MAGNiTT Intelligence: Why do the top industries attract more VC investments than others?

The startup ecosystem in the Middle East and North Africa (MENA) has undergone a big transformation over the last 10 years. Compared to 2009, the number of deals and total funding have increased significantly, from just 5 deals in 2009 to 564 deals in 2019, as well as from $15M to $704M over the same time period. 

This has brought significant changes in the geographical landscape with it, as highlighted in our previous article, with the United Arab Emirates (UAE), Egypt, Saudi Arabia, Bahrain, Oman, Tunisia, among others, growing rapidly.

However, countries are not the only space that we saw shift take place. In 2018, FinTech saw the highest number of venture capital deals in MENA-based startups for the first time in history, and retained that position in 2019. According to MAGNiTT’s 2019 MENA Venture Investment Report, FinTech accounted for 13% of all deals in 2019, up from 11% in 2018. 

This change in industries happened after an initial wave of logistics, delivery and e-commerce deals, as highlighted in the chart below. The startups that were successful in this space, such as Careem, solved for a very basic, yet large, issue: getting people and goods from point A to B. 

Ultimately, venture capital investors are interested in obtaining a return for their own investors limited partners (LPs). Hence, they invest in startups that they predict will have the largest return on their money. In order for that to happen, a startup needs to be active in a large total addressable market (TAM). 

This makes sense. Even if a startup is wildly successful, if it is in a very niche market, it is not going to make or break the fund for an investor. Large inefficiencies in big markets, such as the transportation and logistics sectors, are thus clear candidates for startups and venture capital investment.

At MAGNiTT, we even argue that e-commerce can be seen as a logistics play. While it is relatively easy to provide consumers with choice, the ones that ultimately provided to be successful were the ones that were able to get the items to people’s doorsteps. Souq – now Amazon – is a key example of that, as it acquired local delivery startup WING to improve its customer service and experience. 

 

All these startups solved for (logistical) inefficiencies in a large market by using technology-driven, scalable solutions.

 

But how, then, did FinTech become so popular by number of deals? Well, according to MAGNiTT’s 2019 FinTech Venture Report, in collaboration with ADGM, the majority of deals were in Payments & Remittances startups. While they may seem different at first, these startups aim to solve a similar ‘logistics’ problem: getting money from point A to B.

With the increased internet penetration in large parts of the MENA region, as well as increased e-commerce use, online payments and transfers are becoming increasingly prevalent. However, very similar to transportation of people and goods 5 to 10 years ago, it is sometimes quite challenging to achieve that, with large inefficiencies in online payments. 

Hence, very similar to the initial logistics opportunity, startups and venture capital firms are jumping at this opportunity to provide more reliable and safe payment opportunities. After all, this is just another technological opportunity to provide infrastructure in a large addressable market. 

With the recent developments in the region, we expect these industries to perform well by number of deals and total funding. After all, it does not make much sense to provide bleeding-edge solutions to a market, if the infrastructure is not there.


Download the free 2019 MENA Venture Investment Summary below!
2019 MENA Venture Investment Summary