Taking a Step Back to Move Forward: Insights on the Impact of COVID-19 on Venture Investments in MENA in 2020

The last few weeks have been a challenging, yet fascinating time for all of us in MENA’s entrepreneurship ecosystem. Many startups have been seriously affected, and it is not yet clear what this means for venture funding and the fate of venture capital as an asset class in the region over the next few quarters.

I wanted to take stock of the information we have been gathering to provide our view of the startup landscape in this new COVID-19 era. We’ve leveraged MAGNiTT’s data, research, and community to highlight the preliminary impacts of COVID-19 on MENA’s startup ecosystem. Having spoken to the region’s founders, investors, enablers, and governments, below I will share the following: 

- What does the data actually show about the impact of COVID-19 on venture funding so far? Based on MAGNiTT’s Q1 2020 MENA Venture Investment Report. 

- What is the market saying right now? We speak with hundreds of founders, investors, enablers, and accelerators, and incorporate their feedback.

- What are our expectations to year end? We build off of the funding data so far, and the feedback from our community of founders and investors to share a few expectations. 

- Some questions to think about moving forward, as we look to navigate the next nine months.

We had a positive start to 2020. However, the full impact of COVID-19 has yet to be seen. 

Our Q1 2020 MENA Venture Investment Report was released earlier this week, providing an in-depth review of venture investment over the last three months. In it, the data highlights the early effects of COVID-19 on MENA’s startups. 


What do we actually know about the impact of COVID-19 on venture funding so far?

Based on historical figures, not too much. It will likely take a few months for the impact to be priced in. However, what we do know is that many investment announcements made in Q1 2020 were likely to have been in the making for several months (an average MENA transaction can take six months from early conversations to deal conclusion). For instance, Nana's $18M investment in March, in the current high-demand industry of online grocery delivery, was acknowledged to have been in discussion for several months. 

At a high level, our Q1 report highlights three interesting trends:

Total funding in Q1 2020 was on par with that of Q1 2019. This shows that the momentum of 2019 continued into the early part of this year, with large deals in Kitopi, Vezeeta and SellAnyCar amongst others to the COVID-19 pandemic.

-  Conversely, this was against the backdrop of a 22% drop in the number of deals in Q1 2020 year-over-year. 

-  Interestingly, March saw a 67% drop in deals compared to the same month last year (which could be showing early signs of what is to come).


In conversation with stakeholders:

Some anecdotal evidence from MAGNiTT’s conversations with investors and startups may point to a few emergent trends:

-  Some founders, sensitive to the current social and economic climate, have asked to delay public announcements of their funding rounds, despite securing investment.

-  Many investors with cash have emphasised a focus on supporting portfolio companies that may be struggling, to help them navigate the current crisis.

-  In some cases, we have heard of investors changing deal terms, valuations, withdrawing term sheets that had been agreed, or delaying deal completion until they see how the situation pans out. 

-  Investors with dry powder, or who recently closed funds, are in the best position to deploy capital. Those we have spoken to are actively sourcing startups who are in sectors where we’re seeing increased demand from consumers. 

-  Investors believe now is an opportune time to invest, 'with a much-needed correction in valuations', providing the opportunity to invest in previously expensive companies on more favourable terms. 

-  Startups continue to show their resilience by adapting to ‘the new normal’, creating new propositions in the short-term that can develop into longer-term products. These are particularly interesting for investors who are still deploying capital. 

What is incredibly clear is that 'cash is king'. The startups that are able to maintain cash levels, weather the storm, and come out stronger on the other side are in the best position to scale/succeed post-crisis. This provides hope and much-needed momentum for the region as we evolve out of this period. 


What does the market have to say? 

Throughout this period, we have been having many conversations with stakeholders across the ecosystem during our webinars, workshops, or bilaterals with government entities. We have also sourced feedback from across the ecosystem through interviews with investors, accelerators, and polls of 100+ founders being run on our weekly webinar series, which I highlight in key summaries below:

Advice from investors for MENA’s tech startups:

Investors have been sharing advice they’re giving their portfolio companies to help them navigate the current crisis. The general sentiment has been focused on organisational agility and adaptiveness:

-  Act now! Do your SWOT analysis yesterday and work out how to pivot with the times.

-  The current situation will alter immediate plans - expected revenues, expenses, productivity, burn - try to anticipate and adjust quickly.

-  If you need to take hard decisions, act decisively and don't let it fester.

-  Keep your investors up-to-date and focus on revenue generation.

-  Where you can, pivot and adapt to capture new markets to remain competitive.

We've sourced advice from across the ecosystem.

Are MENA’s venture investors still investing?

Interestingly, MAGNITT saw a spike in activity on the platform, as startup founders move online to connect with investors. When we reached out to our investor community, this is what some of them had to say:

-  "Since most startups are technology-focused, this is also a great opportunity to further innovate and leverage technology." - Fatima Alnaqbi, MBRIF

-  "We are more bullish than ever on the role of technology in pushing forward economic growth." - Hani Dabit, AB Accelerator

-  "The VC asset class is not disappearing; its thesis, focus, and expectations will adapt to a new reality." - Walid Mansour, MEVP

-  "As a long-term investor, we take into account short-term challenges but invest for the long term." - Basil Moftah, Global Ventures

          


Many have advocated for business as usual. However, the proof will be in the pudding, albeit in a few months time.

What have startups highlighted as their biggest challenges?

