African venture capitalists and startups are looking to the Middle East for new capital, but there’s a catch

by MMC
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Image credits: Getty Images

Funding for African startups has seen a significant decline by more than 50% over the last three quarters compared to the previous year, because reported by The Big Deal. To date, startups on the continent have secured between $2.5 billion and $3.4 billion in funding, according to data from The Big Deal and Briter Bridges. With a quarter remaining, it seems unlikely that this figure will reach the levels seen in 2021 And 2022when venture capital peaked at $5 billion to $6 billion, encompassing both equity and debt deals.

It is essential to note that this decline is not exclusive to Africa. Global venture capital has returned to pre-COVID-19 levels. However, Africa’s declining numbers are particularly concerning given its reliance on external funding, especially compared to other emerging tech ecosystems such as India And Latin America.

According to a report According to the African Private Equity and Venture Capital Association (AVCA), 77% of venture capitalists who funded African startups last year were from outside the continent. However, as global investors retrench this year, this percentage could change significantly by the end of the year. While we wait for these numbers, it’s worth highlighting a crucial finding from the report that sheds light on where African founders are looking for their next source of capital.

The US and UK collectively accounted for 50% of foreign venture capitalists investing in Africa. Remarkably, the UAE represented the third largest source of foreign capital for African startups in 2022, with a contribution of 4%, surpassing countries like France and China. Data from Briter Bridges indicates that more than 80 Middle Eastern investors have participated in African deals since they began monitoring the region. In 2019, 16 Middle Eastern investors backed African companies, a number that increased to 50 last year.

Image credits: Briter Bridges

This growing connection between African startups and venture capital firms and investors and LPs originating in or based in the Middle East was highlighted last week at GITEX, a global technology trade show hosted by and hosted in the United Arab Emirates. The event attracted more than 170,000 participantswith 33% from the Middle East, 21% from Africa, 20% from Asia, 18% from Europe and 8% from the Americas.

Only 22% of 950 investors was from the Middle East at the event. However, I spoke with several African founders, mostly in the early stages of building their businesses, who attended the event with the aim of connecting with investors from the UAE and neighboring GCC countries. Traditionally, they sought funding from Western investors, and GITEX offered them the opportunity to explore new and diversified options, given the current challenges of raising venture capital. While discussions are ongoing with both groups of investors, it remains unclear whether they will result in investments.

On the sidelines of the event, executives from some of Africa’s most prominent technology companies, including MNT Halan, Fawry, Andela and Interswitch, participated and engaged with government officials, customers and investors from the region.

Meanwhile, Africa-focused investors have had mixed experiences. Some attended the event to connect with their existing limited partners (LPs) in the Middle East and expand their network to include a broader spectrum of institutional investors, not limited to the region. Additionally, a few venture capitalists have pointed out that while the Middle East is a place to make valuable connections, it is essential to build trust before institutional capital can be secured. As a result, the region remains a long-term strategic priority for their funds.

In contrast, some early-stage venture capitalists explicitly sought institutional investors from the Middle East. One investor mentioned that during some conversations he felt competition between African and British investors vying for the attention of Middle Eastern limited partners (LPs), particularly government and family-backed funds. offices.

Over the past year, investors have been increasingly attracted to the Middle East, seeking to establish lasting relationships with sovereign wealth funds. Venture capital firms are facing one of the most significant funding shortages in nearly a decade. Notably, major venture capital firms like Tiger Global and a16z would have explored the opportunities in Saudi Arabia, the United Arab Emirates and Qatar earlier this year. They were looking for institutional investors interested in diversifying their portfolios from oil into technology sectors like artificial intelligence and robotics, two of the most important technology themes on GITEX.

For a long time, the Middle East and the GCC have been seen as easily accessible sources of financing. However, the regional investment landscape has become more sophisticated, involving more comprehensive due diligence and selectivity than in the past. Now, startup founders and venture capitalists from outside the region must meet specific criteria to get support. During a conversation with an African investor outside GITEX, I learned that some institutional investors based in Dubai and Riyadh required him to have previously supported regional startups before considering committing. Fortunately, he was able to connect with more accommodating partners.

Philippe Bahoshy, the founder of MAGNITT, a Dubai-based data, analytics and insights platform, who was present at GITEX, shared his insights with TechCrunch. He noted that there was a growing perception in recent months that Middle Eastern sovereign entities and venture capital firms have been more active than elsewhere in the global venture capital markets. With With events returning in the fourth quarter, more startups and venture capital firms were expected to come to the region to raise funds, he noted.

“While it is true that there are more sovereign entities like the Dubai Future District Fund in Dubai, Saudi Venture Capital and Jada in Saudi Arabia, the deployment of capital has been selective and primarily focused on those looking to build and to deploy locally,” Bahoshy said. “So when a VC is seeking LP funding or a startup is looking to raise capital, it is crucial to consider how you plan to deploy it for expansion into the GCC or MENA region.”

Octave Phukubye, an investor in the pan-African seed fund Microtraction, also present at GITEX, highlighted that Middle Eastern limited partners are keen to support African GPs. However, he observed that these investors frequently inquire about GPs’ investment plans in the MENA region. This investigation stems from pressure on institutional investors to demonstrate their role in catalyzing the region through technology investments.

“Dubai is positioning itself as the Mecca to produce 40 unicorns in 2030. But there is a gap. Middle East LPs have funds but don’t have many local VC funds led by experienced GPs, and the ecosystem is too nascent to factory-produce stellar founders,” Phukubye said. “There has been talk of GPs currently considering splitting their funds to include the MENA region or creating new funds domiciled in Dubai. And foreign GPs need to migrate their portfolio companies to set up in Dubai so that Middle East LPs or GPs can support these portcos to expand into MENA and larger GCC region.

A rare illustration of how this approach could work for a startup founded in sub-Saharan Africa is Move, the mobility fintech company headquartered in Lagos and Amsterdam. Despite launching in Lagos in 2019, Moove has significantly expanded its reach, with a presence in 13 cities across the world, including Dubai. In Dubai, the company has over 300 employees and maintains very active operations. Moove has positioned itself as Uber’s primary vehicle supply partner in the EMEA region. It operates the largest fleet of electric vehicles, measured in hours of delivery, on the Uber platform in the United Arab Emirates. In August, Moove secured $76 million in fundingwith the equity portion led by Abu Dhabi-based Mubadala Investment Company – marking Mubadala’s first investment in an African startup.

African startups are not only looking for capital in the UAE; Dubai’s appeal lies in its efficient incorporation and taxation system for startups and its facilitation of residence permits and visas for entrepreneurs. In Africa, Egyptian startups have been the main beneficiaries of venture capital from GCC-based investors, including companies like BECO Capital, Saudi Technology Ventures, Middle East Venture Partners (MEVP) and Global Ventures. Notably, while some of the best-funded companies, like Swvl and Vezeeta, have moved their headquarters from Cairo to Dubai to attract more investment and improve their global positioning, early-stage startups are increasingly making this move to escape to current economic challenges. in Egypt.



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