VC funding drop spawns acquisition prospects for Mideast startups

The steep decline in venture capital investment across the Middle East and North Africa has turned many tech startups into ripe candidates for acquisition, the head of fund-tracking platform MAGNiTT says.

Watching the industry slide for the 16th month in a row, Philip Bahoshy, CEO of Dubai-based MAGNiTT, tells The Circuit that the bottom may be in sight.

“This is a great opportunity for potential M&A activity where international investors may encourage their portfolio companies to acquire companies in the region for expansion, or startups and corporates acquiring for market share,” Bahoshy said. 

“Valuations are beginning to come down, making it a lot more appealing for investors, especially those that have dry capital.”

Emerging venture markets – a group of territories that includes Africa, the Middle East, Turkey, Pakistan and Southeast Asia – raised $3.5 billion in the first six months of 2024, marking a 34% decline compared to the first half of last year, according to MAGNiTT’s Emerging Venture Markets Venture Investment Summary.   

Saudi Arabia led the region in VC funding, coming second only to Singapore in emerging markets and raising $412 million, a 7% drop compared to the same period last year.  

Despite a decline in almost all VC metrics in the first half of 2024 – funding, deal count and exits – Bahoshy said he has noticed some signs that may signal a turnaround is near. 

The overall decrease in venture investing has tracked alongside a growing preference for early-stage rounds, indicating a trend that mimics more developed markets, Bahoshy tells The Circuit.

“Investors globally continue to look for opportunities in venture as things potentially look to pick up, especially at [the] early stage,” Bahoshy said, adding that the number of active investors in MENA is on the rise. 

MENA funding rounds fetching check sizes of $1 million to $5 million have tripled in the last several years, rising from 15% in 2020 to 45% in the first half of 2024.  

This shift indicates a growing focus on nurturing emerging startups. Bahoshy suggests that if this pattern holds, “funding is likely to pick up and hence the inflection that we may be bottoming out in the next two quarters.” 

He points to relatively low deal counts in the wider MENA region, but says Saudi Arabia and the UAE will continue to attract deals.  

The kingdom saw a 3% drop in funding rounds to settle at 63 in the first half of the year compared to the same period last year. The UAE saw an 11% increase and 83 transactions. 

Bahoshy expects more of the same as the year goes on, with room for growth if – and it’s a big if – interest rates come down.

As the focus shifts to early-stage ventures, valuations will become more realistic and based on fundamentals like profitability, he added.  

Investors are now focused on deals with strong foundations, good product-market fit and productive founding teams. Unlike a few years ago when investments were made with less due diligence due to FOMO and technology hype cycles, investors are now making targeted bets, particularly at early stages, according to Bahoshy.

The willingness of Gulf sovereign wealth funds to back venture capital firms looking to invest in the region is another potentially crucial factor in venture funding’s turnaround.  

Bahoshy notes investor appetite remains cautious. “People are still concerned about the economic environment. A lot of people are looking at the geopolitical situation. Many are looking at what the political situation is globally, whether it’s in the U.S., Europe, where we’ve just seen two elections take place,” he explained. 

He believes that a reduction in interest rates, which would lower the cost of capital, might stimulate late-stage funding.  

“If things begin to pick up in the wider economy, globally and here in the region, we’ll see similar to what’s happening in the U.S., at least quarter on quarter growth in funding,” he said. 

While transaction numbers might not rise, Bahoshy has found his silver lining: he expects investors to “place bigger bets” on newer startups – creating a larger pipeline of companies on the rise.