MENA: Prepping for a Cold Summer
During the languid summer months, the MENA region's venture capital landscape tends to experience a noticeable deceleration. We delve into several possible factors contributing to this phenomenon.
In the world of venture capital, the arrival of summer often brings about a noticeable lull in activity, especially in the MENA region. While venture capitalists continue to hunt for the next big opportunity, the warmer months tend to be rather cold, to say. At MAGNiTT, we have been tracking the data and for the past five years at least, there seems to be a noticeable drop in VC activity in the third quarter of the year. While there is no definitive consensus on the exact causes, market observations point to a variety of factors that influence investor behavior during this time.
Firstly, the obvious reason tends to be that vacation season likely disrupts the typical deal-making process. Furthermore, entrepreneurs and startup founders, often eager to make a splash, may also defer fundraising efforts or hold off on announcing their rounds until the end of the summer. Consequently, this collective wait-and-see approach leads to a natural decline in deal flow. Adding to that, for the past few years, summer and the month of Ramadan have been coinciding. So, one contributing factor to this slowdown is the influence of the holy month of Ramadan. An analysis of data tracking reveals that fewer announcements take place during this period, creating a generally subdued ecosystem. This year the month fell during Q2 in April and it has turned out to be the lowest month so far in terms of deals and funding. However, it is worth noting that this pertains only to the announcement of deals and that deals may still be in progress or may already be closed, with formal announcements typically occurring after the conclusion of Ramadan.
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We have the numbers to back the notion up. For context, 2021 was a record year for venture capital globally as well as in the MENA region. When we look at the month-on-month breakdown of the funding and deals, we see that even during the year when venture capital activity was at its peak, the region was not able to escape the summer lull. While the number suggests that there was an almost 80% decline in funding moving from June to July, we need to take into account that June had a $415M MEGA deal by Kitopi. Nonetheless, barring the impact of this round, non-MEGA deal funding still recorded a 44% drop while deals decline by 19%. After a slight recovery in August, the (non-MEGA deal) funding dips again, only to make a comeback in October. In terms of quarterly breakdown, funding declined by 22% in Q3 of 2021 compared to the quarter before and Q4 made a recovery by gaining 36%.
2022 was a turbulent and slower year for venture capital activity and the Q3 decline that we have been talking about was even more apparent during the year. While Q1 and Q2 also saw numbers in red but Q3 had a quarter-on-quarter pullback of almost 40%. And Q4 again saw the revival of venture capital activity by bouncing back by 61%. Month-on-month data show that deals slid down from 60 to in their 40s from July till September and then doubled in number in October. Funding also declined consistently, especially in terms of non-MEGA deal numbers, and went from $69M in September to $366M in October, marking an increase of 81%.
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Moving into Q3 this year, we anticipate a continuation of the summer's subdued trend. Deal flow is expected to be relatively restrained, reflecting the historical patterns observed during this season. However, we also have to take into account the key economic indicators, factors such as inflation, valuations, and interest rates play a crucial role in shaping investor sentiment. If inflationary pressures ease, valuations stabilize, and interest rates remain steady, the ecosystem may experience a gradual revitalization. These favorable conditions could stimulate renewed investor confidence and pave the way for increased deal-making activity towards the end of Q3 or the beginning of Q4.
Another factor that historically contributes to the anticipated recovery in venture capital activity is the conference season. As we saw this year with the LEAP conference in Riyadh and the funding announcements frenzy that came with it, including the MEGA rounds from Nana and Floward. October also tends to be the month of tech conferences. This year we have the GITEX coming up during the month. As these conferences approach, the ecosystem is likely to witness an uptick in deal announcements and heightened entrepreneurial energy, signaling a potential turning point in the MENA venture capital landscape. As we move into Q3, it will be interesting to note how much redder will our seasonal funding growth meter go for the quarter or if will we get to see a different trend this year.
The piece has been created using datasets from our Analytics tab.. Learn more about Our Data Methodology
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