With an overall funding decline of 46% compared to 2022 and no mega deals for the first time since 2015, 2023 was quite a challenging year for entrepreneurs in the UAE, as Magnitt’s FY 2023 UAE Venture Investment Report indicates.
Indeed, VC funding, especially in earlier stage ventures, somewhat dried up, as Ryaan Sharif, General Manager at Flat6Labs UAE, explains. “Companies that should have been raising their next round were struggling to find new VCs to deploy the funds, which means that they had to go back to the cap table, look at their existing investors, and ask them for [financial support] to stay alive,” he says, adding that, as a result, most VC funds re-invested in existing portfolio companies rather than in new ones.
Naturally, the impact on founders was significant. “Startups thought they were on a path to raising money much more easily and much quicker, but the timeframe went longer and longer. And for a startup, that’s quite a daunting thing,” says Sharif.
What Doesn’t Kill You Makes You Stronger
Yet, not everything was doom and gloom in the past year. In fact, a tighter purse helped some startups become more robust. “Rather than hyper-scaling and trying to grow extremely quickly, many founders reflected on how to make their company more sustainable; how to create mechanisms to be on the path to profitability rather than hyper-growth. Sometimes, challenging times create better founders,” says Sharif. “[These] startups are becoming more KPI-driven, and they understand that boards are now a lot more stringent in terms of making sure that key KPIs are attached to the money being deployed,” he explains. In that sense, 2023 could actually be seen as an opportunity to weed out the less resilient and sustainable companies. “Even looking at our own portfolio, we got a much better understanding of which founders were agile and able to make quick changes to sustain their growth momentum, albeit less aggressively,” says Sharif.
For example, some startups started looking for ways to finance themselves beyond VCs, as SmartCrowd’s Siddi Farid advised here. “As a backup plan, many of our founders who were struggling decided to approach family offices and angel investors. They ended up securing enough to sustain themselves until the VC could make a decision,” explains Sharif.
All in all, by helping both founders and VCs refocus, the general slowdown was beneficial.
Signs of Progress
Another upside is that, because the funding crisis was global, an increasing number of international startups are moving to the UAE, a recent Flat6Labs report shows: foreign companies that applied to its Ignite seed funding and incubator programme surged by a whopping 284% between June 2021 and October 2023.
“That’s a consequence of the job market abroad,” says Sharif. “Some of the larger tech players like Google, Facebook, and so forth, are making an incredible number of redundancies; many of these tech-savvy [former employees] are taking the risk of starting their own startups. And the UAE has become a very lucrative market to find venture capital; so, many people have decided to pack their bags in countries in which running a business can be quite expensive, and come to the UAE where they can register in free zones and scale out to neighbouring countries like Saudi Arabia, Egypt, and so forth.”
Sharif is hopeful that the region will become even more attractive to international entrepreneurs once governments figure out how to harmonise GCC countries’ different sets of standards, laws, and regulations. “There’ll be a much bigger appetite for global players to come in and make acquisitions,” he says, explaining that for example, Saudi Arabia – whose vast capital capabilities explain how it became MENA’s most funded market in 2023 as per Magnitt – is transforming. “There’s much more receptiveness [in KSA] to tech developed elsewhere that would make sense to deploy into Saudi. I do think that there will be a reset soon. We’re too small a global player now to have too many rivalries,” he says, adding that, “It would make sense, potentially, for a startup based in the UAE to look at raising capital in Saudi Arabia from Saudi investors, to help grow the market there. Times are changing.”
Eventually, this convergence of factors is driving the maturation of the UAE entrepreneurial ecosystem, helping position it as a global hub. “The UAE has built a conducive place where a lot of people want to live, and is definitely number one in the region in terms of attracting top talent. It has big players, sovereign wealth funds, large family offices… so, there’s potential for exits as well,” says Sharif, explaining that 2023’s decline in mega deals and exits is par for the course in a region where venture capital started to emerge around 2011 only. “We’ll see a lot more exits in the next two to three years,” he predicts.
So, 2024 may not be the year when the UAE ecosystem reaches full maturity, but it’s still very promising. “Many LPs will be deploying new funds and some of the top-tier VCs in the region are very close to closing their funds. This means there’ll be a lot more dry powder in the market and VCs will be a lot more receptive to making new investments, including in earlier stages,” says Sharif, who concludes, “Many lessons from 2023 will move into 2024.”