Undoubtedly, startups in all industries and at all stages across MENA will be re-evaluating their business models and revisiting their product-market fit. With regards to revenue, this is very much for each company to manage. 

What is clear is that a fresh approach is key to align the interests of your customers’ current needs with their future needs - creating short-term solutions that can evolve into longer-term revenue streams. Creativity is required to simultaneously create and capitalise on these opportunities. 

Unsurprisingly, revenue remains top of mind for all entrepreneurs. 

          


After revenue, challenges around team management are close to heart

When it comes to managing costs, we’ve already heard a lot of stories about the need to let go of staff, furlough employees, and cut salaries. In many cases, the cost of talent can take up to 80% of a startup’s monthly cost. Unfortunately, this is the most likely place where founders will look to make decisive and difficult decisions. 

Sharif El-Badawi, Partner at 500 Startups, highlighted on our webinar that, right now, the most important aspect to take care of is the well-being of staff. This was re-iterated in our discussions with Muhammad Chbib, CEO of Tradeling, who stated: "throughout this period, you must have a humane approach to managing staff members".

          
 


Expectations for Venture Investments to year end

With all of us trying to adapt to the new times, how will the venture investment landscape evolve over the coming months?

Number of deals (#):

-  One key driver of venture investments across MENA has been the success of many accelerator programs in the region. They make a significant proportion of early-stage investments. In the current environment, if these institutions don't rapidly shift to online platforms to support their founders, we will likely see a significant drop in the total number of investments in the region, and future pipeline. Considering that these are early-stage investments, this will affect pipeline development for later-stage investments. 

-  Many investors, however, are encouraging companies to take bridge rounds, and, in some extreme cases, advise them not to shy away from down rounds to further lengthen their runway. This may lead to numerous follow-on investment rounds as investors seek to secure their initial investments.

-  As we see existing companies, as well as new emerging companies, capitalise on the change in market dynamics and new embracement of digital technologies, investment is likely to flow into demand driven sectors such as healthcare, delivery, entertainment and online education. 

With this in mind, we expect that the number of deals over the year will likely be lower than levels of 2019.

Funding amounts ($M):

-  With many highlighting a correction in valuations in the favour of investors, startups may look to raise smaller rounds as opposed to bigger bets to get through the current crisis in the short term. This will likely impact aggregate funding figures for the region in 2020.

-  With the restriction in travel leading to a difficulty with regards to in-person meetings, it is likely that a further lengthening of the due diligence process will take place, leading to a delay in deployment beyond the summer months.

-  In all cases, many investors will need to report to their LPs, and will be accountable for their successes during this period. Consequently, they will likely have a more risk-averse “wait and see” approach while they focus on supporting and managing their existing portfolios in Q2 as they determine which startups are likely to survive, and then capitalise on those investments later this year. 

What has been interesting to note is that startups are hungry for investment, with the MAGNiTT platform having seen a record 117% increase month-over-month of applications to funding institutions on the platform in March alone. 

Another key factor will be how sovereign wealth funds / Fund of Funds will look to deploy capital in the coming months. This will be crucial to increase risk appetite by GPs to further fuel the ecosystem.

On balance, given the strength of 2019, it is likely that we will fall short of the total funding amounts, however we anticipate a pick up of activity in Q3 and Q4 that will bring us close to the $700M figure deployed in 2019. 

One recurring theme that has been echoed throughout conversations, has been that now is the time for startups to explore M&A opportunities, where they may exist. Putting ego's aside, leveraging the collective can create stronger entities as well as develop new solutions that can be a driving force for the entrepreneurship space as well as propositions for future investment. We anticipate that the trend towards increased exits and M&A activity to continue through 2020.


Questions to think about

There is a lot to consider as MENA’s startup ecosystem continues to evolve against the backdrop of COVID-19. A lot of time, energy, and capital has been invested in developing the MENA landscape. How we all address the problems now will have a long-lasting impact on how the ecosystem will develop. A positive outlook is essential while being realistic about the challenges and opportunities that will develop. 

A few things that I have been thinking about, that I wanted to share with you: 

-  Talent is the core of all startups. How can we make sure that, as a region, we are able to retain top-tier talent post the COVID-19 lockdown?

-  What do we need to do now to ensure a startup pipeline for years to come across all stages of growth, to see regional success stories succeed beyond our borders?

-  Should we encourage M&A activity in the current environment as a way of creating more resilient and robust propositions for future investment?

-  Which of MENA’s historical and inherited challenges are we able to overcome as a result of the unique scenario we find ourselves in (which has, incidentally, also brought about accelerated and rapid digital transformation)?

-  Are there new and/or creative investment vehicles that we should look to explore and implement to support venture investments across the region in the short and medium term as solutions for funding?

-  How does MENA want to be remembered for supporting its ecosystem at this critical time of need in years to come?

We know that a healthy and flourishing entrepreneurial ecosystems takes years to build and develop. The $700M invested in MENA-based startups in 2019 is a number that is, at least, about five years in the making. 

A final question: Resilience is about always looking at how we can solve problems with the resources that are available to us. How does MENA look to capitalize on the current situation to further position and strengthen itself across the global startup and venture landscape, to emerge a reference hub for others?
 


Earlier this week, we launched our Q1 2020 MENA Venture Investment Report, providing an in-depth review of venture investment over the last three months. In it, the data highlights the early effects of COVID-19 on MENA’s startups.