Insights: Why the MENA region offers exciting opportunities for VCs, startups

Image: London Business School

It was recently reported that leading US technology venture capitalists (VCs) such as Andreessen Horowitz, Tiger Global and IVP have been flying out teams of executives to Saudi Arabia, the UAE and Qatar.

Eight thousand miles might be considered a long way to travel for any business trip with virtual meetings now being accepted as the norm in these circumstances, but one may argue that there’s no substitute for in-person interaction. A confluence of the effects of the crisis in Ukraine, entrenched inflation and rising energy costs means that downside risks dominate the outlook producing tighter financial conditions. As such traditional North American and European backers are having to contend with a severe economic downturn that has forced them to retreat from private investments.

Venture capitalists are sitting on a record $300bn of “dry powder” we have recently learned. This is money raised that has not yet been deployed. But many are struggling to find lucrative investments in startups and will be unable to raise a new venture fund. Cash that VCs put into startups has fallen more than 50 per cent over the past 12 months, according to data provider Crunchbase.

In the meantime, in the MENA region, cash-rich countries continue to seek to diversify their economies, away from petro-based businesses into technology-led enterprises.

The MENA region is growing in ‘economic’ appeal

It seems that this present tough economic environment, in some ways resonant of the fuel crisis and stagflation of the early 1970s afflicting many Western economies, has magnified the lustre and economic appeal of the MENA region, identified as the “most liquid place on the planet right now”, according to the head of a $1bn venture fund.

Certainly, such recent events as the failure of the Silicon Valley Bank, together with a myriad of economic concerns plaguing Wall Street and San Francisco, means that ready access to funding is very alluring. The abundance of family money in the MENA region, and growing government financial and other forms of support for startups, combined with the region’s need to drive economic diversification, has put the region into the spotlight.

The area is also hungry itself for opportunities in the form of new goods and services and for growing businesses across many different sectors. The region’s reform programmes and diversification initiatives further enhance the broader economic environment in which new businesses can thrive. In short, what we are presently witnessing across MENA region is a rapid prototyping of a new, and very sustainable VC ecosystem, backed by enviably solid sovereign wealth funds.

Beyond the appeal of the region’s rock-solid economic foundations lies a culture of innovation underpinned by a young population that is digitally aware and connected. I have been hugely encouraged by what I have witnessed within our own alumni community in the MENA region. The inaugural London Business School (LBS) MENA startup competition held at the end of last year provided an additional spur to the support and resources we provide regional startups, including the successful LBS Incubator programme, which helps early-stage companies navigate their paths to growth, enabling them to raise sizeable funds in seed capital.

Early-stage incubators are at the heart of the region’s economy, with the Department of Economic Development in Dubai stating that startups now make up 50 per cent of the total companies registered in the emirate and employ half its workforce.

My response therefore to the news that big name VCs from the US are making the region their target destination to raise capital is that these companies should be encouraged to consider such initiatives as the start of a long-term relationship with the region. Think of the MENA region in terms of the work of an incubator: partner with the region, support the budding ecosystems and individual startups to take confident strides ahead, and help them develop their talents. Part of me protests that this approach is perhaps somewhat overdue. On the other hand, however, it is better late than never.

Jane Khedair is executive director of the Institute of Entrepreneurship and Private Capital at London Business School