The Opportunities — and Perils — of Middle East and Africa Venture Capital

“It’s kind of like doing venture in the Silicon Valley in the ‘80s, when the [Kleiner] Perkins of the world and so on actually really sat with the founder every two weeks and ... helped them build their business.”

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Illustration by II

Across the globe, a different venture capital story is unfolding from the one in the headlines. In the Middle East and North Africa, venture capitalists say unique local challenges, separation from other VC markets, and skilled entrepreneurs mean there are an increasing number of investment opportunities. Venture capital markets in some regions are, arguably, rightsizing. In MENA, they are just getting started.

With less than $5 billion invested annually, MENA’s venture capital market is a fraction of the size of the U.S. Not long ago, it wasn’t uncommon for the largest VCs in the world to raise single $1 billion funds.

But rising interest rates and recession fears have wrecked the U.S. venture capital market. In 2021, there were a record 19,025 VC deals with a total value of $348 billion. Last year, there were only an estimated 15,766 deals valued at $170.6 billion, according to PitchBook. The first quarter of 2024 isn’t expected to be much better.

The venture capital ecosystems in MENA are not immune to the macroeconomic conditions dragging those in the U.S. or elsewhere. In MENA the number of investments made, and the sum of money they doled out, also fell last year, although not as drastically. After a record 875 deals with a value of $4.8 billion in 2022, deal volume slumped to 663 and $3.8 billion was invested, according to PitchBook.

However, even last year, deals and capital invested in MENA startups were greater than in 2021 and a multitude higher than they have been historically. In 2013, there were only 148 deals valued at $200 million and it took until 2020 to reach 566 deals valued at $1.4 billion.

The MENA market’s size and state of maturity is reminiscent of venture investing decades ago, say many investors.

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“It’s kind of like doing venture in the Silicon Valley in the ‘80s, when the [Kleiner] Perkins of the world and so on actually really sat with the founder every two weeks and brainstormed with them and helped them build their business. That’s where we are as an ecosystem, really having to support the founders, work closely with them, help them grow and grow the ecosystem with us,” Noor Sweid, managing pattern of Global Ventures, a Dubai-based venture capital firm she founded in 2018.

There are many famiiliar startup tailwinds. For example, there are huge, young populations in Africa that have mobile phones and are digitally savvy, yet are severely underbanked. Unlike in the U.S. and other places, where brick-and-mortar banks might keep some customers from adopting digital solutions — or banks from evolving their services — no such infrastructure exists in many parts of Africa. It is a place ripe for fintech startup innovation, VCs say.

Similar problems exist in other industries, where there are significant needs but no obvious solution because of the lack of infrastructure and investment capital. Another obvious opportunity Sweid points out: There are far fewer doctors per person in some parts of the world — and they are often located frustratingly, or even impossibly, far for patients — compared to the U.S. Telemedicine and other innovations to provide services might be the only solution, she says.

Locals can help navigate the distinct challenges of the region.

There aren’t powerful lobbying organizations slowing or preventing innovation so solutions don’t necessarily require outside-the-box thinking — few boxes, or long-established ways of doing things, don’t exist. And the local governments want to save and improve lives, so if someone locally truly understand the problems, there’s hope to resolve them, according to Sweid.

Gbenga Ajayi, a partner at QED Investors and the head of the firm’s investments in Africa, said that in the U.S. and other markets, a startup doesn’t necessarily have to solve a massive problem to be successful, so some venture capitalists spend a lot of their time just trying to determine if a product or service has a big enough market to make a venture investment worth it. As an example, Uber drastically changed the world of taxis but it was a “want” not a “need.” If Uber didn’t exist, taxis would still work relatively well.

In Africa, Ajayi says, all the problems are seemingly obvious and giant. There’s no doubt that millions of people need better access to water, food, healthcare, and financial services. Solving those, by way of allocating a finite amount of capital and generating returns for investors, is the real challenge he faces.

In Nigeria, Ajayi says 90 percent of all problems are so profound that traditional investment approaches aren’t effective. They need innovation and that requires VC, he explained.

Larisa Miller, co-founder and CEO of Phoenix Global Holdings, a consulting and investment firm based in the U.S. and the United Arab Emirates, highlighted similar opportunities in MENA that other VCs did. But she also added that firms like hers exist for a reason. The market is small and investing in startups there requires specific knowledge, skill, and restraint.

“VC’s and LPs, while recognizing the significance of the Middle East as an investment marketplace, do face unique regional challenges. The complexities around regulatory and legal compliance, stemming from foreign ownership restrictions, repatriation of profits, and regulatory approvals, can be daunting to investors new to the region,” Miller said. “Understanding the cultural nuances and building relationships can challenge the familiar processes of investors, making it worthwhile for VCs and limited partners to seek local expertise.”

Local investors in the MENA region are also sophisticated and have capital to deploy, she added. They are tough competitors to both any VC unfamiliar with the region trying to set up shop and limited partners abroad. But that’s a sign of the opportunities, even though there aren’t as many as other regions.

“I am bullish on MENA venture capital, mostly in terms of the supply of proximate entrepreneurs available in the region. Specifically, if you draw a circle 1,500 miles out from Dubai as the epicenter, the population there-in easily exceeds one billion people. Entrepreneurs go to the capital like moths to a flame,” said Jack Selby, a managing director at Peter Thiel’s family office, Thiel Capital, and a managing partner at AZ-VC, a Phoenix-based venture firm that targets early-stage companies.

“This dynamic should be very bullish for MENA VC over the next decade.”

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