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African Tech Ventures Look to Middle East for Investment Opportunities, Facing a Key Challenge

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Recent reports from The Big Deal indicate a sharp decrease in funding for African startups, with a more than 50% drop over the last three quarters compared to the same period in the previous year. Currently, the funding secured by these startups ranges between $2.5 billion and $3.4 billion, according to figures from The Big Deal and Briter Bridges. With only one quarter left in the year, the likelihood of reaching the venture capital heights of $5 to $6 billion seen in 2021 and 2022, which includes both equity and debt deals, seems slim.

It’s essential to recognize that this downturn is not unique to the African market; venture capital investments have decreased globally to levels last seen before the COVID pandemic. Nonetheless, the reduction in funding is particularly striking for Africa due to its heavier dependence on foreign investment, especially when contrasted with other developing tech markets like India and Latin America.

A report by the African Private Equity and Venture Capital Association (AVCA) notes that a significant majority, 77%, of venture capital funds directed towards African startups in the previous year originated from investors outside Africa. This trend might see a shift as global investors pull back their investments this year, and we are waiting for those numbers to materialize. Nonetheless, a key finding from the report highlights the emerging trends in investment sources for African entrepreneurs.

Investors from the United States and the United Kingdom were the most significant foreign contributors, making up half of the venture capital investments in Africa. Impressively, the United Arab Emirates emerged as the third-largest investor nation, providing 4% of the foreign venture capital to African startups in 2022, surpassing traditional investor countries like France and China.

¬†According to Briter Bridges’ data, the presence of Middle Eastern investors in African markets has been steadily increasing, with over 80 investors from the region engaging in African deals since tracking began. Notably, the number of Middle Eastern investors in African startups rose from 16 in 2019 to 50 last year.

At the recent GITEX technology expo hosted in the United Arab Emirates, there was a significant showcase of the strengthening ties between African startups and investors from the Middle East. The event drew in a crowd of over 170,000 people, with a geographical attendee breakdown: 33% from the Middle East, 21% from Africa, 20% from Asia, 18% from Europe, and 8% from the Americas.

Of the 950 investors at GITEX, just 22% were from the Middle East. Nonetheless, numerous African entrepreneurs, particularly those in the early stages of their ventures, were present to cultivate connections with UAE and GCC investors. These founders have typically looked to Western investors for capital. Still, GITEX gave them a chance to pursue new, diverse funding avenues amidst the difficulties of securing venture capital. Conversations are ongoing with potential investors from both regions, but it is yet to be seen if these discussions will result in actual investments.

At the margins of the conference, top brass from Africa’s premier tech firms, such as MNT Halan, Fawry, Andela, and Interswitch, were actively involved with regional government representatives, clientele, and financiers.

Investors with a stake in Africa, meanwhile, reported diverse experiences. Some were present to engage with their Middle Eastern limited partners (LPs) they already had relationships with and to widen their circle to encompass a more varied array of institutional investors beyond the confines of the local area. A few venture capitalists pointed out that while the Middle East is a fertile ground for forging significant business relationships, cultivating trust is a prerequisite for attracting institutional funds. Hence, the Middle East is viewed as a region of long-term interest for their investment strategies.

Conversely, certain venture capitalists at the initial stages of investment have been actively pursuing institutional investors from the Middle East. An investor shared that during discussions, there appeared to be a rivalry between investors from Africa and the U.K., each eager to capture the interest of Middle Eastern limited partners (LPs), including those linked to government funds and family offices.

In the past twelve months, investors have noticed a noticeable pivot towards the Middle East to forge long-term connections with sovereign wealth funds. This shift comes as venture capital firms navigate one of the most challenging periods of funding scarcity in the last ten years. Prominent firms, such as Tiger Global and a16z, have been scouting for prospects in nations like Saudi Arabia, the UAE, and Qatar earlier in the year, aiming to tap into institutional investors looking to expand their investment horizons beyond oil into burgeoning fields like artificial intelligence and robotics, both highlighted at the GITEX technology week.

For a considerable time, the Middle East and GCC have been regarded as hubs for easy access to capital. Nonetheless, the dynamics of regional investments have evolved to become more nuanced, with a greater emphasis on detailed due diligence and selectiveness than seen previously. Startup entrepreneurs and venture capitalists outside the Middle East must adhere to specific standards to secure backing. Reflecting on a dialogue with an African investor at GITEX, it was revealed that some institutional investors from places like Dubai and Riyadh required proof of their investments in regional startups as a prerequisite for their engagement. He was fortunate, however, to find more flexible partners.

During GITEX, Philip Bahoshy, the MAGNITT founder whose company specializes in data and analytics from Dubai, provided TechCrunch with some key observations. He remarked on the increasing trend of heightened activity among Middle Eastern sovereign funds and venture capital firms compared to global venture markets in recent times. He anticipated attracting more startups and venture capitalists to the region in the fourth quarter to seek funding.

Bahoshy emphasized that while sovereign entities, such as the Dubai Future District Fund in Dubai and entities like Saudi Venture Capital and Jada in Saudi Arabia, are notable, their investment strategies are cautious and primarily target companies intending to establish and grow within the local market. He advised that venture capitalists seeking Limited Partner (LP) investments or startups aiming for funding must have a clear strategy for their expansion within the GCC or MENA regions.

At the same event, Octavius Phukubye, representing the pan-African early-stage fund Microtraction, commented on the eagerness of Middle Eastern limited partners to back African general partners (GPs). However, he noted that these Middle Eastern investors often question the GPs about their strategic plans for investments in the MENA region, which reflects the pressure on institutional investors to showcase their impact on regional growth through technology investments.

Dubai is aspiring to become a hub for creating 40 unicorn companies by the year 2030. However, there’s a notable discrepancy. While Limited Partners (LPs) in the Middle East have the capital, the region lacks sufficient local venture capital funds steered by seasoned General Partners (GPs). Furthermore, the entrepreneurial environment is still too immature to consistently generate exceptional entrepreneurs, according to Phukubye. Discussions have been underway about GP fundraising to allocate a portion of their funds for investments in the MENA region or to establish new funds based in Dubai. Additionally, there is a movement for overseas GPs to relocate their portfolio companies to Dubai. This would allow LPs or GPs in the Middle East to invest in these relocated companies, helping them to expand within the MENA and broader GCC regions.

 

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