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01 October 2018

MENA’s growing VC industry

Philip Dowsett, Funds Partner at Morgan Lewis, sheds light on Dubai and MENA’s growing venture capital tech investment landscape


In terms of the international stage, for a while it’s been all eyes on Dubai and its prevalence in relation to its standing as jurisdiction of choice for operating in or out of the Middle East.  By virtue of this prevalence, Dubai has arguably, and by default, found itself as the Middle East and North Africa (MENA) region’s jurisdiction of choice for the start-up and venture capital (VC) industry. 

Market shares and initiatives

Now, notwithstanding this somewhat serendipitous facet of Dubai’s growth and stature as a hub of business in MENA, over the last few years Dubai has promulgated many efforts to cement this status and ensure it remains the VC centre of the Middle East.  According to a recent report, the UAE leads the MENA region as home to 42 per cent of its start-ups, followed by Egypt at 12 per cent, Lebanon at nine per cent and Jordan at eight per cent.  However, a number of other MENA countries are launching similar initiatives to try and capture a portion of this fledging market and attempting to knock Dubai of its mantle. 

For example, in the last year, Saudi Arabia has launched ambitious plans in the country’s 2030 Vision plan to depart from the notion of being an oil-dependent economy, and encouraging female participation in the workforce, as well as its recent $3.5 billion investment into a leading US tech company. 

Oman has also initiated ambitious plans, with various investments arms of the country launching the country’s first equity-based venture capital firm, Innovation Development Oman Holding that has an initial capital of $129 million. Additionally, the Oman Investment Fund launched its own $200 million Oman Technology Fund. 

Qatar has equally initiated its efforts with The Qatar Development Bank having launched a $365 million SME Equity Fund to provide capital to innovative start-ups and entrepreneurs, as a part of the country’s overall economic diversification.

On a global stage

Taking a step back, the VC industry in itself is an established industry and market in the West. VC investment in the United States last year totalled around $58.6 billion and Europe had $16 billion, while MENA only stands at around $800 million.  The MENA region is therefore playing a challenging game of catch-up. This is however carried out against the backdrop the MENA VC industry which is still in its infancy. It has arguably become an industry in itself over the last decade and its progress and achievements within that period are nonetheless notable.

The rise of VC in the Middle East has primarily been led by a select band of protagonists that have each, and in certain cases, all, been involved in financing rounds for the most high-profile start-ups in the MENA region.  This roster includes Wamda Capital, STC Ventures/Iris Capital, Middle East Venture Partners (MEVP), and Beco—which now has numerous other investors vying for a piece of this VC action in the MENA.

It’s fair to say however, that this interest has, and in the large part remains to be, from MENA-based investors. The lure of investing in MENA start-ups has not quite yet gained the mainstream interest from across the various ponds. 

That said, there has recently been an increased interest from foreign investors into MENA-based start-ups, including Series A and B investments in Fetchr which attracted considerable interest from Silicon Valley VC firms (recently closing a U$ 41 million Series B round). A Series A investment by Russian VC, Addventure, was also made in Service Market (formerly known as movesouq). On top of that a majority European-based investment was made in Sprii (formerly MiniExchange). And of course, the recent high profile buy-out of Souq by Amazon. 


Given the potential that the nature of many tech-based start-ups means that locality and operational bases are flexible compared to traditional asset-based business, and the attractive tax-free opportunity that basing an operation in a MENA country may afford, one may question why the MENA region has not attracted more start-ups. 

This is potentially multi-fold:

  1. Operations in MENA are not without their hurdles.  Although of course operating across state-lines in the US and across Europe comes with managing different laws and regulation, there are numerous synergies and similarities. However, in MENA operating across the region often involves grappling with laws and regulations that are generally more simplistic in their nature and often which have not modernised to address technology business, resulting in ambiguities and uncertainty around operations. This is often coupled with complex issues relating to foreign ownership (which differs in each country), as well as varying demographics.
  2. The ownership issue. A number of Gulf Cooperation Council (GCC) countries require local ownership, and this can be a struggle for foreign investors to get to grips with.  On the positive side, several countries have free zones affording 100 per cent foreign ownership which circumvents this concern, but, depending on the nature of the business, sometimes an onshore presence in the same country is required which then requires local ownership (and structuring appropriately to protect the assets).
  3. We need a Unicorn (or two). In the same way proof of concept is often vital in a start-up, MENA needs headline grabbing deals and exits to legitimise its standing.  And with the Souq exit and the recent $100 million investment by STC in Careem creating a paper Unicorn, this is getting there.
  4. The cost issue.  Setting up in the GCC can be notably more expensive than doing so in Europe and the United States.  However, there more cost-efficient options such as establishing in Egypt, Jordan or Lebanon where it is cheaper to set-up and have start-up culture.  Although, it is not uncommon for these start-ups to look to relocate their HQs to Dubai when finances start to permit.
  5. Geopolitics and negative press.  Unfortunately, one thing holding back investment in MENA (on many fronts), are negative headlines. These have—in the past—had the tendency to overshadow the many successes, growth, and increased stability throughout much of the MENA region.

MENA is not Silicon Valley.  One of the further challenges as a start-up in the MENA region is the lack of transparency over financing terms and investment criteria, as well as the difficulty in obtaining information on potential suitors for investment, as compared to a considerably greater flow of information in the western world.  Part of this is due to the limited number of deals which means that benchmarking terms are more difficult. There is also no real access to the same reports or insight into financing terms that can be at the hands of start-ups in the US and Europe. 

The MENA Private Equity Association has sought to redress this and provide more visibility on structures, terms and investors, and despite movement, information and comparatives are still difficult to obtain. Consequently, VC investors are potentially in a stronger negotiating position in the MENA region than outside of MENA, and the luxury of term-sheet shopping as a start-up in MENA is generally rare, and arguably the investors hold most of the cards and know how to play them. 


On the positive side, notwithstanding the infancy of VC in the MENA, many of the principals working for the leading VC firms in the region are sophisticated and seasoned. Plus, as the VC industry in the MENA region matures, these individuals and firms have endeavoured to adopt best international practises and proper documentation to ensure that—even if by size—MENA is catching up and that it can compete from a sophistication perspective.

Ultimately, notwithstanding its infancy, the VC industry in MENA is quickly becoming an industry in its own right and is a key focus for many of the jurisdictions looking to move away from the legacy dependency on oil and create alternative means of wealth and income. Concerted efforts have been made by a number of the MENA governments to foster entrepreneurial spirit and accommodate start-ups—from the launch of incubators and accelerators, to accommodating 100 per cent foreign ownership structures and tax-free regimes. 

With proven increasing interest from non-MENA VC firms into the region’s start-ups and on the back of the Souq acquisition and Careem, the paper-Unicorn, more eyes from the international stage are on the MENA VC industry. LEBANONVENTURE CAPITALMIDDLE EAST

Based on the last few years and the determined, albeit ambitious, plans of various governments, the MENA region is seemingly positioning itself well capturing its own share of the global VC market. It will be increasingly interesting to see if anyone can topple, or at least start to unbalance, Dubai off its current pedestal as the home of MENA VC.





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