The Middle East and North Africa tech startup sectors are witnessing unprecedented growth in the United Arab Emirates and Saudi Arabia, with the emergence of a new crop of cash-rich investors and tech unicorns.

Fadi Ghandour is a prominent Middle East and North Africa tech investor and philanthropist

This rapid rise of tech startups from Rabat to Riyadh is being fuelled by the increase of sovereign wealth funds as major investors in addition to the growing smartphone penetration. A record-breaking $3.94 billion in funding were raised by startups in 2022, with the heaviest deal concentration in the UAE, Saudi Arabia, and Egypt, according to Wamda, a regional thought leader and tech investor.

Although the trend may seem modest compared to more advanced tech startup markets or even emerging market peers (Southeast Asian startups, for example, raised nearly $18 billion), the rise of sovereign wealth fund investments and government mandates to grow tech ecosystems coupled with intense competition to attract entrepreneurs signifies robust growth over the coming years.

Fadi Ghandour, the founder of Aramex and executive chairman of Wamda, said, “The sovereign wealth funds have been game changers in the region. They have a mandate to enable ecosystems locally. They can move the needle with their big checks, but it’s not just the money. This also moves the regulators to act and build the best environments for entrepreneurs. This also attracts talent. All three – funding, regulations, and talent – are in the best place I’ve ever seen it.”

The Dubai-based Jordanian entrepreneur, investor and philanthropist has played a key role in the growth of Middle East and North Africa (MENA) tech startups. He was one of the early investors in Maktoob.com, the regional online service company acquired by Yahoo in 2009 for $164 million, marking the region’s first high-profile exit. He has also been the first port of call for entrepreneurs and founders looking for angel investment or mentorship in the lean years before venture capital arrived in the region.

The Maktoob sale was described as an “A-ha moment” for the region, according to Christopher Schroeder, author of the incisive book, Startup Rising: The Entrepreneurial Revolution Remaking the Middle East. “The A-ha moment came with the realization that what has been happening in startups, technology and entrepreneurship is happening everywhere,” Schroeder wrote. “If it is happening in Latin America, Eastern Europe, South East Asia and Africa, then why not in the Middle East?”

Still, even after that “A-ha moment,” the funding ecosystem remained challenging and Ghandour became a member of a small group of angel investors supporting the nascent scene.

Ghandour added, “I admire those early entrepreneurs. Funding was so difficult. The ecosystem was very modest. Everything was a challenge.”

The region has never been short on talented entrepreneurs, but the ecosystem is now more vibrant. High-profile purchases of regional companies by global tech players raised the stakes. Souq.com, the Dubai-based e-commerce retailer, was sold to Amazon in 2017 for a reported $580 million. Adding to the momentum, UberUBER +0.2% acquired its Middle East and South Asia rival, Careem, for $3.1 billion in 2019. Both deals were widely seen as milestones in the region’s tech scene, and it gave a boost to other entrepreneurs.

While venture capital funding came to the region in 2014, mostly in the form of outside investors like Tiger Global and Naspers, government-backed funds and high-net-worth family offices generally stayed on the sidelines, Ghandour told me. That has now changed.

Ghandour points to three sovereign wealth funds, in particular, as leading the charge: Mubadala and ADQ in the UAE, and the Public Investment Fund (PIF) in Saudi Arabia. “These funds have really seeded and built an ecosystem of no less than 60 VC funds in the region. From 2019, there were 10, now there are 60. All stages of funding are available now in the region,” he said.

The $3.94 billion raised in 2022 was spread across 795 deals, a 24% jump in value from 2021, according to Wamda. The UAE attracted roughly 47% of regional investment, with $1.85 billion across 250 deals, followed by Saudi Arabia ($907 million in 153 deals) and Egypt ($736 million in 180 deals), Wamda research noted in its end-of-year report.

“Saudi and UAE and Egypt are the three markets of size and significance of government and private and institutional support. That is where the entrepreneurs are coming and where they are trying to solve the digitization of bricks and mortar companies.”, Ghandour added.

At the recent LEAP 2023 technology conference in Saudi Arabia, a flurry of new funds amounting to $2.43 billion were announced to invest in Saudi and regional technology companies. It’s a strong start to 2023, in one of the world’s strongest markets.

“People underestimate the incredible change that has happened in Saudi Arabia,” Ghandour said. “They are attracting their own national talent back home and empowering them and creating a regulatory environment that empowers them, while also attracting foreign talent. It’s a different Saudi Arabia.”

Several companies that made Forbes’ list of the Top 50 most funded Middle East start-ups in 2021 also saw strong funding in 2022. They include: Pure Harvest Smart Farms, the Abu Dhabi-based agritech firm that produces greenhouse fruits and vegetables; fintech players Tabby and Samara; and TruKKer, a Saudi-based logistics company.

Meanwhile, UAE-based cleantech energy firm Yellow Door Energy raised the most capital in 2022, totaling $400 million, according to Wamda.

While Ghandour is bullish on regional tech startups, he cites fragmentation as a key challenge. “There is friction to move from one market to another,” he said, “due to different regulatory environments in each market. Regulators are moving faster than before, but they still need to keep up. The digital market must be invested in, not just with money, but with a regulatory framework also,” he said.

The Middle East and North Africa region still has tremendous upside. Latin American startups, for example, raised more than double the amount seen in the MENA region, totaling $8.28 billion – and it was considered a down year. With similarly sized populations, and education and GDP per capita levels, MENA’s tech startup funding will likely converge and possibly surpass Latin America within a few years.

As competition heats up between Dubai, Abu Dhabi and Riyadh to attract the most promising entrepreneurs, smartphone penetration rises across the region, and state-backed investors continue investing strategically in regional tech companies, we may be just in the early stages of a robust cycle of growth for MENA startups.

Source:  Forbes