If one were to believe the massive growth of e-commerce platforms and startups in the MENA region over the last decade, the increasing number of startups founded, and the millions of dollars raised over funding rounds, combined with a more rapid pace of tech adoption across all sectors, the MENA region’s startup ecosystem might just be the next gold rush for serial founders and investors.
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This year alone saw an incredible rebound. With 116 million USD raised in June, bringing the total of investments raised by MENA startups to 882 million USD, July saw a whopping 206% rise month on month, with 355 million USD raised in total by 38 startups. According to estimates by Wamda, MENA startups raised nearly 4 billion USD in funding in 2022. Despite a rough year in 2023, where total investments were slightly north of 4 billion USD (1,17 billion of which was in debt financing), the longer trend shows a rather promising sector.
The MENA region is now home to over 5000 startups. In the earlier years, there were only very few funding sources for startups in the region. Estimates place that number at less than 20 in 2008, growing to over 50 in 2012. According to the most recent numbers, published by Magnitt, the number of investors in the MENA startup ecosystem increased by 33 %, reaching 262.
Even the funding received by startups skyrocketed from only a few millions in the early 2010s, while recent estimates speak of investors pouring billions of dollars in total funding. Courtney Powell, COO and Managing Partner at 500 Global, remarks in an interview with Wired “we are entering a golden age for MENA startups”. The major leap happened in 2020 to 2021, a 4X increase in the value of total investments from the previous year, and a reliable threshold of above a billion USD. Since then, the growing adoption of nascent technology and innovative solutions has laid the ground from one of the main emerging startup ecosystems.
This growth potential is due to several factors, a powerful variable, as stated in the Entrepreneurship in the MENA report, published by Mckinsey, “is the region’s rapidly increasing access to technology as well as its propensity for digital adoption and consumption”. This, in addition to policy reforms aiming to facilitate foreign investment, has made the MENA ecosystem a promising emerging market.
This growth however is not without setbacks. Besides a significant shrinking in investment flow in 2023, there are certain discrepancies between the regional ecosystems; notably the UAE and Saudi Arabia being the most active, followed by Egypt, while other ecosystems, such as in the Maghreb, still face hurdles of funding and local market integration and interest. The development of a conducive ecosystem for startups and tech-focused industries is a relatively recent phenomenon in the MENA region; having made the cross from a nascent sector to a driving economic force in many of these countries in only a few decades.
As such, startup ecosystems and sectors of technological innovation became necessities for countries in the MENA region in order to diversify their economies and compete in the global digital economy. The investment landscape in the MENA is largely driven by sovereign wealth funds, institutional ventures, with some household international investors dipping their toes as well. At a time when global venture capital investment is increasingly more challenging to attract at a massive scale, the regional ecosystem maintains its momentum as well as its solid investment infrastructure.
The high involvement of major ventures like UM6 Ventures in Morocco and sovereign wealth funds like Mubadala in Abu Dhabi and the Qatar Investment Authority, as well as investment promotion agencies like the tunisian FIPA, GAFI in Egypt and EDB Bahrain, is not only indicative of an institutional effort to promote an economic environment conducive to innovative technologies and entrepreneurship, but is also underlined by a growth strategy, aimed at accelerating the advent of new patents, business models and new technological solutions; a similar catalytic condition to the early decades of the San Francisco Bay Area where the US Navy research facilities and available private investors provided both the technical and financial support for the first wave of Silicon Valley startups.
In tandem with institutional efforts, two particular modes that have come to play an increasingly important role in shaping much of the recent investment trends in the MENA startup ecosystems are corporate venture capital and strategic partnerships. Big corporations in the region are now also emerging as a reliable investment source for startups, providing both the financial capability to scale major projects, and the strategic guidance required to navigate shifting market trends.
This collaboration, as a long term partnership, also helps big corporations make investments that are in line with governmental development projects and agendas, while also ensuring access to the latest innovations and untapped markets. At this point, diverse collaboration with international investors and startups is key to gaining access to cutting-edge tech and further innovation. Going the CVC route is a contrast compared to other traditional investment ventures, but has become a significant pillar in global ecosystems. CVC investments can range from incubators and direct investment opportunities, to hackathons and accelerator events.
Although corporate VC investment reached its peak globally around 2021, with total funding estimated at 169 billion USD, according to CB Insights, a 142 % increase from the previous year. It has since begun to dry up, with the total raised in 2023 only reaching 55 billion USD, a 6 year low. A stark contrast to the thriving CVCs of the MENA region. They have emerged as one of the most reliable investment partners for startups, marked by focus on strategic alignments and access to cutting-edge innovations, rather than solely prioritizing growth and financial returns.
In the Gulf Region alone, venture investment made by private corporations has increased at a CAGR of more than 18 %, with investments growing from approximately 111 million USD in 2017 to 300 million in 2023. While VCs have traditionally been the most sought after investment sources for founders, CVCs have come not only to provide an alternative, but also offer unique assets, a network of partners and funding capabilities that traditional VC may not have.
