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The Middle East steps into the global VC spotlight
Sequoia Capital, YCombinator, and Techstars have set up shop in the region in recent years. But why are global VCs taking the Middle East so seriously as a tech ecosystem?
An excited hand in the audience shoots up and pierces the air. “The answer is funding! If we can’t fund it, we can’t build it!” a tech startup entrepreneur blurts out.
This was the scene at Abu Dhabi’s financial center — the Abu Dhabi Global Market (ADGM) — at a conference of leading tech entrepreneurs gathered to discuss and debate what it takes to grow a global tech startup. The speaker on stage has just asked what the most important ingredient of building a startup is, and the nods rippling around the room mean the answer amongst the entrepreneurs is clear. Venture Capital funding is a huge deal for innovation indeed.
Venture capital funding is when an investor deploys capital and their contact book and know-how into a new business in exchange for a share in its ownership. Their hope is that the funding will improve the product and marketing of the business, helping to grow sales and, therefore, the valuation of their ownership stake, where their prize ultimately lies. A $1 million check can return $1 billion in profits.
It’s a tried and tested model critical to developing probably the most important tech jurisdiction of the modern age — Silicon Valley.
Anyone who has watched the movie The Social Network will remember how the fortunes of a young Mark Zuckerberg and his fledgling startup, Facebook, changed after getting backing from a top investor. Google, Microsoft, Apple, and Netflix probably wouldn’t exist today if it weren’t for the pivotal intervention of savvy investors backing a visionary entrepreneur with a wild dream to change the world.
GLOBAL VCs MARKING THEIR EXPANSION
And now, it’s the turn of the Middle East. In early May, a startup ecosystem’s most important VCs, Sequoia Capital, landed in Abu Dhabi to stage a major event, marking their expansion into the region. Although best known as a marquee name in Silicon Valley, its regional activity is led out of offices in India and Singapore, and its leadership has set its sights on the next big growth market.
Only 1% of the companies that seek Sequoia India/SEA’s support are granted it, and within that 1%, a stellar collection of unicorns has emerged. Their arrival in the region was seen by many as a huge endorsement of the potential of the local tech ecosystem.
Sequoia’s arrival follows news that YCombinator, the legendary gold-standard Silicon Valley accelerator, has made a slew of investments into various regional tech firms. Other startup investment houses like 500Global, Techstars, and Plug&Play have set up shop here in recent years. Many of these funds are clustered around the ADGM, where a record of 25 VC funds is now headquartered.
But why are they, and other global VCs, now taking the Middle East so seriously as a tech ecosystem?
According to Magnitt, last year, over $2.6billion was deployed into 590 startups across the region. Over half of that was invested in startups based in the UAE, tackling everything from food services and education to financial technology.
The region saw 138% and 149% growth from 2020 and 2021, respectively, far outstripping the global average VC growth in 2021, which was around 92%. According to Shorooq Partners, $864million was deployed in Q2’2022, seemingly flying in the face of a global market downturn.
Shorooq Partners Managing Partner Mahmoud Adi is one of those who are seeing definite traction. ‘’One of our portfolio companies, Pure Harvest Smart Farms, raised more than $64 million in a round that saw South Korea-based IMM Investment Global participation. We also saw another portfolio company, Lean, raise $33 million in a round led by Sequoia India.”
Indicators are that we are just at the beginning, however. Comparatively, just ten years ago, India had zero unicorn tech companies. Today it has over 150. The Middle East will almost certainly follow in these footsteps over the next decade, with the trail blazed by success stories like UAE-based Unicorns Careem, Jahez, Anghami, Swvl and Kitopi, and Egypt’s Fintech, Fawry.
Adi reflects on the formula driving the tech sector here: ’’The region has developed a successful track record of fostering innovation and talent over the past decades. The success stories have helped strengthen confidence in the region’s tech ecosystem. We foresee this trend holding as more startups continue to address the wider opportunity across the region.’’
What factors are driving this growth? Well, for a start, there are nearly 500 million upwardly mobile citizens in the region, many of whom are just coming online. This, coupled with strong government ambition and sophisticated packages of support to make the region a tech-first global economic hub, represents a growth opportunity that global VCs will not look away from.
Apex Head of Strategic Development, Dr Bhaskar Dasgupta, is convinced that along with the startups and their VCs, we must factor in the people who invest in the VCs. ’’The network effects of having asset owners and family offices become more LP driven is attracting more GPs to the region, which leaves more startups coming off the back of all these financing activities’’.
He also observes that wider global factors are at play. ‘’The issues in Europe and the US mean that international investors are increasingly eager to look at countries like the UAE, which are stable, productive, safe, common law based, tax-efficient, and a good place to do business in,’’ Dasgupta adds.
Adi suggests another key to success is the pool of skilled tech talent. ‘’The exceptional talent we have in the region and the strong conviction behind them. We have seen people coming out of successful local startups and building amazing companies. This has triggered a talent flywheel that we’ve become accustomed to in places like Silicon Valley. The flow of talent is crucial.’’
Progress is not a straight line, however. The recent market downturn flashes warning signs that startups and VCs worldwide are paying serious attention to.
Dasgupta says, ‘’Startups need to have a very strong case in how they’ll maintain the next 12-18 months with their current funding cycle and will need to focus heavily on revenue generation — durable and sustainable business models are the key. VCs like this stuff, especially as they invest today with a potential exit in 2-3 years in an upswing economy. Revenue growth in 2-3 years will turbo-charge exits.’’
As global tech plays more of a role in our lives, the Middle East is witnessing blooms cascading into the private markets from years of tech-first, entrepreneur-friendly government policy. Markets have witnessed this before, often against the turbulence of global market downturns, in the post-1960s US and then in places like Singapore and China.
Now, as the Middle East steps forward, the future looks bright.