Insights from Tech Scaleup MENA Preliminary Report 2021

“Innovation seems to be the common denominator of the several government driven programs across the region. The urgency of building the cornerstones of the post-oil economy is palpable. Eclectic new smart cities projects are tangible examples of the urgent need for the region to be recognized as a test bed for a few, specific growing new industries. The upcoming Dubai Expo (2021) will represent another opportunity to showcase how the Arab Region is ready to play a key role in the future economy.”

The Report offers a first overview of the MENA tech scaleup ecosystem that, before 2015, was virtually “non-existent. The number of new scaleups increased from about 40 per year in 2015-2016 to 64 in 2017 up to 85 on average in the 2018-2020 period; similarly, in terms of capital raised, investments increased from $0.3B in 2015 up to $0.6B in 2016-2017 and stabilized at about $1B thereafter.

As of December 2020, the study tracked 448 scaleups across 19 countries, able to attract $6.2B in funding – about 0.08% of the region’s GDP. Specifically: UAE – United Arab Emirates (195 scaleups – $4,341M raised), Kingdom of Saudi Arabia (69 – $611M), Egypt (57 – $577M), Lebanon (44 – $198M), Jordan (22 – $131M), Kuwait (18 – $106M), Islamic Republic of Iran (8 -$65M), Morocco (8- $20M), Tunisia (7 -$35M), Bahrain (5 – $24M), Sultanate of Oman (5 – $13M), Qatar (3 – $11M), WestBank and Gaza (3 – $10M), Iraq (2 – $2M), Algeria (1 – $6M). 

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In this framework, public support in the MENA region appears to be consistent over time. Since 2015, the public has contributed to scaleup investments in several forms – like the $150M Oman Tech Fund, established by the Sultanate of Oman, the Algerian National Startup Investment Fund, and Egypt’s “Fekretak Sherketak” – by providing at least $0.1B per year. Generally speaking, public financing appears to be a regional specificity, providing Shariah-compliant alternatives to conventional VC funding.

Governments support the innovation ecosystem: in the past years, about $2B of investments (about one-third of total, 14% of all rounds) saw the participation of government institutions or public-supported funds.

“The report reveals there is still a lot of potential for startups and SMEs in the Arab region to scale up, which is one of the major objectives of the ICC/ESCWA Centre of Entrepreneurship – commented Gabriel Petrus, Deputy Director for Global Partnerships & Development, International Chamber of Commerce (ICC) – This preliminary report is a first step to help us take public and private sector collaboration to the next level, enabling in the Arab region a stronger open innovation ecosystem in the upcoming years” .

Long-term strategic programs for innovation that may foster the creation of vibrant local startup communities include the Saudi and Egyptian coordinated plan “Vision 2030”, Kuwaiti “New Kuwait” initiative, and the ongoing Emirati “Vision 2021”. Algeria is also taking steps to facilitate investments in the region, as its government recently announced the end of its 51/49 rule governing FDIs.

“The Arab region’s employment is leaning on well-established SMEs. Hundreds of Arab startups proved their scalability on the regional and global levels. Still, we need to raise these numbers to hundreds of thousands to resolve the unemployment issue positively and enable open innovation businesses to tackle the regional Sustainable Development Goals (SDGs) – added Kareem Hassan, Executive Director of ESCWA Technology Centre for Development – This report studied the Arab scaleups, identified the regional gabs, compared them with global experiences, and drafted the plan to support the Arab ecosystem. We are looking forward to collaborating with all entrepreneurship actors in the region and local governments to take this report and its recommendations to the next level.”

Covid-19 pandemic does not seem to have particularly impacted the growth trajectory of the MENA scaleup ecosystems. Both 2020’s numbers of new scaleups and capital raised are aligned with prior years figures and no significant contraction is reported.

However, like other emerging tech hubs, Arab countries are still not big enough to attract the attention from international investors and corporates yet, as the following evidence suggests.

