MENA startup ecosystem trends of 2020 that are likely to continue in 2021

2019 was the banner year for the MENA startup ecosystem which put the region on the map as an emerging startup destination, with Careem’s acquisition by Uber as the highlight. This put high expectations of 2020 being an even bigger year, however, the Covid-19 pandemic brought about uncertainty in the first half of the year which forced investors and startups to adapt to meet the changing landscape. 2020 saw a shift in investor behavior, yet over USD 1bn was invested across 496 deals, representing a 13% increase in total funding, compared to 2019. (Source: Magnitt)

Despite the light start into 2021, with decline in both inflow of funds and deal activity (compared to January 2020), investments are expected to flow in, and certain trends from 2020 are likely to continue into 2021:

Continued prioritization of key sectors:

Many investors chose to invest in industries and sectors that showed high growth potential amidst the Covid-19 pandemic. 2020 witnessed a shift in industry focus with funding in healthcare, education, food and beverage, e-commerce, fintech, and transport and logistics coming back into focus. There was also a clear focus on consumer oriented B2C solutions in education, e-commerce and healthcare, while other sectors were dominated by funding in B2B enterprise ventures (source: Magnitt).

UAE-based Pure Harvest Smart Farms secured USD 135.8mn and Nana, an e-grocery marketplace in Saudi raised USD 28.9mn.

These sectors “positively” impacted and brought to the forefront by Covid-19 will continue to be in investors’ bucket list this year.

Shift in investors’ appetite:

Although the number of deals in the region fell by 13% from 2019 to 2020, the average investment ticket size increased by 35%, indicating investors’ preference towards later-stage, less risky investment rounds. One of the notable deals in this regard was EMPG’s USD 150mn Series E round led by OLX Group.

Figure 1: More sizeable later-stage investment rounds were witnessed in 2020 (Source: Magnitt)

This shift in investors’ appetite is expected to continue over 2021, with investors preferring to invest in sound startup ideas with sizeable traction numbers and solid proof of concept. Larger bets are likely to be placed on more established companies, in order to weather the challenging times ahead.

Concentration of deals in MENA’s top 3 innovation hubs:

UAE, Egypt and Saudi Arabia have been the top 3 most active geographies in the region by deal and funding activity. UAE led the way with $579M invested across 129 deals, the UAE saw an average ticket size of $5.1M, indicating a larger share of later-stage deals.

Figure 2: Breakup of funding across countries in the MENA region (Source: Magnitt)

Deal flow and investment activity in these three countries are likely to lead the way in 2021 as well.

The pandemic has changed the macro-economic outlook for the MENA region, with many expecting the region to head towards an economic recession. However, not all is pessimistic. The traction in investment flow in 2020 is reassuring that funding activities will continue over 2021, with some tweaks. Startups with strong fundamentals will continue attracting deals, while investors with a stronghold on cash will continue investing in sectors impacted “positively” by the pandemic with bets on companies in late-growth stages.

At Falak, we work on transaction advisory deals across the region, helping startups and businesses across different stages build their business strategy and assist them in their fundraising efforts. We also work as buy-side advisors to investors to help them source lucrative investment opportunities.

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