2020: A year to break records in venture funding

When in November 2013 Dubai won the Expo, we already knew that 2020 would be a year set to break records – a practice we have honed over time in the region. Since 2013, when venture funding was particularly muffled with only $29MM raised in MENA, the investment landscape has become more colorful and exciting and 2020 is prone to see another bunch of records being broken in our startup ecosystem.

Stepping into the new year, we can look back at a successful 2019 for startup investments ($704MM in funding through 564 transactions in 2019 with 23% coming from the UAE only according to the latest MAGNiTT report) and exits ($3.1 billion completed acquisition of Careem by Uber). We expect 2020 to keep on an upward pace based on the inflow of funds in this asset class, and in general more experienced and execution-focused entrepreneurs in the driving seat. No doubt Fintechs will keep on striving, and we anticipate great opportunities arising in digital health and education. With Egypt topping the number of deals in 2019 and KSA’s startup scene catching up rapidly, entrepreneurs will face fiercer competition from neighboring contenders, which could lead in the coming years to consolidation (M&A activity) and to a more mature ecosystem.

UAE Fintechs still leading the pace

2019 was again a great year for Fintech in the MENA ($77MM invested according to MAGNiTT) with the UAE establishing itself as one of the top international hubs, hosting one third of the fintechs in the region. Digitization of financial services is happening at an unprecedented pace thanks to our hunger for digital innovation, together with a unique adoption rate for blockchain technologies from institutions (e.g. the UAE Government’s Emirates Blockchain Strategy that aims to transform 50 per cent of government transactions into the blockchain platform by 2021). As a result of the active implementation of regulatory testing environments (the so-called “sandboxes”) in 2019 such as the ADGM RegLab to test innovative models in the Fintech space, we do not expect any slowdown in 2020. Quite the opposite in fact, with an increasing adoption rate for B2C products, and startups focused on financial inclusion gaining further traction. We are particularly bullish on InsureTech startups (such as Addenda, Democrance, Yallacompare) that are expected to disrupt a broad range of bland insurance products and inefficient claims processes.

 Digital Health will stick out in 2020

The verticals with the deeper infrastructure gaps we believe will see the strongest momentum belong in the HealthTech and PharmaTech sectors that both already got increasing attention in 2019 from investors on deals such as Meddy.com, Chefaa and Yodawy. We foresee incredible opportunities in these spaces as consumers, healthcare providers and insurance companies are on the lookout for a better value proposition. A digital transformation of the healthcare sector in the MENA is a necessary step, as witnessed already in other parts of the world.

 An increasingly competitive market that could lead to consolidation

One of the interesting trends to monitor is the establishment of well-funded startups from Egypt and KSA in the UAE market (Vezeeta; SWVL moving their HQ to Dubai). From the recent boom in these neighboring ecosystems, several startups have emerged with the resources to aggressively compete throughout the region. Some locally focused startups will have to roll up their sleeves and face these new challengers, who are also coming into the market with the means to poach their talents.

We anticipate an increasing level of M&A transactions as tech companies in the MENA are maturing and expanding rapidly therefore attracting regional and global attention from larger players. The increased competition from neighboring startups may force some of them to look at external growth strategies to take a dominant position in this buzzing market. Will we see an IPO in 2020? Unlikely, although the recent world-record IPO from Saudi Aramco may inspire a few. A growing number of late stage investors are also coming to the region hence reducing the need to raise capital in the public markets, and the preference to be listed overseas still prevails. The 50% plunge of NMC Health shares listed on the London Stock Exchange following a short-seller report might alleviate this.

Additional investments and great deal flow

The region is witnessing a new wave of promising startups led by high-skilled and experienced entrepreneurs who contributed in building success stories such as Careem and Souq. We now find such individuals with a first-hand experience on fast scaling in the driving seats of well-funded ventures like SWVL. We clearly see an improvement in the quality of the deal flow and the profiles leading these ventures. In this “upgraded” technology landscape, startups are raising larger rounds at higher valuation, especially from Series A onward (e.g. TruKKer closing a $23MM Series A).

To address this overall positive trend in venture capital, several of the leading investors in the region have raised additional funds such as Beco Capital ($100MM for Beco Fund II) and MEVP ($65MM added to MEVF III) while KSA’s Public Investment Fund has just launched a $1.07bn investment vehicle dedicated to startups and SMEs, and New-York based VC firm Modus Capital announced a $75MM fund targeting early & growth stage companies in the MENA. With this additional funding capacity brought in the region, a stronger interest by LPs in this asset class, a higher volume of transactions and larger rounds throughout the funding cycles, 2020 is set to be buzzing with deal announcements all around.

Accelerated venture building

Another trend we expect to translate in 2020 is the surge of startup accelerators in Egypt, KSA, Lebanon and the UAE, to fast-track the overall hunger for innovation in the MENA region. Leveraging on the success of programs such as Startup Bootcamp (Dubai Smart City, Fintech), Plug & Play (Travel and fintech), Misk 500 (sector agnostic) we anticipate the launch of further corporate accelerators and innovation programs for specific verticals and in particular in digital health, education and space tech. New entrepreneurship hubs such as Dubai Digital Park are also opening this year while WeWork is setting up shop in Abu Dhabi with an aggressive growth strategy for the region. The Innovation Impact grants Program of Expo2020 will also contribute to the visibility of our startup landscape on the global scene as a flourishing entrepreneurial ecosystem. We should also see further initiatives from governments on education at university level giving rise to a future pool of talents ready to join the fast-growing number of innovative companies.

All in all a great year to come for our startup ecosystem.