
Not surprisingly, investment in industries that cater to demand for digital products and services grew significantly—everything from e-commerce to fintech, health care, education, logistics, entertainment and food and beverages. Given that pure technological innovation is not the region’s strongest competitive advantage, successful MENA companies have often been those able to take concepts that already flourished aboard and adapt them to the local market.
Prominent examples include the car-hailing application Careem, bought by Uber in 2019 for $3.1 billion, and Souq, an e-commerce platform acquired by Amazon in 2017 for $580 million. Next in line is likely to be music streaming platform Anghami, the regional version of Spotify, which announced in early March that it was about to list on Nasdaq with a valuation of $220 million, making it the first MENA technology company ever to go public.
Along with e-commerce, fintech remained the fastest-growing sector in 2020, as each attracted 12% of deals. The pandemic has accelerated adoption of digital banking around the region; banks have invested massively in new tech partnerships to keep their operations going during lockdown periods, while pure players have seen a surge in demand. For the past couple of years, digital banking has been largely supported by the authorities in each country, adapting legal frameworks, injecting capital and boosting internet infrastructure.
“We have seen a paradigm shift in recent years, as policymakers across MENA markets take steps to diversify their economies with a focus on making them less dependent on government spending and fossil fuels, and more driven by innovation and sustainability,” Mirna Sleiman, founder and chief executive of Fintech Galaxy, recently wrote in the local online magazine Executive. “The financial sector, which has long been ripe for disruption, stands to play a key role in this shift, with demographics and financial inclusion being fundamental drivers.”
Payment, transfer and remittances solutions are the biggest fintech markets at the moment, followed by lending, crowdfunding and digital wealth management.
“Cash has become a means that many people are reluctant to handle,” says Padmini Gupta, CEO and co-founder of rise, a Dubai-based startup that focuses on financial inclusion and facilitates remittances. “Banks and fintech firms globally have been successfully innovating to provide solutions to this outlook in two key ways: by considering how the industry can empower more consumers to pay digitally, and by developing products that will enable more businesses to accept digital payments offline and move online. It is expected that digital payments will eventually overtake the use of cash in the MENA region.”
Major fintech deals in 2020 have included Bahrain’s open banking platform Tarabut, which raised $13 million in seed money; Dubai-based investment platform Sarwa, which secured $8.4 million; and the UAE’s Nymcard, an online payment-card system that raised $7.6 million.
While the startup landscape is still dominated by local entrepreneurs and investors, it is attracting growing attention from global stakeholders looking to inject both capital and expertise. In 2020, international investors accounted for 22% of the total investor pool, up 3% from the prior year.
A milestone in that regard was the acquisition this summer of Instashop, a Dubai-based grocery delivery service, by the German online food-tech giant Delivery Hero for $360 million. In 2016, Delivery Hero bought Talabat, MENA’s largest food-delivery network, originally founded in Kuwait. In October, Google launched its first MENA accelerator program, and several international venture capital funds are stepping in as well.
“The number of international players investing in MENA based startups is growing, and the region is still relatively good from a value perspective,” says Bahoshy. “We expect more mergers and acquisitions, as companies coming out the pandemic will either merge to be stronger, or get acquired by international players that want to benefit from capitalizing on the region.”
While law and infrastructure are evolving to meet the needs of the new digital economy, a number of hurdles remain. Scaling across multiple markets is still difficult, as the region lacks a harmonized legal framework for business.
“For entrepreneurship to be successful, you need an environment where startup founders can set up cost effectively, be able to fail, and still be incentivized to start again,” says Bahoshy. “Scaling across the region and operating in different countries cost effectively remains a challenge for a lot of companies.”
Financial inclusion is also a challenge. The World Bank reports that two-thirds of MENA adults are unbanked. While this represents an opportunity for fintechs looking to offer mobile payment services, populations with no access to bank accounts are also the poorest and therefore have little money to spend, digital platform or not.
“Modest-income employees make up the outliers to the traditional banking system here in the Middle East,” says rise’s Gupta. “This is the challenge we face, and our aim is to make sure this segment of the population is accounted for and served as we transition to a fully digital banking space, not leaving them behind. Rise currently operates in the UAE, India and the US, but is looking to expand to Bahrain and Saudi Arabia.”
The MENA region remains an unstable part of the world, making investment a gamble even in outwardly inviting markets. Lebanon, for instance, was one of the most promising countries for tech, with an innovative, highly educated workforce and an opportunity to create companies with back offices in Beirut but with a regional scope. The Bank of Lebanon supported these initiatives with strong financial incentives for investors, but the economy crashed in 2019, leaving the tech ecosystem shattered.
Much of the same is the case in Algeria, North Africa’s largest market after Egypt, where tech was starting to blossom in the hands of local entrepreneurs. Following the last elections and mass protests, however, many of these entrepreneurs left the country in search of better opportunities abroad.