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| 05 February, 2018

Venture capital: MENA rising in the eyes of the West

Philip Dowsett is a funds partner at Morgan Lewis in Dubai. He advises clients on business and finance issues in the Middle East, United Kingdom, Europe, and North and South America. Representing clients from a variety of industries, Philip counsels on private equity and venture capital matters, complex cross-border mergers and acquisitions, takeovers, divestitures, joint ventures, and corporate finance transactions, including Islamic finance.

Website: http://www.morganlewis.com

Funders from other parts of the world are paying more attention to the Middle East’s venture capital scene


Dubai has, by default in recent years, found itself as the Middle East and North Africa (MENA) region jurisdiction of choice for the start-up and venture capital (VC) industry. 

Dubai has promulgated many efforts to cement this status and ensure it remains the VC centre of the Middle East.  The UAE leads the MENA region as home to 42 percent of its start-ups, followed by Egypt (12 percent), Lebanon (9 percent) and Jordan (8 percent). 

However, a number of other MENA countries are launching similar initiatives to try and capture a portion of this fledging market.

For example, Saudi Arabia has launched the ambitious 2030 Vision plan to depart from the notion of being an oil-dependent economy, and encourage female participation in the workforce, as well as making a $3.5 billion investment in a leading US tech company.

Oman has also launched the country’s first equity-based venture capital firm, Innovation Development Oman Holding, with initial capital of $129 million, and the Oman Investment Fund launched its own $200 million Oman Technology Fund.  Qatar has initiated its efforts with The Qatar Development Bank, having launched a $365 million SME Equity Fund to provide capital to innovative start-ups and entrepreneurs.

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The VC industry is an established industry and market in the West, with VC investment in the United States in 2016 totalling around $58.6 billion and Europe $16 billion, which dwarfs that in MENA, which stands at around $560 million.  The MENA region is playing a challenging game of catch-up, but its progress and achievements are notable.

The rise of venture capital in the Middle East has primarily been led by a select band of protagonists that have been involved in financing rounds for the most high-profile start-ups. This roster includes Wamda Capital, STC Ventures/Iris Capital, Middle East Venture Partners (MEVP), and Beco Capital.

This interest has, and in the large part remains to be, from MENA-based investors, but thie acquisition of Souq.com by Amazon last year was a sign that this is changing.

So, given the potential that the nature of many tech-based start-ups means that locality and operational bases are flexible compared to traditional asset based business, and the attractive tax-free opportunity that basing an operation in a MENA country may afford, one may question why the MENA region has not attracted more start-ups? There are several reasons for this:

Firstly, operations in the MENA region are not without their hurdles.  In MENA, operating across the region often involves grappling with laws and regulations that often have not modernised to address technology business, resulting in ambiguities and uncertainty around operations.

On the ownership issue, a number of Gulf Cooperation Council (GCC) countries require local ownership, and this can be a struggle for foreign investors to get to grips with.  On the positive side, several countries have free zones affording 100 percent foreign ownership which circumvents this concern, but, depending on the nature of the business, sometimes an “onshore” in the same country is required, which then requires local ownership (and structuring appropriately to protect the assets).

Another barrier is the lack of success stories, although this is improving. With the Souq exit, and the $100 million investment by STC in Careem last year creating a ‘unicorn’ on paper, this is getting there.

Then there is the cost issue.  Setting up in the GCC can be notably more expensive than in Europe and the United States. However, there are more cost-efficient options, including establishing in Egypt, Jordan or Lebanon.  It is not uncommon for these start-ups to look to relocate their HQs to Dubai when finances permit.

Geopolitics and negative press play a role. Negative headlines about the Middle East in the past have overshadowed the many successes, growth, and increased stability throughout much of the MENA region.

One of the further challenges as a start-up in the MENA region is the lack of transparency over financing terms and investment criteria, as well as the difficulty in obtaining information on potential suitors for investment.  Part of this is due to the limited number of deals, meaning benchmarking terms is more difficult, but there is also no real access to the same reports or insight into financing terms as in the US and Europe.  The MENA Private Equity Association has sought to redress this and provide more visibility. Consequently, VC investors are potentially in a stronger negotiating position in the MENA region and the luxury of term-sheet shopping as a start-up in MENA is generally rare. 

On the positive side, many of the principals working for the leading VC firms in the region are sophisticated and seasoned, and have adopted best international practices to ensure that the region can compete in terms of its sophistication.

Concerted efforts are also being made by MENA governments to foster entrepreneurial spirit and accommodate start-ups, from the launch of incubators and accelerators, to accommodating 100 percent foreign ownership structures, coupled with tax-free regimes.

Any opinions expressed here are the author’s own.



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