Middle East primed for entrepreneurial digital sector growth, says McKinsey

02 July 2018 Consultancy-me.com 5 min. read

As one of the most digitally connected regions on the planet, the Middle East is well placed to overcome its lagging digital sector capitalisation according to management consultants McKinsey.

Exploring how investors can support and enable growth in the region, the McKinsey digital report makes a bold pronouncement straight off the bat; the Middle East and North Africa are on the cusp of a potential entrepreneurship gold rush. To support this proposition, the authors point to two primary factors – the region is one of the most digitally connected globally, with high levels of online consumption, and the venture capital dollars have already begun rolling in.

Exhibit A. With approximately 60 percent of the overall MENA population under the age of 30, and 30 percent within the 15–29 year-old bracket, it might logically follow that, coupled with the region’s current and increasing access to technology, there is vast potential for a rapid expansion of the local digital sector in the coming years. The statistics bear out this potential. At present rates, 88 percent of the Middle East population is online daily, and 94 percent own a smartphone – with higher penetration in Kuwait, Saudi Arabia and the UAE than in even the US.Growth in smartphones, broadband and 3G/4G usage in Middle EastAnd despite active social media use standing at a relatively low 38 percent of the population, the numbers grew by 47% in the Middle East in 2016 alone. With respect to the diverse economic maturity of nations across the region, recent adoption rates in the comparatively developed Kingdom of Saudi Arabia may provide a regional map of demand for the future – with the KSA now ranking seventh globally for the number of individual social media accounts, and its Instagram uptake jumping from about 2 million users to 13 million in just the past two years.

Despite this level of online engagement, however, local enterprise has yet to capitalise on the digital market potential. Giving the example of e-commerce, the McKinsey report notes that only 8 percent of small and medium enterprises across MENA have an online presence, and just 1.5 percent of retail sales are conducted online; figures, respectively, at one tenth and one fifth of the rates in the US. Furthermore, the international IT and tech behemoths are capturing the bulk of the local digital value-creation.Share of digital contribution to GDP in Middle EastMcKinsey pegs the current rate of overall digital realisation in the region at just 8 percent of its potential – compared to 18 percent in the US – a gap worth around $95 billion per annum to the collective Middle Eastern GDP. All told, the current contribution of the digital economy to the region’s GDP is half that of in the US. Again, considering the significant economic development underway in certain parts of the region, and the general development and technological flow-ons expected in others, the potential for the growth of the MENA digital landscape is huge.

While questions remain as to whether certain elements of the equation will plan out, the report authors believe there is enough evidence to suggest that the future looks promising, namely, the previous native successes which demonstrate that there is space for regionally specific digital services to flourish, and – Exhibit B – the ‘startling’ increase in local investment funding for start-ups since 2014. In this short period, the number of deals has nearly doubled, from 138 in 2014 to 260 last year, with the average ticket size (exc. Souq and Careem) jumping from $430,000 to $1.59 million at a compound annual growth rate of 54%.Funding growth for start-ups in the Middle East between 2014-2017Of further note, this increased appetite for funding local start-ups is coinciding with both a broader increase in the number of VC investors operating locally – up from just nine in 2008 to 145 in 2016 on McKinsey estimates – and an explosion of public and private support networks for digital entrepreneurialism in the region, such as through the establishment of structured incubator and accelerator programs – with the consulting world playing a leading role.

Just a few of the developments in recent months alone; The Dubai International Finance Centre (DIFC) has partnered with Accenture to further develop its FinTech Hive as world-leading accelerator; Deloitte was tapped by The Saudi Arabian Monetary Authority (SAMA) to help build a rival fintech ecosystem in Riyadh, and; Roland Berger has joined Bahrain FinTech Bay as founding partner, with Alvarez & Marsal Managing Director Saeeda Jaffa appointed as an independent director of the hub’s executive board.

McKinsey, itself, has recently launched ‘Fuel Ignition’ in Dubai, a start-up club to help regional entrepreneurs scale their ventures with guidance on areas such as strategy, pricing and sales. For private and public investors, the global strategy and management giant advises that they will need to play an active role in unlocking the region’s digital promise, by taking “deliberate and concerted actions regarding investment theses, networking, growth mindset, investment scale, governance and performance management.” That potential entrepreneurship gold rush, the firm says, will hinge on the right enabling environment.