Venture capital activity in the Mena region last year saw $560m invested in 260 start-ups with eCommerce and fintech the most popular sectors
Regional start-ups enjoyed record funding in 2017
The Middle East’s start-up ecosystem experienced a record year of funding in 2017 with US$560 million invested in 260 start-ups, Magnitt’s annual State of Mena Funding report revealed on Tuesday.
“We are continuing to see growth and maturity of the Mena start-up ecosystem,” said Philip Bahoshy, the founder of the online start-up community Magnitt, of the record year, which saw more investment transactions undertaken than any previous year. “We are seeing many of the existing venture capital firms (VCs) in the region deploy more capital from new funds into their portfolio companies as well as new investments.”
The $560m figure includes the $150m invested in Careem last year by regional VCs including Kingdom Holding. Amazon’s acquisition of Souq.com last March year is not included, as traditional M&A transactions are not included in Magnitt's data.
“Careem and Souq are great examples for others to follow, however, given their success, their funding figures skew the underlying data and creates a misrepresentation of the growth of the ecosystem,” said Mr Bahoshy.
But 2017 was still a record funding year for the region even when Careem's investments are not taken into account, with remaining investments up 65 per cent on 2016 levels.
Mr Bahoshy says such growth can be attributed to the growing maturity of the region's start-up ecosystem.
Magnitt's Mena Founders report noted that 60 per cent of the top 200 funded start-ups in the region were founded between 2012 and 2015, and that it takes on average three, four and five years to raise Series A, B and C funding respectively.
"So the natural progression is that many of the successful start-ups founded during that period will continue to seek larger follow on rounds as they mature," said Mr Bahoshy.
UAE-based ventures continue to secure the majority of funding activity, accounting for 70 per cent of investments last year, according to the report, something Mr Bahoshy attributes to the government's focus on innovation in its strategic agenda as well as the high proportion of expats in consulting and banking roles who take the plunge into entrepreneurship.
Sanjay Narang, president of the Entrepreneurs’ Organisation, says three key factors drive the UAE's dominance in the start-up sector. The first is the country's tech savvy and affluent customer base that has accepted eCommerce at a faster rate than its surrounding countries, while the second is the increase in outsourcing options for last mile delivery. "This has enabled a larger pool of SMEs to sell and deliver online without the heavy capex investment," said Mr Narang. The final factor, he said, is the UAE government's support of SME companies through the provision of funding and incubators.
Saudi Arabia saw the largest increase in deal transactions last year, up by 4 per cent on 2016.
Meanwhile, fintech and eCommerce start-ups secured the most investment with 11.9 per cent of total funding. Fintech start-ups accounted for three of the 10 largest investments in 2017: payment processing start-up Paytabs secured $20m in a Series A round from undisclosed private investors; price comparison website Souqalmal gained $10m in Series B funding (with UK firm GoCompare joining the funding round), while Wahed Invest, the automated investment adviser, secured $7m.
The top three investments overall though were the $150m in Careem announced in June, $125m invested into the on-demand video streamer StarzPlay Arabia, and $41m gained by the delivery app Fetchr in May.
Mr Bahoshy said the emergence of new regional VCs interested in the start-up space is helping to fuel the growth of start-ups. These include family offices and individual angels and corporates that have a growing appetite for innovation as an alternative asset class.
“Governments across the region continue to encourage innovation as a source of diversification and to assist with unemployment and empowering youth,” Mr Bahoshy said.
While 2017 set the benchmark for the region, Mr Bahoshy expects to see a continuation of this trend in 2018. "Our prediction is that 2018 will be another record year for Mena investment. Deal flow continues to grow across the region. More entrepreneurs continue to get into the start-up space which will fuel the bottom of the start-up pyramid," he added.