'It's time to shape MENA startup ecosystem into something bigger'

28 January 2024 Consultancy-me.com 5 min. read
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The startup ecosystem of the Middle East, North Africa and Pakistan (MENAP) is growing. Yet there still is much potential for further expansion – analysis from McKinsey outlines how the sector can accelerate into its next level.

The Middle East, North Africa and Pakistan region should have a more robust startup ecosystem – there’s no getting around that. While it has grown significantly in the past few years, it is disproportionately small compared to the investing power of its nations.

While the region boasts some of the world’s wealthiest, most active global investors (sovereign wealth funds alone manage $3.3 trillion in assets), startups often struggle to attract funding. There is a lack of typical later stage investors which requires companies to seek alternative paths to raise funds.

'It's time to shape MENA startup ecosystem into something bigger'

But this historically small and immature space is beginning to grow, and signs point to the dissipation of this unique misalignment of capital supply and demand. International investors are looking more closely at the region. International venture capital firm 500Global places the MENA region at the top of its list of high-potential areas for investments.

Flashy headlines are often mistaken as proof of a robust startup ecosystem – yes, there are positive signs of growth in the region, including five-fold growth in venture capital funding since 2017 and seven companies reaching $1 billion valuation since 2019.

'It's time to shape MENA startup ecosystem into something bigger'

But in reality, investors are taking a risk-averse approach, McKinsey & Company found in a 2023 report.

Abdur-Rahim Syed, partner at McKinsey & Company, explains that the top 10 startups account for 35 to 55 percent of funding each year, and activity is densely focused in just four of the region’s 18 countries: UAE, KSA, Egypt and Pakistan. Because capital is so concentrated in a handful of startups, while funding grew by 7 percent in 2022, the number of deals actually fell from 725 to 703.

This reluctance to take risks is also evident in the much steadier growth in mid and late-stage funding, he adds. From 2017 to 2021, the number of series B deals grew roughly 34 percent, and the average deal value rose 17 percent per year. Meanwhile, over the same period, the number of early-stage deals grew by just seven percent annually, while the number of series A deals fell by one percent.

'It's time to shape MENA startup ecosystem into something bigger'

Francesco Malatesta, a McKinsey partner and one of the report’s authors, emphasizes that for the region to evolve into a genuine source of innovation rather than a fast follower or copycat, there’s a crucial need for a healthier, more consistent pipeline of new start-ups, along with supportive investors.

Yet copycat startups, which repurpose an existing idea from another part of the world for the region, have attracted global players to MENAP. Amazon acquired Souq, Uber acquired Careem. While this could present an attractive exit strategy for start-ups and investors, too many ‘copycats’ also limit the global, disruptive potential of regional start-ups.

Private exits account for the overwhelming majority of exits – 98 percent in 2022. These transactions include sales to local strategic buyers, like Noon’s acquisition of Namshi, and market-entry plays by global players.

'It's time to shape MENA startup ecosystem into something bigger'

Public listings

Public listings are far less common, for a few reasons. Cairo-based online investment marketplace Exits MENA highlights a few obstacles for startups considering an IPO: A lack of market sophistication (though this is slowly changing); a complicated regulatory environment; public investors’ lack of familiarity with startups; and the need for strong governance structures in the company.

However, Saudi Arabia’s parallel exchange Nomu is showing promise, with Jahez’s successful IPO leading the way.

To continue building upwards, the MENAP region needs to develop a more sophisticated and cohesive startup ecosystem, says Massimo Mazza, global Leader of Fuel, the venture capital and entrepreneurship practice at McKinsey. That means working with policymakers and the private sector to attract global talent, to guide and upskill entrepreneurs and to help startups expand regionally and globally.

For local start-ups to become global disruptors, they need easy access to the entire region to test and enhance their offering while also driving innovation; such a broad and unified market is significantly more attractive than the individual countries that make up MENAP. Strong capital markets and greater liquidity are key to building these global disruptors. Both measures will likely require coordinated regulatory changes.

“The region has made great strides in the past few years, building a startup culture and ecosystem out of nothing,” says Mazza. “Yet it’s now time to shape this sector into something bigger, with global impact and an eye on exponential growth.”