We’re not out of the woods yet: Philip Bahoshy’s H1 2020 review of MENA’s startup ecosystem
After a whirlwind first half of the year, MAGNiTT CEO and Founder, Philip Bahoshy reflects back on these last six months in the MENA venture space and provides data-driven insights into how the ecosystem has been impacted by the current, unpredictable climate.
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When we published our 2019 end of year report, I predicted that, short of a natural disaster or war, we would see $1BN of venture investment in MENA-based startups in 2020 - then COVID-19 came and flipped the world upside down. The big question, of course, is “How has COVID-19 actually impacted startup investments in MENA?”
2020 has seen more investment in fewer startups
In H1 2020, $659M was invested in MENA-based startups - for reference, this is already 95% of the total venture investments in the full year of 2019. This amount is up 35% from H1 2019 and was invested across 251 investments. The total number of deals in H1 2020 is down 8% from H1 2019 and is only 45% of last year’s total deals.
How has this happened? And what does it mean?
To say that COVID-19 has impacted startups and investors in the region would be an understatement. The world has changed, and MENA’s entrepreneurship space is seeing new opportunities and challenges as a result.
In some ways, COVID-19 has been a hard slap in the face for many founders in MENA. In fact, 72% of founders reported a monthly revenue drop of 25% or more in our recently published joint MAGNiTT & INSEAD Startup & Investor Sentiment Report - which, suffice it to say, has serious implications for their fundraising plans, as well as decisions to let people go.
In other ways, COVID-19 has been a much-needed and rapid accelerant of digital transformation and tech-adoption in the region. This has been reflected in the funding trends, particularly for startups in industries that have been ‘positively’ impacted by the current pandemic climate - EdTech, FinTech, and HealthTech.
Unsurprisingly, the outbreak has resulted in a shift in investor appetite as well. With respect to industry, 27% of investors have indicated that they had shifted to focus on industries that are more ‘positively impacted’. With respect to funding stage, investors have been increasingly looking at later-stage deals, either through new investments or as follow-on rounds in their existing portfolio companies. This has highlighted an approach towards larger investments on more established startups as opposed to smaller deals in “riskier” earlier stage startups. For those startups that do receive investments, we have also seen an increase in average ticket size across all stages, reflecting the appetite for longer runway to weather the challenging times ahead.
We have seen this most clearly in the UAE, which has the highest concentration of later-stage startups across MENA. The UAE continued to receive the lion’s share of total funding in H1 2020 (59%) with multiple large-ticket deals such as EMPG ($150M), Kitopi ($60M), and SellAnyCar ($35M). In contrast, the more nascent ecosystems of Egypt and Saudi Arabia both saw over a 100% increase in funding YoY. Egypt maintained its first rank by a number of deals, accounting for 25% of all transactions in MENA in H1 2020. Saudi Arabia saw the largest percentage increase in total funding. The continued growth of these two ecosystems, despite the crisis, considerably contributed to a strong start to 2020.
Our latest research, surveying investors from across the region, revealed that the capital available to deploy in startup investments in 2020 across MENA remains at a respectable level of $560M in dry powder.
We’re not out of the woods yet
The numbers reported to date of both investments and disclosed dry powder availability, paint an optimistic picture of the future - for now. Early indicators show that we may well be on-track to achieve the $1BN prediction. Unfortunately, it is more likely that the full impact of COVID-19 will hit venture figures later in the year. We know that it takes on average 9-12 months to fundraise in MENA, and we expect that we will feel the effects of this soon. 75% of investors expect that the MENA region is heading towards an economic recession. Startups remain more pessimistic with 24% expecting that the region is heading towards a depression. Our research also highlighted that 77% of surveyed startups have yet to benefit from government initiatives to support their operations.
Over the last 10 years, a lot of energy and investment has been put into building the ecosystem across the region. In spite of this complex backdrop, technology and startup solutions have never been more relevant to solve for society’s pain points. We have seen that there remains a clear appetite for venture capital as an asset class in the region. Policy decisions and initiatives are required now to support startups and their employees during this time, and help them navigate this crisis.
A healthy and flourishing entrepreneurial ecosystem takes years, if not decades, to build and develop. Supporting founders and encouraging investors now will benefit the ecosystem for many years to come.
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