It’s a tough time for the venture capital industry right now. The party seems to have come to an end for startups and venture capitalists. There’s a dearth of liquidity in the market, and investors are unable to cash out of some of their long-term bets. Meanwhile, AI startups dominate attention.

According to Magnitt, aggregate Emerging Venture Markets (EVMs) raised $9.1 billion in 2024, marking a 41% decline compared to FY2023. Deal activity followed suit, with 1,527 deals reflecting a 20% drop year-on-year (YoY). 

While the doomsday economic scenarios will continue this year — global economic and political uncertainty, inflationary pressures, and tightening liquidity, industry experts say government-backed initiatives, growing tech ecosystems, and diversification could provide growth in the Middle East. 

“With strategic investments and a focus on long-term growth, a rebound is possible, though it will likely be gradual rather than immediate,” says Jeff Reid, Professor of the Practice of Entrepreneurship and Director of the Georgetown Entrepreneurship Initiative, McDonough School of Business, Georgetown University. 

Lower interest rates and renewed investor confidence could attract local and international capital, driving increased funding activity across EVMs, says Farah el Nahlawi, Research Lead at Magnitt. “Late-stage funding is expected to rebound, as it was most affected by macroeconomic conditions.”

LIQUIDITY CHALLENGE

Liquidity is the holy grail for VCs and startup founders, and IPOs could resurrect the industry by providing investors with a liquidity option and enabling them to make new investments.

IPOs are a critical component of the VC ecosystem, says Khaled Talhouni, Managing Partner at Nuwa Capital.  “As more and more companies complete successful IPOs, such as Jahez, Tameeny/Rasan, Nice One, and Talabat, the model becomes increasingly validated and therefore increases the appetite of people to invest in the space.”

Reiterating that increased IPO activity, particularly in Saudi Arabia and the UAE, offers a pathway to liquidity, Tony Hallside, CEO of STP Partners, says strong regional equity markets and the push for dual listings provide opportunities, though not a panacea. “Investors will need to recalibrate expectations for longer investment horizons.”

Clearly, key IPOs in 2024, like Talabat, WeBuyCars, and Rasan, signal a growing pipeline of public market activity in EVMs. In 2025, at least two to three more tech IPOs are expected, driven by regulatory reforms, secondary offerings, fiscal incentives, and stronger engagement between local and international exchanges. “With surging IPO activity anticipated, these developments could provide much-needed liquidity and confidence for the VC ecosystem,” says el Nahlawi.

There is some optimism regarding liquidity in VC for 2025 as many more companies are expected to go public, but even so, the environment will not be easy as IPOs are likely to remain few and more selective. “As such, VCs will need to be more strategic in identifying exits, focusing on sustainable growth rather than relying on IPOs for liquidity,” says Reid.

ATTENTION IN AI FIRMS

At the same time, however, investors have been rushing to invest in AI firms, which will continue in 2025. In EVMs, notable deals like Intelmatix’s $20 million Series A in Saudi Arabia and Southeast Asia’s $1.7 billion AI funding highlight the sector’s growth. Government initiatives, such as G42’s chip export deal, Qatar hosting World Summit AI, and AWS’s Saudi investments, reinforce AI’s strategic importance. 

Globally, think of ChatGPT-creator OpenAI’s seismic $157 billion valuation. OpenAI is backed by Microsoft, which has made a multibillion-dollar investment in the firm.

Analysts see opportunities to make money from investments in cybersecurity and crypto, fintech, renewable energy, and logistics.

“While cybersecurity, climate startups, and crypto remain areas of interest, AI’s innovative potential will likely keep it at the forefront of VC investment,” says el Nahlawi.

According to Hallside, crypto’s appeal remains mixed, contingent on regulatory clarity, “but niche applications in Web3 are likely to gain traction. The focus will be on balanced, strategic bets.”

AI will become integral to any type of product being built going forward, irrespective of the space itself, says Talhouni. “So, for example, cybersecurity will rely heavily on AI as a core part of the industry. The technology will transcend industries, and AI will permeate across.”

NEW GENERATION OF TECH POWER BROKERS

However, the hunt for liquidity is getting harder. Things weren’t much better regarding mergers and acquisitions, the other exit strategy for venture funds. With traditional VCs cautious, will we see a new generation of tech power brokers in the region?

“I’m not sure that VCs are indeed cautious; we have seen a reduction in the overall investment but not in the number of deals done. This indicates that VCs are still investing just at an earlier stage with smaller tickets,” says Talhouni.

According to Magnitt, traditional VCs continued to dominate the startup ecosystem in 2024, capturing, on average, around 47% of the investor pool across EVMs. However, alongside traditional VCs, new players may include angel investors, corporate venture arms, and high-net-worth individuals seeking to capitalize on regional growth opportunities.

“The doors are also open for family offices, regional funds, and corporate investors to establish themselves as new tech power brokers,” says el Nahlawi. 

Reid adds that these emerging figures, often with deep local knowledge and connections, will be critical in driving innovation, fostering new startups, and attracting capital to the region’s tech ecosystem.

“Additionally, regional accelerators and incubators are playing a pivotal role in shaping the next wave of tech leaders, emphasizing a collaborative ecosystem,” says Hallside.

There are, at present, no major listings expected for the first quarter. And no one expects things to bounce back quickly in the first quarter of 2025. The market remains under considerable stress. However, there’s no need to throw in the towel.

“Fundraising challenges and global economic headwinds may temper growth. A measured optimism is warranted as the region develops a more mature ecosystem,” says Hallside.