In the last two years, many unprofitable tech startups in the MENA region have cut costs, scaled back, or shut down.

The region’s startup ecosystem has encountered significant challenges, marked by a 46% decrease in venture capital funding in the first half of 2024. The ongoing conflict in Gaza and the threat of further escalation have created uncertainty, prompting investors to adopt a cautious approach.

The struggle is seen ever more so in Egypt, as the country witnesses a 55% decline in the number of investors in 2023 compared to the previous year. This downturn is mirrored in the number of deals, which halved during the same period. 

The country has been particularly hard hit by currency devaluation and soaring inflation, leading to dwindling startup funding. While the number of investors has stabilized in 2024, the overall investment landscape remains subdued.

The prevailing economic challenges have compelled investors to shift their focus towards smaller deals, with most transactions in 2023 and early 2024 falling below the $1 million mark. 

In the face of a challenging funding winter, Egypt’s B2B e-commerce marketplace, Cartona, recently secured an $8.1 million Series A extension, culminating in over $20 million raised in Series A financing. The funding round was led by Algebra Ventures, with participation from existing investors such as Silicon Badia.

In 2020, Mahmoud Talaat and Mahmoud Abdel-Fattah co-founded Cartona, a mobile app connecting buyers and sellers, serving over 188,000 retailers in Egypt.

HOW TO SET YOURSELF APART

So, how did Cartona push investors to invest in it? What sets its business model apart?

Talaat says the ability to demonstrate a clear path to profitability and sustainable unit economics, with positive gross margins across the business, has bolstered investor confidence.

“Our advice for building investor confidence during a challenging environment is to demonstrate sensible, sustainable cash-flow management and showcase a clear long-term vision and business strategy for the company, highlighting a clear path to profitability and positive unit economics.” 

According to Talaat, an asset-light business model with a lean cost base and compelling unit economics remains a major competitive differentiator, especially amid an inflationary environment. It also enables them to focus on tech-enabling solutions. 

“Our business model has allowed for efficient scaling and cost management, enabling us to reach experience levels on par with asset-heavy operating models.” 

Will these financing rounds boost overall funding and prompt venture capital investors to change their message?

Aly El-Shalakany, Managing Partner of Acasia Ventures, notes that data for the first half of 2024 shows a continued year-on-year decline in VC funding across the region. However, he notes that there is room for positive developments for the year’s second half and beyond.

“Investments in the UAE have picked up strongly this year. Saudi Arabia has kept up the pace, and Egypt has recently announced several high-value, high-profile deals. We are also seeing more exits in the region, albeit coming from a very low base,” El-Shalakany says.

According to him, the best way to set a startup apart is to outperform competitors sustainably. “We are in a cycle where capital is scarce, which means badly run startups can’t just spend their way out of trouble anymore, which is good for the market. No matter how strong your sales pitch is, it will be a tough sell if you can’t back it up with traction and results.”

INNOVATION AND TECH

Standing out as a startup inevitably involves delving into the role of innovation and technology. The Middle East is poised to benefit significantly from AI, with PwC estimating a potential $320 billion boost to the region’s economy.

The HLB Survey of Business Leaders 2024 reveals that most leaders in the Middle East and Africa are AI Innovators, with 47% either already extensively using AI or keen to adopt it to gain a competitive edge. A McKinsey report found that 62% of respondents say AI is used in at least one business function in their organizations.

Talaat notes that Cartona leverages technology and AI to secure a competitive edge in the market. 

“We have developed proprietary technology solutions to fully integrate with retailers and suppliers for ordering, inventory management, branding & promotions, BNPL, ledger and tax. We have also adopted advanced data analytics and AI to help optimize operations and personalize customer offerings. “

According to Talaat, innovation extends beyond technology and product development, and it’s seeking new ways to enhance its business model and value proposition. 

“We also foster a culture of experimentation and propose innovative solutions to problems,” he says, adding that it is exploring strategic partnerships and collaborations and aiming to expand its product offerings.

FUTURE OF FUNDING

Talaat notes that investors increasingly prioritize startups with proven track records of sustainable growth and profitability. He highlights that the fintech and e-commerce sectors will likely remain attractive investment opportunities as they transform into traditional sectors.

El Shalakany believes that the VC asset class is susceptible to interest rates and will continue to be so. As interest rates are expected to decrease over the next 12-18 months, capital is anticipated to find venture capital’s risk-adjusted rewards appealing.

“What’s encouraging for MENA is that, for the most part, many good startups have weathered the storm and learned that the only way to survive is to aim for profitable, sustainable growth.”

Now that startups are more capital efficient, El Shalakany says they should be well-positioned to leverage fresh capital for exponential growth. “I hope some of these startups will now start to use M&A as a way to expand to other territories and create globally competitive businesses.”