The Middle East region, which witnessed explosive growth in the number of startups and the scale of funding opportunities in the last few years, is now facing slow growth. While headline figures for 2023 might suggest a modest 1.7% year-on-year growth in startup funding ($4 billion), a closer look reveals a concerning trend.

Debt financing, which surged by a whopping 300% last year, accounts for a hefty chunk of this total. Excluding this debt, the picture becomes bleaker, with a near 35% drop in actual equity investment compared to 2022.

The decline isn’t limited to investment amounts. The number of funding transactions has also plummeted by 27%, with Egypt experiencing a particularly sharp drop (deals halved). 

The UAE, a previous leader in the region, witnessed a significant decrease, with overall investment in startups falling by 47% (including debt) and a staggering 65% decline in debt-free investment.

Experts attribute this downturn to a confluence of factors, including currency devaluations, global conflicts, and broader economic woes. 

However, the question remains: how can startups in this increasingly saturated market stand out and secure funding amid these challenges?

RISE OF STARTUPS

Noor Sweid, Founder and Managing Partner at Global Ventures, says the startup ecosystem has significantly evolved in the last few years. “The startup ecosystem in MENA has evolved from $990M in 2019 to $2.6 billion in 2023 and is poised for exponential growth, with the World Bank projecting 3.5% economic growth in 2024, surpassing the global forecast of 2.4%,” Sweid says.

She credits this expansion to founders creating innovative, cutting-edge technology solutions addressing the region’s acute challenges. The MENA region features a large, young, and digitally savvy population, with over half under the age of 30. Combined with internet penetration rates exceeding 80%, this creates a significant consumer base for startups entering the ecosystem.

MAGNiTT CEO Philip Bahoshy says the startup ecosystem is maturing, which is reflected in the improved quality of startups seeking funding and increased investor interest. He attributes this growth to several factors, including government support, pivotal policies, and access to early-stage funding.

“Countries like Saudi Arabia and the UAE are developing robust environments for startups, thanks to strong governmental initiatives, funding programs, and funds of funds designed to support local entrepreneurship,” he says

Apart from supportive government regulations and policies and the region’s young, tech-savvy population, Gillan Shaaban, Paymob’s Chief Commercial Officer, credits sovereign wealth funds with the ecosystem’s expansion.

“The prevalence of sovereign wealth funds in the region injects significant value and expertise into the startup ecosystem. These funds provide financial backing and a wealth of knowledge and strategic guidance, which is crucial for the growth and sustainability of startups.”

CHALLENGES FACING STARTUPS

Sweid says the primary challenge for MENA startups is capital scarcity.

“While there is an abundance of compelling investment opportunities, many promising startups lack the funding for growth. Even those that secure investment often struggle to scale at the pace of their European and US counterparts due to limited access to growth capital.”

Additionally, founders in the region face challenges such as currency fluctuations, complex regulatory environments, and difficulties in acquiring and retaining talent. 

These hurdles demand exceptional resilience from MENA founders, making capital efficiency a core aspect of their companies. As a result, emerging market companies emphasize profitability to achieve sustainable growth.

Shaaban says the region’s diversity signifies a challenge for startups, as they must demonstrate success in multiple countries and show real scalability. “Investors often seek proof that a startup can adapt and thrive across different regional markets.”

To successfully navigate the transition from a fledgling company to a large-scale operation, Shabaan recommends that MENA startups prioritize recruiting and nurturing young talent who can develop into future mid-level and senior managers. They should also design operational systems with flexibility in mind, allowing them to adapt to different growth phases. Most importantly, startups should prioritize achieving positive unit economics from the outset. 

“Continuously optimize your operations for profitability as you scale, ensuring each unit sold contributes meaningfully to the company’s overall financial health,” adds Shabaan.

STYLE AND APPROACH

Sweid says pitch mistakes are subjective, as each founder’s presentation reflects their style and approach. Some founders, driven by passion, tell a compelling story that resonates personally, focusing on their vision, mission, and the impact they aim to make. These founders excel at creating a strong emotional connection with potential investors, showcasing their dedication and belief in their objectives.

On the other hand, some founders adopt a more analytical approach, relying on detailed data and analysis. Their pitches emphasize the quantitative aspects of their business, such as market size, growth projections, financial models, and competitive advantages. These founders demonstrate their industry understanding and execution capability through numbers.

“Ultimately, the best pitches are often a combination of both. Successful founders can show their passion while providing solid data and analysis to support their claims. By taking a more balanced approach, they can appeal to a wider range of investors, thereby increasing their chances of securing funding,” she adds.

Aly El Shalakany, managing partner at Acacia Ventures, says there are countless potential mistakes, adding that founders should concentrate on delivering a pitch by clearly communicating the problem they are solving, explaining why their solution is unique, highlighting the size of the opportunity, and demonstrating why their team is best suited to execute the business model.

“Most importantly, be yourself! Investors can easily see through a lack of authenticity. About 80% of the pitch should not change based on the type of investor you are targeting, but it doesn’t hurt your chances to research the investor you are targeting and to demonstrate why this investment fits within their investment thesis.”

He explains that if you are targeting an impact investor with specific goals, include information in your pitch about your current and future impact regarding the metrics that matter to them. Conversely, if you pitch to a purely commercial investor who isn’t interested in impact, don’t include that information and focus on the commercial aspects instead.

HOW TO STAND OUT

A startup is only as good as the team it builds around it, says Bahoshy. “Now more than ever, especially in a cost-conscious environment, startups must focus on building the team’s culture, vision, and strategic plan. Resilience and hustle are key to adapting to an ever-evolving macroeconomic landscape.”

El Shalakany shares a similar view, emphasizing that what truly distinguishes investment opportunities is the team’s quality and execution capabilities. “Building something disruptive, especially in our part of the world, is extremely difficult, and you have to have an abundance of resilience to make it through while being humble enough to be agile to adapt to dynamic circumstances.”

Sweid says Global Ventures supports mission-driven founders by thoroughly researching each sector and understanding its intricacies before investing in companies across the value chain.

It seeks founders who address significant problems with unique, scalable, and defensible solutions. It also evaluates the founders’ backgrounds, assessing their motivation to solve the problem and their ability to recruit the right team. The problem being addressed must be substantial, with a sizable total addressable market.

Additionally, it assesses how competitive and defensible a startup’s solution is compared to existing alternatives in the market.

“A clear monetization strategy, product-market fit, and a viable business model are crucial. Startups should articulate their fundraising requirements, outline milestones, and communicate ideal partnership dynamics, explaining why the firm they are pitching to is the right partner for their journey,” adds Sweid. 

Shaaban outlines three key areas for startups to focus on to grab investor attention:

Find your niche: Clearly define your target market and ensure your pricing resonates as valuable within that specific segment. Catering to a well-defined niche fosters a strong brand identity and loyal customer base.

Coherent product stack: While mastering your primary segment, develop a product stack that increases your net revenue per user over time. This strategy strengthens your market position and showcases potential for future growth to investors.

Diversify your market channels wisely: Focus on achieving positive unit economics by building diverse demand channels. Continuously analyze these channels to identify the most cost-effective options, ensuring sustainable and profitable growth.

“Investors prioritize startups with a clear understanding of their market, a scalable product strategy, and a solid plan for economic sustainability. Beyond a compelling idea, demonstrating these strategies can significantly enhance a startup’s attractiveness to potential investors,” she adds.