COVID hit startups badly – but something surprising is happening

At the end of last year, the Middle East’s startup scene was on the up and up. The region’s ride-hailing service, Careem, was acquired by Uber in a $3.1bn deal, and the wider industry witnessed record levels of engagement. 

Research from MAGNiTT, a startup data platform, revealed that $704m was invested across 564 different startups across the region in 2019. “To put it into perspective, 2009 saw $15m of funding in five venture deals,” the company noted. 

The number of funding deals and the broad trend of investment in Middle East startups have been rising.


Image: MAGNiTT

“The story remains success breeding success,” Christopher Schroeder, co-founder Next Billion Ventures and author of Startup Rising: The Entrepreneurial Revolution Remaking the Middle East, told ZDNet. “The massive mobile penetration [is] attracting investment from within the region,” Schroeder observed, and that investment is coupled “with more global tech companies exploring ways to enter”.

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However, that momentum was, of course, pre-COVID. With the pandemic impacting economies, businesses and lives around the world, what does it mean for the Middle East?

Mixed fortunes for startups

Initial prospects for many startups in the region didn’t look good.

A report from Wamda and Arabnet in May, featuring findings from 247 startup founders across the region, highlighted that nearly half, 49.4%, of those surveyed had a cash runway of six months or less. That dropped to one to two months for logistics startups.

Moreover, 71% of startups commented on the negative impact of the pandemic on their business – with startups in e-grocery, edtech and fintech tending to buck the trend – while half of respondents also commented on the impact this had on their funding. Postponement, increased selectivity, and slowed-down investment from venture capitalists were all cited as key concerns.

In response, companies put a range of measures in place to reduce costs, including working from home, delaying expansion plans, salary cuts and creating new business models.

“The survival factor for over half of the startups in the region is [dependent on] getting new investment or grants,” the report’s authors wrote. “Financial aid, whether in the form of investment, loans or bill waiver, is necessary to support the region’s startup ecosystem.”

covidresponsestartupsmiddleeastwamdaarabnet.jpg

In response to the pandemic, companies have put a range of measures in place to reduce costs.


Image: Wamda and Arabnet

However, this seemingly bleak outlook isn’t universal.

Reinforcing Wamda and Arabnet’s conclusion that the impact of COVID has varied from sector to sector, data published by MAGNiTT over the summer showed that $693m had been invested in the region’s startups during 2020.

“That represents a staggering 95% of the total venture investments throughout all of 2019, already a record-breaking year for startup deals for the region,” says Areije Al Shakar, director and fund manager at Al Waha Fund of Funds, a Bahraini government program designed to create a VC community across the region.

“The pandemic may have had an adverse impact on the startup and investment scene globally, but we’re seeing something exciting and unexpected occurring in the Middle East,” she added.

There are a couple of reasons for this perhaps surprising situation.

Philip Bahoshy, MAGNiTT’s founder and chief executive, told a UAE-based newspaper earlier in the year that more later-stage investments with larger round sizes have been taking place.

That means money is typically being put into more established businesses. These are entities that “can provide [investors with] a longer runway to weather the challenging times ahead”.

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Research seems to reinforce this suggestion, demonstrating that while overall investment in the sector is going up, the number of companies being invested in is going down.

New numbers from MAGNiTT reflect this reality, whereby “August 2020 saw a 48% drop in the number of deals, while total funding on the other hand increased by 93% when compared with the same month last year”. Its data told a similar story in July and in the first half of 2020, where funding for Middle East startups was up 35% year on year.

These trends are having a number of negative impacts on the region’s startups.

Most obviously, exit timelines are being extended and there are concerns that investment in new ventures has been stymied. Dubai Future Councils has also addressed the issue of burnout, noting that “many tech startups have high burn-rates”, a trait likely to be exacerbated by the stresses of the pandemic.

Future investments in startups

There is a “shift in investor appetite towards lower-risk, later-stage startups”, acknowledges Areije Al Shakar. “But this doesn’t have to mean that smaller, newer startups and higher-risk ideas will be left by the wayside. The region’s burgeoning VC community is deploying their capital more strategically and sparingly, but more accurately.”

Part of this accuracy can be seen in efforts designed to support sectors that are meeting clear business and consumer needs right now. Those same companies, it would seem, are also the ones that are most likely to be keeping their heads above water.

Flat6Labs, an accelerator based in the Middle East and North Africa region, discovered that – among its startups – edtech, SaaS, fintech, e-commerce, and IT industries, “are either operating normally or beyond normal capacity because of the pandemic”. In contrast, startups in transportation, travel, agritech and logistics, are finding the going a lot tougher.

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Ambar Amleh, partner at Ibtikar Fund, a five-year-old seed fund based in the West Bank city of Ramallah, said: “The pandemic has accelerated trends that needed to be accelerated in this region, like e-commerce, telehealth, online education, and digital payments.”

Speaking to the International Finance Corporation (IFC), a member of the World Bank Group, Amleh commented that his company plans to launch a second fund “that capitalizes on the trends that were expedited and amplified” by COVID. Among these trends, social distancing has meant that streamlined e-commerce systems have become “quite necessary”, she said.

“It is also a good opportunity for startups to start going online,” Flat6Labs advise, stressing that “those whose business models depended heavily on legwork – the physical presence of someone on the job” tend to have been the most badly affected.

“Find a way to make their business become mostly cloud-based,” they recommend to founders. “If you can do that, you can truly future-proof your startup.”