Investors in the Middle East and North Africa (MENA) region are shifting to early-stage investments, following a global trend of seeing lower risk in these deals compared to late-stage counterparts. 

This shift has caused investment activity to remain flat, but there are some positive signs for the future, such as the launch of new funds and the potential for a strong Q4 2023.

Venture funding (VC) in the MENA region saw an uptick in the third quarter of 2023, raising $250 million across 78 deals, according to MAGNiTT. This represents a 32% increase in funding from the second quarter but a 44% decrease from the same period in 2022.

Saudi Arabia and the UAE led the region in capital raised, with Saudi Arabia reporting a 172% quarter-over-quarter (QoQ) increase and the UAE seeing a 55% uptick in new funding. 

The UAE also saw the most activity in the number of transactions, capturing a third of all deals closed in MENA for the first nine months of 2023, despite a 30% year-over-year (YoY) decline.

The sharpest decline in funding was observed in Egypt, which saw a 70% retreat in the number of transactions compared to last year.

Philip Bahoshy, CEO at MAGNiTT, commented on the report’s findings: “While we saw a 32% QoQ incline in funding levels, this was against the backdrop of a record low figure in Q2 dating back to 2019. Investment activity has remained flat with investors focusing on early-stage bets.”

VC funding in the MENA region is shifting to smaller deals, with 44% of all deals in 2023 falling into the $0K-$1M round size bracket. This represents a significant decline from 2019 when 80% of all investments fell into this bracket, and 2022, when this number shrunk to 36%.

This shift is driven by cautious investor sentiment, favoring smaller deals in the first three quarters of 2023. This trend is also reflected in valuation trends for the region, with early-stage SEED rounds seeing a 28% rise in average valuations in 2023 YTD. 

Despite the challenges, Bahoshy also noted some positive signs for the MENA VC landscape, including the launch of new funds by Chimera Capital and Aliph Capital in the UAE and IMPACT46 and KAUST in Saudi Arabia. He also said that investment activity in Q4 2023 will indicate the strength of 2024’s VC landscape.