Scaleups: density and capital raised

In the MENA region the Scaleup Density Ratio is an average of 0.1 scaleups every 100K inhabitants, given a 400M population. On the capital side, the Scaleup Investing Ratio is equal to 0.08% (capital raised by Scaleups as a percentage of GDP). These figures appear to be far both from more established areas (e.g. Europe, with 1.4 and 0.64%, and the UK, 4.4 and 1.97%) and emerging ecosystems (e.g. South Korea, 1.3 and 0.74%, and China, 0.8 and 1.39). Not to mention the US, Israel, and Silicon Valley.

On the other hand, if we look at the “United Arab Emirates”, the ratios (2.0 and 0.63%) are comparable to the European average as well as to emerging ecosystems such as South Korea. Particularly the Scaleup Density Ratio (2.0) is even higher.

In the “Tech Scaleup World Matrix” the MENA region is positioned in the bottom-left sector (low scaleup density ratio, low scaleup investing ratio), including countries or regions that are still at the beginning of their innovation journey.

On the other hand, if we look at the “United Arab Emirates”, the ratios (2.0 and 0.63%) are comparable to the European average as well as to emerging ecosystems such as South Korea. Particularly the Scaleup Density Ratio (2.0 ) is even higher. Same as for Lebanon and the Kingdom of Jordan (respectively with 0.64 and 0.19%%, and 0.22 and 0.12%).

Most of the local ecosystems, except the UAE which aggregates 44% of MENA scaleups, are still in their infancy. Despite the growing dynamism of the local startup arena, thus far only a handful of scaleups have emerged in many countries.

“To access them foreign corporations or investors will have to put in place a time consuming scouting effort, compared to taking a more effective look at countries and hotspots with higher Scaleup Density Ratios – commented Alberto Onetti, Chairman of Mind the Bridge – We are not just referring to Silicon Valley, home of almost 7,500 scaleups, or Israel, counting more than 2,000 scaleups, but also fast growing ecosystems such as South Korea with 650 scaleups, mostly in Seoul.”

Also in terms of capital raised, the MENA region presents figures that are more comparable to runner-up scaleup economies of the European continent e.g. Spain ($7B), Switzerland ($7.5B), and the Netherlands ($10.3B).

“Up to December 2020, big tech is starting to bloom in the MENA region, as we recorded 11 Scalers and 1 Super Scaler in the region, that attracted $3.4B out of a total $6.2B made available to local scaleups – added Marco Marinucci, CEO & Founder of Mind the Bridge –  With regards to the first, we record a significant gap from the UK (95 scalers), but also Germany (50) and France (46). But when we talk about Superscalers, the UK alone hosts 6 Super Scalers, while Germany and South Korea host 3. From a broader perspective, the gap with other global tech innovation regions remains large.”

Tech Hubs

Dubai Is the Main Tech Hub of the Region hosting, alone, 178 scaleups (40% of the total amount recorded in the MENA region), which collectively attracted $4.2B in funding (about two-thirds of the total amount of funding made available to MENA scaleups). It’s followed by Cairo, hosting 52 scaleups that raised altogether about $0.6B, Beirut (44 scaleups, $0.2B collected), and Riyadh (42 scaleups, $0.5B).

Dual companies

38 scaleups (about 8% of the total of the MENA region) relocated abroad to boost their growth, choosing the US (13, half of which favouring New York rather than the Silicon Valley), France (4), and the UK (4) as the main targets. 

A VC-Fueled Scaleup Region

Almost the entirety ($6.0B, 96%) of capital raised by MENA scaleups comes from VCs, including private equity funds, family firms, CVCs, public-supported equity funding vehicles, and governmental organizations. On the other hand, the IPO channel still has to be exploited (only 2%) as well as the ICO channel (2%).

Corporate to VC Investments 

In addition to the government support, companies – either through their CVC arms or directly (off-balance investments) – participated in about 20% of the total VC rounds involving scaleups that equal 61% of the total capital raised by MENA scaleups.

Industries

65 scaleups (15% of the total), including the tech behemoth Noon ($1B raised alone) operate in Ecommerce. 11% (49 scaleups) are Fintech (cumulatively raising $0.8B, 13% of the total, roughly on par with Ecommerce scaleups, not counting Noon), while 8% (34) operate in Logistics ($0.3M raised). The digitalization of the enterprise sector is well represented by HR Tech and Business and Productivity Software scaleups (62 scaleups in total, about $250M raised altogether).

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