From followers to leaders: The evolution of the Middle East VC ecosystem
Although its total venture capital funding is still relatively small, the Middle East is now considered one of the most entrepreneur-friendly regions in the world with a startup ecosystem increasingly comprised of global innovators.
Venture capital (VC) funding has helped grow a slew of US startups into some of the world’s most iconic tech companies over the past 50-60 years. In the Middle East, the VC industry first emerged in the 2010s and is only now beginning to make a real impact on the innovation ecosystem. It has so far funded a lot of what Tamer Azer, Partner at investment firm Shorooq, describes as “me-too” companies — those which take an established model from one region and transpose it to another.
The launch of Uber in 2009, for example, inspired a multitude of ride-hailing apps around the world, including Dubai-based Careem, which was founded in 2012 and acquired by Uber in 2019. Another example is Amazon-inspired Souq.com, also established in Dubai, which had become the largest e-commerce platform in the Arab world by the time it was purchased by Amazon in 2017.
“For a while, we thought this model would play out all across the world,” said Azer. “We build a strong local champion that’s acquired by the big global player.”
But with the steady development of the region’s stock markets, “slowly but surely, there are more pathways to exit than just being acquired by an Uber or Amazon,” he said. This could lead to a new paradigm in which publicly-listed regional champions could be the ones snapping up and consolidating smaller players in the region.
Egypt-based MNT-Halan, a fintech serving the unbanked and underbanked at home and abroad, is one such example, with plans for an initial public offering (IPO) on the Egyptian Exchange.
VC funding: down for now
The high-interest-rate environment of the past two years has taken a toll on VC funding across the Middle East and North Africa (MENA). After peaking in 2022 at USD3.6 billion, fundraising slumped to USD1.9 billion in 2024 (see Figure 1).
This highlights how far US monetary policy can affect startups’ access to capital around the world, including in MENA.
Nasha Afshar, Head of Partnerships at Further Ventures, sees the growth and development of the region’s stock markets as an important boost to the VC ecosystem. “They facilitate exits, attract international capital and ultimately provide liquidity,” he said.
The external environment, however, remains important. "Investor appetite can still be influenced by geopolitical developments. Generally, when the macro environment is favorable, people are happy to allocate more to VC investments,” said Afshar. “If inflation eases in the US, there’s going to be scope for interest rates cuts, which should enable a greater allocation to risk assets, including VC.”
Moreover, the factors that drove the surge in MENA VC funding in 2022 remain firmly in place, including strong government support driven by efforts to diversify the region’s economies, said Afshar.
“There are tech startup support structures throughout the Middle East, such as accelerators, incubators and venture studios,” he said. These include Hub71 in Abu Dhabi, backed by the government and strategic partners such as Mubadala, the Abu Dhabi’s sovereign wealth fund, the Abu Dhabi Global Market (ADGM) financial freezone, and Microsoft. The Dubai International Financial Centre’s Innovation Hub plays a similar role.
“It’s designed to help startups scale with access to capital market opportunities and a really strong support network,” said Afshar. “They receive equity-free incentives, office space as well as direct connections to investors, corporations and government entities. So it’s an ideal launchpad for high-growth companies in sectors like fintech, AI, healthtech and Web 3.0.”
The governments of the Middle East have also sought to attract startups to set up within their nations by tying access to capital to “having a local presence or a business model which generates revenue locally,” he said. “So it’s not as easy as fly in, get capital and leave.”
Ashar Saleem, Senior Vice President, Equity & Fixed Income at Kimco Invest, said that in response to the UAE’s success in luring startups from around the world, Saudi Arabia has also stepped up its efforts to create a more conducive entrepreneurial environment, with favorable regulations, incentives and support structures.
“The UAE still has an advantage in terms of ease of regulation, moving in and out and because its freezones follow common law, which is better understood by foreign businesses and investors than local laws,” he said.
Hot new sectors
While e-commerce and fintech continued to command the biggest shares of Middle East VC funding in 2024, other sectors are increasingly making their presence felt (see Figure 2).
This includes healthcare technology, “driven mainly by local vendors in response to government demand,” said Ayman Abouhend, Chief Investment Officer at Significa Ventures. There are also startups working on clean energy and climate technologies, as well as tech to make the oil and gas industry more efficient and less emissions-intensive, he said.
One more rapidly emerging category is sportstech, which covers things like sensors, data analytics, tracking systems and wearable technology to power the digital transformation of athlete training and physical sporting events. “This is partly driven by Saudi Arabia’s vision to host the 2034 World Cup,” said Abouhend.
The region’s space economy has also taken flight, he added, with spending on satellites alone expected to reach USD75 billion by 2032.
Meanwhile, Afshar is excited about the prospects for digital assets in the region “due to the supportive regulatory environment, specifically in Abu Dhabi and the UAE overall.”
Emerging pioneers
The Middle East’s startup ecosystem is now cultivating new-to-market innovations, specifically in deep tech, said Azer.
A string of trailblazing biotech and tech-bio firms are popping up around the region. Egypt’s Proteinea is using AI to power drug discovery and Saudi Arabia-based NanoPalm is working to revolutionize in-vivo therapies for genetic diseases. Making its mark in the additive manufacturing world, the UAE’s Immensa maintains a digital warehouse of spare parts which it can quickly 3D-print on demand for industrial clients, who might otherwise have to endure production delays owing to lengthy procurement cycles. And a semiconductor cluster is emerging in Cairo.
“There’s cool stuff happening, with people actually building exciting companies that are not me-too, which solve global problems,” said Azer. “They’re not selling products first in the Middle East and saying ‘if it works here, maybe I’ll try to sell it overseas.’ They’re actually building products for a global market from day one.”
Growing pains
The burgeoning Middle East VC ecosystem generates much discussion and media coverage, but it remains relatively small. Even in its biggest year, 2022, total funding did not measure up to the annual revenue of the Abu Dhabi National Oil Company. And the USD1.9 billion in venture funding in 2024 is not even 1% of the USD314 billion global figure.
“By virtue of our industry being super chatty, we think we’re much bigger than we actually are,” said Azer. “We’re like a tornado in a teacup.”
Several obstacles stand in the way of scaling the region’s startup and VC ecosystem.
The gap in early-stage funding is being filled, and there have always been late-stage investors who are “willing to cut cheques for USD50 million to USD100 million," said Azer. What’s missing is the “middle stage” consisting of "people who are going to cut a check for USD10 million to USD15 million towards a USD25 million to USD30 million round.”
Afshar said that it would also help if the region’s regulators could pursue better regulatory alignment to make it easier for startups to scale across the Middle East. “For example, let's say that if the whole Middle East eventually had a digital asset regulatory environment that was as supportive as ADGM, then you’d lower that friction,” he said.
Talent is another important bottleneck, added Afshar. “There definitely needs to be stronger talent development. If you do that, it'll thrive even more. You can either look to build that talent and expertise locally, or attract international talent.”
Afshar stressed that while the MENA VC ecosystem “is absolutely ramping up,” these gaps need to be addressed for it to really take off. If that happens, he believes it could “become one of the most dynamic startup markets globally.”
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