Venture capitalists typically have a strong risk appetite, but some investors are becoming increasingly cautious.

From logistics companies to fine-dining restaurants and even farms, some VC investors have been diversifying their investments, moving their focus beyond tech and AI startups into niche businesses. While opting for “safe bets” that demonstrate profitability, investors are into active co-creation where they have expertise. 

This mix, they say, has real moats.

As big tech continues to spend upward of $600 billion on AI in 2026, Vijay Valecha, CIO at Century Financial, says “market participants have begun to question whether firms can generate returns on these investments and, if so, what the payback period would be.”

He adds that this has caused investors to diversify away from AI and tech into other sectors.

Bilal Abou-Diab, Co-Founder & CEO of Vault Wealth, points out that AI and technology remain key opportunities because the disruption ahead is significant. But he says, “When parts of the market become crowded or richly valued, investors naturally begin to look for balance elsewhere. That is why we are seeing continued interest in other essential parts of the economy, whether in energy, energy infrastructure, new energy, healthcare, consumer businesses, materials, or industrials.”

Experts say that in today’s uncertain market, niche businesses might be smarter investments.

“Amid heightened volatility and skepticism about the AI hype cycle, investors are seeking out companies with tangible, defensible business models, especially those less exposed to geopolitical or macroeconomic shocks,” says Madhur Kakkar, Founder & CEO, Elevate Financial Services. “Bernstein’s retail sector analysis underscores how some legacy formats, like warehouse clubs and home improvement, are proving resilient against technological disruption.”

MOVING TOWARD CO-CREATION

This all comes on the backdrop of an ecosystem that has been going through the wringer.

Experts say that many startups in the region remain unprofitable. At the same time, many funds have raised too much money and haven’t delivered proper returns to their investors.

Now, instead of just finding opportunities and waiting, many investors want to actively shape outcomes through co-creation. This shows a more involved kind of capital, where investors see themselves as long-term partners in building value, not just passive money providers.

Suzanne Kumar, Partner at Bain & Company, says their report shows investors worldwide are becoming more “selective.” While it doesn’t say investors are leaving tech for traditional sectors, it highlights a shift toward “concrete value creation.” Kumar adds, “There’s a move toward hands-on value creation rather than passive ownership.”

“Investors are in constant pursuit of value creation,” says Aliasgar Tambawala, Co-CIO at Klay Group, adding that the way to “navigate uncertainty is to buy and hold businesses that do well in all market environments.”

In many cases, investors are becoming more hands-on, says Abou-Diab. “Capital alone is no longer always the differentiator it once was, particularly in competitive markets. Increasingly, the most effective investors want to bring more than funding: they want to contribute strategic insight, operating expertise, partnerships, distribution, and governance support.”

APPETITE IN NICHE VERTICALS 

Some investors are already creating new markets by focusing on underinvested niche areas like fine dining and on-demand services.

“There does appear to be growing interest in scaled platforms operating in niche verticals, particularly where they address real, recurring demand,” says Abou-Diab. He points to sectors such as mobility tech, elder care, on-demand services, and food security as attractive because they combine structural needs with long-term demographic or behavioral trends.

What investors tend to like in these categories is not their niche status, but that they can become highly defensible once scaled, he adds. “A focused platform in the right vertical can build strong customer loyalty, operational know-how, proprietary data, and meaningful barriers to entry. In the current environment, that combination of specialization and scalability is becoming increasingly compelling.”

Take, for example, Saudi Arabia’s startup, Spice, launched to solve specific problems in the premium dining space—giving access to growth capital. In Saudi Arabia, where the experiential dining and foodservice market is projected to grow to $58.3 billion by 2033, Zeid Husban, Co-founder & CEO of Spice, says the “size of the opportunity is quite significant”.

The startup provides restaurants with what they need most—growth capital. “We pre-purchase future credits that get repaid via real guest visits, with no debt or equity strings attached, driving real growth for our restaurant partners,” he says.

DOMAIN EXPERTISE MATTERS

Domain expertise is crucial when investing in niche sectors. Husban and his co-founders have spent over two decades building and exiting restaurant tech ventures—exited iFood.jo to Delivery Hero in 2016, and POSRocket to Foodics in 2022. 

Husban says that, especially in hospitality, generic capital often fails due to seasonality, volatility, and misaligned incentives. “Our founding team has two decades in F&B startups, which lets us design Sharia-compliant funding structures that get repaid naturally through curated diner traffic.” 

Specialization also gives a lasting advantage through better underwriting and quicker trust with operators, he adds. “We think like operators and have the understanding and empathy needed to build long-term partnerships based on a true win-win.”

“Our domain expertise is the safeguard that ensures the model works for restaurants, not against them, and that is exactly how we have built a moat around this business as first-movers and category leaders,” Husban says.

Domain expertise matters more because dealmaking is getting harder, says Kumar. “Capital is constrained, interest rates remain relatively high, and scrutiny on investment choices is increasing. With the bar for returns rising, acquirers must be more rigorous about where they can create value.” 

“Regional investors are shifting from passive bets to co-creation because they want to be part of the growth story,” says Husban. “This is especially true in Saudi Arabia’s high-growth sectors like hospitality.”

In a world of constant economic policy changes and high geopolitical volatility, passive investing is fading. Kakkar says active co-creation—through sector shifts, careful balance sheet reviews, and focusing on real business models—is now the main way to create value. 

“Niche and traditional businesses are earning investor respect as market volatility, inflation, and AI skepticism push capital toward resilience and away from speculation.”