Our forecast for venture capital in the Middle East this year.

Watch out for a surge in sector-focused start-ups

The COVID-19 pandemic had a big impact on the economies of the Middle East last year. The tourism industry (traditionally booming sector) was dramatically hit, decreasing its contribution to GDP. Furthermore, oil prices dropped considerably, causing distress for the MENA countries that rely mostly on oil revenues, and capital markets became increasingly volatile.

Despite this, in a sign of continued growth and high investor confidence, 2020 saw a record of just over USD $1 billion invested in MENA based start-ups, a 13% increase year over year. This was largely due to large investments in the first half of the year in start-ups such as EMPG ($150 million), Kitopi ($60 million) and Vezeeta ($40 million). The United Arab Emirates maintained its leading position, with 56% of funding allocated to its start-ups. Bahrain also saw its largest increase % of funding in its start-ups, while the Kingdom of Saudi Arabia saw a 55% increase in total funding deployed to Saudi start-ups ($152 million).

COVID-19 was a real accelerant of digital transformation for the MENA region, especially in industries that saw a surge in demand, such as e-commerce, Edtech and healthcare. These sectors saw an increased demand due to global lifestyle changes and attracted investors’ attention with increased capital inflows into these sectors.

Expect continued government support

The venture capital investment ecosystem in MENA continues to thrive and innovation remains a top priority for regional governments, ensuring that start-ups are well nurtured. The initiatives range from governments providing start-ups and SMEs with technological resources to get up and running, to government-backed venture capital funds ready to invest. We provide a top level overview of some of the latest initiatives in the region below.

United Arab Emirates

The Abu Dhabi Investment Office – the government hub in the Emirate of Abu Dhabi responsible for attractive foreign and domestic investment – announced in January that it has partnered with Microsoft to provide a range of initiatives to support start-ups with the tools and resources to scale their businesses. The program provides technology, cloud services and business support tools aimed at accelerating growth opportunities for start-ups.

Saudi Arabia

The Kingdom of Saudi Arabia’s Vision 2030 strategic policy positions start-ups and SMEs as a key factor in the kingdom’s ongoing economic prosperity. Techstars, the global network that helps entrepreneurs to succeed, has announced a partnership with the Saudi Ministry of Communications and Information Technology to launch the Riyadh Techstars Accelerator. The accelerator launches next month, with start-up participants set to receive active mentoring, funding and access to curated workshops and resources.

Egypt

Egypt's government continues to be a pioneer in the MENA region thanks to its focus on engaging start-ups and SMEs in the field of financial technology, however, non-profit entities are also providing increasing support to this part of the economy. Last month, the International Finance Corporation (IFC), a member of the World Bank Group, announced it was partnering with the Egyptian FinTech Association (a non-profit, non-political organisation which is a member of the Global Fintech Hubs Federation) on the IFC’S Fintech Acceleration Programme to support innovation and entrepreneurship in the country.

Looking ahead

The Middle East has weathered the COVID-19 storm and is witnessing an increase in venture capital-backed transactions, especially in sectors forced to evolve during the pandemic such as healthcare, education and fintech. The onset of the pandemic may have been catalyst for positive change in the sense that it has forced entrepreneurs and start-ups to be more focused on innovation to survive. In a region that has often struggled to consistently raise later stage capital, this pivot to more sustainable innovation by a smaller number of sophisticated regional start-ups hopefully means that the trend towards a higher number of transactions will continue well into 2021 and beyond.

Here to help

We encourage all venture capital funds and corporate venture capital funds interested in the region reach out to a member of our Corporate/M&A and Capital Markets team, as investors should retain experienced lawyers to protect their rights and work with them through local law implications. Similarly, if you are looking to set-up or structure a fund in the United Arab Emirates, please get in touch.