A slowdown in global economic growth and liquidity pressure have resulted in a slowdown in VC funding globally and in the Middle East, Africa, Pakistan and Turkey (MEAPT), according to a recent report by MAGNiTT.
Although 2023 was predicted to be a record year for exits, exits actually dropped, MAGNiTT CEO Philip Bahoshy said in a webinar last week. Significantly, investments are increasingly being made at the seed round stage in MENA as well as in Africa, with early-stage startups getting higher valuations and more available capital, which Bahoshy attributes to the dearth of capital and the return of accelerators’ offline programs across MENA. Series A rounds, on the other hand, are seeing a drop-off in valuations, largely due to fewer valuations being made, less available capital, and longer fundraising times.
By The Numbers: Deals & Funding
In MENA, Q2 2023 was the lowest funded quarter since Q3 2020, with deals dropping to the lowest level since Q2 2017. Funding dropped by 42 percent and deals dropped by 49 percent in the region compared to H1 last year, with almost half of the total capital coming from three mega deals made in Q1.
MENA startups raised $1.1 bn – capturing 57 percent of the $1.9 bn deployed across MEAPT. MENA exits made up almost half of the total exits in MENAP. “It is a challenging year for venture capital regionally, and that is not out of sync with what is happening globally,” said Bahoshy.
While funding in Africa was driven largely by local accelerators, it was VCs that drove investment in MENA.
Even as deals dropped, mega deals boosted funding flows. Excluding the three mega deals closed in Q1, total funding dropped by 62 percent y-o-y in MENA. In fact, 60 percent of total funding went to the top five deals, namely, Egypt’s Halan, the UAE’s Tabby and Saudi Arabia’s Sary, Floward and Nana. Together, Halan’s $260 mn raise, Floward’s $156 mn raise and Nana’s $133 mn raise accounted for almost 30 percent of the funding.
Small deals continued to dominate fund flows in MENA, with only five percent of deals exceeding $20 mn and nine percent going to the $5-20 mn bracket. 48 percent of funding went towards early-stage startups in the $0-$1 mn bracket and 38 percent towards the $1-5 mn bracket.
The top five industries saw a 50 percent drop in total deal numbers compared to H1 last year. Even fintech, which continued to dominate deal growth, saw deal flows decrease by almost 50 percent y-o-y. E-commerce / retail and transport and logistics were the second and third most funded industries, respectively.
Saudi Arabia, the UAE and Egypt – the region’s top startup ecosystems – saw a 51 percent decline in deals, with invested capital dropping by 31 percent y-o-y. Saudi Arabia came out on top in terms of funding in the region, largely driven by two mega deals. With the exception of Halan’s $260 mn funding round, funding to Egyptian startups declined by more than 80 percent, and 75 percent on deals compared to H1 last year.
The total number of regional investors almost halved compared to H1 last year and international investment has decreased to 33 percent of total investment in H1. Exit activity has also slowed down compared to last year, with mergers and acquisitions decreasing by an estimated 30 percent this year.
Global Investment Down
At the webinar, Bahoshy noted that the slowdown in VC funding and mega deals capturing the majority of funding is not a trend that is unique to MENA. He attributed the decrease in fund flows in global markets partially to rising interest rates and predicted that the trend may continue to impact VC funding next year. In the region, he noted that capital flows have dropped compared to the past two years, registering fewer transactions compared to the past five years.
Regionally, some of the factors that have emerged during Q3 that will likely influence investment flows in Q4 and into 2024 include: Growing economic ties between MENA and South East Asia – especially the Saudi-Singapore Joint Council; rising oil prices and oil price volatility; the admission of Egypt, Saudi Arabia and the UAE into BRICS (effective January 2024); and Egypt’s currency devaluation.
Bahoshy noted a slight uptick in activity in Q3 compared to Q2 in terms of capital and deal flows in both the UAE and Saudi Arabia, although, in the absence of a significant increase in capital and excluding potential megadeals in the last quarter, funds and deals in the region will likely remain lower than last year.