VCs vs CVCs – The broad strokes
Simply put, the difference between venture capital investment and corporate venture capital is mainly a question of investment objectives and access. In a typical VC context, startups are expected to scale, and eventually generate high return for the investors, hence the financial focus of VCs. CVC investments may have secondary goals; notably strategic alignment behind building a reliable investment portfolio, combined with a leading position vis-à-vis the advent of emerging markets and new technology.
With the new economic development plans that many countries in the region are currently working towards, the aim is to diversify major economic sectors beyond energy and natural resources, for which corporate venture investment has emerged as a viable solution. Investment in corporate open innovation is by far the main hallmark of CVCs, which, as explained in the Corporate Venture Capital in the GCC report by PWC, “involves investing in, or cooperating with, startups from the early development stages until later stages in order to enable access to innovations not created by the internal research and development (R&D) department”. In 2022, nearly 70% of corporate ventures investing in MENA startups were based within the region itself, According to The Rise of Corporate Venture Capital report published by Magnitt
Corporations behind CVC funds may have the business and strategic acumen, coupled with a large network of institutions and partners. Startups on the other hand are defined by their agility, and adaptiveness to market trends, new technological innovations and new business models, making their dynamic approach a core asset for major corporate investors. As such, although corporate ventures can take up to a year to finalize a deal, funding rounds can be shorter than a typical VC investment. The main risk associated with CVCs is exposing IP to a potential channel competitor, hence the need for proper IP protection.
Corporate capital usually begins its involvement with startups at the seed stage and into the expansion stage, at which point the involvement grows as the startup advances towards IPO, and partnerships and joint ventures become more critical for scaling. With this model, CVCs tend to have a higher tolerance for risk, prioritizing ground-breaking innovation over quick returns.
The advent of corporate VCs in the MENA ecosystem seems a natural development considering the particularities of the region; high income from natural resources and energy sectors, combined with a governmental drive to develop reliable networks and promote innovation hubs. The need to attract venture capital and large scale investments is largely born out of a necessity to diversify the economy. In only a few decades, the MENA region has managed to create a high smartphone and internet penetration rate, making a conducive environment for digital innovation and the adoption of technological solutions.
Strategic Partnerships – New model for corporate-startup collaboration
If corporate ventures are becoming a central part of the startup ecosystem, both globally and in the MENA region, it remains only one of the models available under the umbrella of corporate-startup collaborations. These strategic partnerships can often take many forms like corporate accelerators, venture client units, sandboxing and hybrid venturing hubs. Strategic partnerships between corporations and startups often serve both parties, by enabling corporations to become early adopters of innovative technologies and solutions, while providing founders with the funding and expertise needed to grow.
Strategic partnerships are defined mainly by the arrangement involving two separate entities, and as such does not entail any significant changes in management. Another feature is the broad scope of a strategic partnership where the sharing of resources and know-how often involves working together on several projects. This also translates to a longer timeframe for the partnership, whereas venture investments are limited in time and scope, and with specific exit strategy defined since the early stages of the investment.
Main CVCs in the MENA region
With the development of technologies and business models, major corporations in the MENA were quick to capitalize on the trend as backers, becoming today one the most prominent investors in a rapidly growing ecosystem. Companies like Almajdouie Holding and Crescent Enterprises, as well the Saudi-based Aramco and STC, have each set up their own capital venture arms.
STC alone has so far poured in more than 100 million USD in funding. Raed Ventures (Almajdouie), one of the most active investors in the region, is currently the leading backer of over 40 startups, with an average round size estimated at the six figure. Corporate venture capital now makes up about 18 % of all investors in the GCC, with Saudi Arabia and the UAE, both accounting for 74 % of all CVC investors in the region.
North Africa, although not as active a hub as the UAE or Saudi Arabia, is still a vibrant ecosystem with an important share of investors, notably in Egypt and Morocco. Here, the presence of international corporate venture investors like Orange Ventures, Societe Generale Ventures and Vodafone Ventures alongside major local VCs and CVCs underlines the region’s potential for growth, and increasing appeal for global players.
What CVCs Look for in Investments ?
The investment criteria for each corporate venture investor depend on the corporation’s position, core business lines, industry focus and their future roadmap. Strategic alignment is often used as a catch-all term for the ineffable factor that attracts a major corporation to a young unvetted startup, but there is a more thorough approach behind the rationale of CVCs.
Generally, corporate venture investors rely on some of the fundamental aspects that are common in any startup investment; financial considerations like the investment stage, the growth potential and exit attractiveness, as well as more strategic measures like the service or product, the targeted market and the technological capabilities. Although there has been some research into the investment criteria of general venture capital investment, CVC investment in startups (especially in tech) is still not as researched, with only a few papers providing a basis for knowledge on the topic.
