The Middle East is witnessing rapid digital transformation coupled with entrepreneurial growth and a massive infusion of innovation. Investors, big organizations, and policymakers are helping emerging tech companies, eventually boosting the economy.
Early-stage financial and strategic investments are often crucial for businesses, as they dominate entrepreneurial innovation.
In the last few years, the Middle East has also become a significant funding source for many foreign investors interested in nations such as the United Arab Emirates, Qatar, Saudi Arabia, Bahrain, and Kuwait. But what will it take for the Middle East to be a global startup hub?
Fast Company Middle East conducted research by speaking to over 60 startups, venture capitalists, and policymakers to find out.
The region has already become a destination for developing startups. The region’s policies, free economic zones, tax laws, and government support for technology and digitization have given a strong base for developing global startups.
Global investors are investing in markets, highly qualified entrepreneurial talent is moving here, and the IT hub is actively growing with the support of local governments. For example, MENA startups raised $3.94 billion in 2022 across 795 deals, which is 24% more compared to 2021.
The region has a well-developed infrastructure, which startups can use to quickly and easily reach customers and partners worldwide.
As western markets become more saturated and attractive government incentive programs continue to emerge in the region, there is an increased interest in startups and the market at large.
Also, amid a global recession, the region is seen as a promising market. Some countries may also benefit from an increase in investment as companies look to diversify their operations in response to the recession.
There are many more initiatives and VCs in the region now compared to previous years.
Every startup in the region is faced with a unique challenge. But mostly, it is funding. Compared to western countries, investors in the region are fewer, making it difficult for startups to get the capital they need to grow. Another challenge is the limited market size in the region. Here startups often have to compete with larger global companies, which makes it difficult to succeed.
According to the World Economic Forum, the Middle East and Africa will be home to around 3.4 billion people by 2050 – this is likely to be more than China and India combined. Such an unprecedented boom will present challenges as well as opportunities for businesses.
Imad Hammad, Founder of CarSwitch, says, “Undertaking a venture is an intrinsically challenging journey, stretching your core across numerous facets as you attempt to adapt and further develop your skill sets. The region’s nature has not lent itself to large funding rounds, with a few notable exceptions in the last 1-2 years, which are likely to become rarer with the global capital crunch.”
Over 40% of the CEOs mentioned that funding is one of the biggest challenges for companies. In the absence of large funding bursts, startups have a lean build, which often sacrifices investment in overhead. These functions have nowhere to fall but on the founders themselves. From legal requirements of various jurisdictions, particularly as scaling in MENA typically implies new countries with varying laws, labor requirements, and potentially commercial restrictions, to developing people and culture and building the brand.
Apart from funding, another challenge companies face is hiring talent. Almost 35% of CEOs said hiring the perfect candidate is challenging as there is often a shortage of skilled workers and high talent competition.
Also, one of the region’s biggest missed opportunities is a better cross-border flow of technology, ideas, capital, and regulations. Ahmad Yousry, Co-Founder and CEO at Rabbitmart, says, “We have seen significant benefits brought about by the ease of cross-border operations and uniform sets of regulations and laws, especially in the EU and the US, whereas startups in the Middle East, have to navigate a new set of challenges in pursuit of unicorn status.”
Other regional challenges for startups include infrastructural limitations, economic volatility, and bureaucratic procedures for opening small or medium-sized businesses.
HOW ARE INVESTORS HELPING?
In the region, investors are enabling growth by providing capital to businesses and helping to create an environment conducive to economic development. By investing in businesses and promoting policies that support growth, investors play a key role in helping spur economic development in the region.
Dina Sam’an, Co-Founder and Managing Director of CoinMENA, says, “The region’s private and public investors are maturing and becoming more active. It’s not as developed as some other regions, but it’s better than ever. Investors here actively work to create a supportive ecosystem for startups to grow and succeed. This is happening through several ways: Funding at the angel, seed, and venture capital levels, creating incubation and accelerator programs, creating innovation hubs, and connecting founders with potential investors.”
According to Gaurav Biswas, Founder and CEO at TruKKer, investors now see tremendous growth opportunities with regional startups “that secure a greater market share and evolve like global players that resolve chronic pain points for consumer and enterprise users.”
However, the startup ecosystem is still nascent. Most active funds are either early-stage, pre-market fit funds or sovereign funds focusing on late-stage pre-IPO companies with very large ticket sizes. There is a sizable market gap for growth phase investors in the region.
FUNDAMENTAL CHANGES IN THE ECOSYSTEM
Startups in any market can often struggle to access the capital they need to grow and scale. This can be addressed by increasing the availability of venture capital, angel investment, and other forms of early-stage funding.
Investors at all stages are still somewhat risk averse regarding homegrown startup concepts and business models, and they tend to prefer those that have already seen success in larger markets and have not necessarily proven to be viable in the Middle East market just yet.
Given the maturity of the region’s entrepreneurial ecosystem, it is also challenging for startups to be successful without the support of a top-tier startup program or having received interest from international investors. Although the ecosystem has much to offer in terms of opportunities, it can be daunting for first-time founders to gain access to support and referral-based connections to ease their journey.
Additionally, entrepreneurship education needs to be promoted to encourage more people to start their businesses. Secondly, investors must be more willing to take risks with young companies. This is critical for the development of a healthy startup ecosystem. They provide early-stage companies with the capital they need to grow and offer mentorship and guidance to help startups succeed.
CAN CONSOLIDATION EXPAND THE REACH OF STARTUPS?
For a startup in any industry, M&As are a strong testament and affirmation of its viability and potential, often critical in the rapidly changing startup environment. For a region, it tells an excellent story for investors and stands proof of any region’s ability to deliver shareholder value, offering highly lucrative exit opportunities. However, it is critical in any transaction to preserve the local spirit of homegrown startups – providing highly localized, relevant services to their markets.
The CEOs had mixed reactions to consolidation and M&As. Half believed monopolies are not usually doing good, and startups addressing the same problems add to the competition, benefiting the consumers. There is always the potential for cultural clashes and other challenges when two companies merge or one company acquires another.
Additionally, there is always the potential that the larger company will not be able to successfully integrate the smaller company into its operations. Ultimately, it depends on how well the consolidation and M&A are executed and the goals of the parties involved.
However, 50% of the CEOs also believed consolidation and M&As could expand the reach and reduce the number of startups addressing the exact solutions. This is because when larger companies buy out smaller companies, it gives the larger company a greater market share and reduces the competition. Also, when smaller companies merge, it can create a more efficient company that is better equipped to compete.
The startup ecosystem has been growing exponentially in recent years. Along with a growing population and a youthful demographic, the region has seen a surge in entrepreneurs, coupled with innovation in all sectors. But can it be an attractive, viable, and sustainable hub for startups?
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