2023: MAGNiTT's Predictions for the Emerging Venture Markets

With the global venture capital industry witnessing the impact of the economic downturn challenges and geopolitical tensions in 2022, we share our predictions on what’s to come in the year ahead.

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The Emerging Venture Markets raised over $7Bn in 2022, as we saw in our 2023 Emerging Venture Markets Report. While the number makes it seem like the VC ecosystem maintained the level of funding highs seen in 2021, in reality, it was distorted by a strong Q1 followed by quarterly declines in funding and deals. The impact of the global economic downturn came to light in Q2 and throughout the year we saw a drop in valuations, the focus of investments shift, and an increase in M&A activity.

As we venture into 2023, we share a few predictions on what the VC world can expect to see during the year.

Valuations

The reduced availability of capital to fund an ever-increasing number of startups, combined with broader macroeconomic conditions, has and will continue to lead to the normalization of startup valuations. As MAGNiTT now tracks these valuations on our platform, we predict valuations will settle around pre-pandemic levels soon and that there will be acute differences in valuations across geographies.

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Exits

We witnessed a record year for M&A activity in 2022. Alongside a correction in valuations, and given the challenges of raising funds in an environment of higher interest rates, a subdued IPO market globally, and more urgent cash conservation imperatives, some startups will be left with few choices in 2023 aside from seeking acquisitions or consolidations as an alternative to fundraising. This provides an opportunity for international startups, regional corporates, and well-capitalized companies from the region to acquire promising startups from across different regions to achieve scale. We think this could result in more exits and acquisitions from across EVMs in 2023 than ever before.

Investment Divergence by Geography

This will be driven by the success of government initiatives and the support of local ecosystem programs. In particular, geographies with strong government support and policies, like KSA and UAE, will continue to see further initiatives, funds, and funds of funds deployed to support startups within their borders, while startups in geographies that do not have a focus on innovation in the current economic environment are likely to struggle.

Increased interest from Asia

Recent COVID concerns from China notwithstanding, Asia as a whole is engaging more extensively with Emerging Venture Markets, e.g. the recent China-Arab States Summit in Saudi Arabia attended by Chinese President Xi Jinping and upcoming roadshows by major conferences and exhibitions to attract startups and investors from Asia. In particular, MENA is primely positioned as a launchpad into Africa as MENA startups consolidate and scale up across EVMs. This will further accelerate the cross-pollination of companies acquiring competitors for regional growth and expansion, and we will see a larger proportion of investors in EVM startups attributed to Southeast Asia.

SEED/ Series A “sweet spot”

Late-Stage investment will be hard to come by due to a lack of liquidity in the market, especially for large-scale investments. Investors will generally look to focus on their current portfolios, although some with dry powder will seek opportunistic investments. Those GPs raising from LPs will face similar challenges to startups. However, with the normalization of valuations, we expect an increase in the deal flow towards startups raising SEED rounds or early Series A as the sweet spot for potential investment, specifically if the startup has a proven product-market fit and a clear path to monetization and – more importantly – positive unit economics.

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