In a paper titled Developing the selection and valuation capabilities through learning: The case of corporate venture capital, the researchers develop the positive impact of experience on the selection criteria of corporate venture investors. According to the paper, “Experience intensity of a CVC program was influential in the selection of portfolio companies with strategic potentials but not in the selection of portfolio companies with financial potentials”. Meaning that CVCs that are more invested in a specific market, industry or niche are more likely to invest with the aim of gaining a strategic advantage (early access to technology and new business models).
Knockaert et al’s The extent and nature of heterogeneity of venture capital selection behavior in new technology‐based firms and Siegel et al’s Corporate venture capitalists: Autonomy, obstacles, and performance are largely cited as the foundational works for research on CVC’s investment criteria. A synthesis of these benchmarks can be used as a checklist for startup founders.
- Product & service: CVC investors primarily focus on the uniqueness of a product or service, often assessed through its concept or prototype. Consider your competitors, and whether an alternative exists. Although new concepts are often the most sought-after, there is also a requirement to demonstrate market need and acceptance, if not through sales (even from competitors), then through market studies and proofs of concept.
- Technology: With tech-based industries being largely patent-heavy sectors, startups with IPs and patents are certainly more likely to secure corporate venture investment, depending on its relevance to the investors’ core business lines. The technological capabilities are evaluated through a functioning prototype.
- Market: CVC will generally prefer to invest in startups based in a market where they’ve invested previously. Yet, the most important characteristics of the target market are its size and potential for growth. For novel concepts, investors will also consider the product/service’s potential for disrupting existing markets or creating new ones. For entrepreneurs, it is essential to gather as much knowledge about your competitors, and develop a solid competitive advantage.
- Investor fit: In a CVC context, investors will more likely get involved with startups operating in a market segment that aligns with their expertise. Corporate investors generally adopt a more hands-on approach, and are more active in developing the startup. The in-depth knowledge and reach of a major corporate backer can be of great benefit to founders. This strategic fit can only be realized in a partnership which complements the investors’ long term orientations.
- Entrepreneur / team: Investors will often seek teams with complementary skill sets, both technical and managerial. The business experience of team members is also crucial as it demonstrates product and market knowledge and helps eliminate any gaps. CVCs also put emphasis on the founder’s leadership capabilities and ability to assess and react to risk.
- Finance & exit attractiveness: Although not as important as strategic fit, financial considerations play an important role in investors’ decision making. A focal point here is the timeframe before a startup generates its first positive cash flow. Knockaert’s paper defined the worst acceptable timeframe as 3 years, with the norm being around 18 months. Another factor to consider is portfolio restrictions. CVCs would generally prefer investing smaller funds in several startups, with each fund not exceeding 10 to 20 % of the total fund budget.
The exit strategy is evaluated even at the early stages of an investment, in order to gain a better understanding of how ROI can be realized. The most common exits in CVC investments are mainly acquisitions or selling the company to an external investor.
CVC-Startup case study – EVENTTUS (Egypt)
Founded in 2012 in Egypt, Eventtus is an event tech startup specialized in developing cutting edge tech solutions for conferences and virtual events. In less than a decade they became one of the most prominent success stories in the MENA region. The founders, Mai Medhat and Nihal Fares both educated and trained in computer science and mechanical engineering, managed to attract sizable backing from Raed Ventures, one of the biggest ventures in the region and venture arm of Almajdouie Holding.
They received their initial seed investment of 174k USD from Vodafone and Cairo Angels. Later on in 2016, their journey with Raed Ventures began with a 450K USD funding round. A year later in 2017, they received a third round of funding of 2 million USD from Algebra Ventures, before being acquired by Bevy for an undisclosed amount. As of today, Eventtus is one of the leading solutions in the event tech sphere, operating in 35 countries.
From the early Raed investment to its final acquisition, every step helped expand the startup’s reach, providing them with necessary financial support and technical capabilities to further solidify their offering. By acquiring Eventtus, Bevy has supplemented its suite of community platform tools.
And Now … So what ?
In shaping the modern startup ecosystem in the MENA region, a process of massive scale partnerships and investment initiatives was largely ushered in by major corporations. In doing so, the need for ever evolving processes and technological solutions was not always sought in partnerships with foreign companies, but also as a strategic approach to create a conducive environment for the sourcing of these capabilities locally. This dynamic was at the core of early startups in the region, and still shapes the ecosystem.
The challenges faced today by startups and entrepreneurs in the region are on a different scale. If corporate-startup collaborations have helped seal a certain gap (absence of many VCs), it has also emerged as a significant investment mode that has so far positively affected the region’s economic growth. Still, the challenges faced today by startups require more than just corporate backing.
There are regulatory barriers, limited access to early-stage funding, and gaps in infrastructure that continue to impede growth. As much as these issues require enhanced support systems, corporate is now one of the main ways for startup founders in the MENA to bridge these gaps.
Discover the State of Funding in MENA – 2019 to 2023 : The white paper of this month is taking you through the ups and downs of MENA’s startup funding over the last 5 years. If you’re a startup founder, an investor or an ecosystem builder, this is your chance to learn from the past, spot the trends, and write your own success story.
Don’t miss out on knowing the history that could shape our future!
