Funding to accelerate for UAE tech companies

Walid Faza, partner at Wamda Capital, addressing the audience while sharing the key findings of the report. Leslie Pableo for The National

Funding for UAE technology companies, which reached $1 billion in 2016, will rise amid increasing interest from foreign investors and more exits, according to a survey.

The UAE, the Arabian Gulf’s second-largest economy, is responsible for nearly 40 per cent of the Middle East and North Africa region’s top exits – the point at which an entrepreneur sells his stake in a company to another business or investors –said the Google-commissioned report compiled by OC&C Strategy Consultants in collaboration with Wamda.

Souq’s acquisition by Amazon in 2017 for nearly $600 million set the record for the region, and it was quickly followed by deals involving Namshi ($151m for a 51 per cent stake) and JadoPado (for an undisclosed amount) in the same year.

“We strongly believe that funding for venture financing for early-stage technology companies [in the UAE] will continue to increase,” said Walid Faza, partner at Wamda Capital, on the sidelines of the report's release in Abu Dhabi on Tuesday.

The study also recommended that UAE tech companies go cross-border, typically into Saudi Arabia and/or Egypt, to achieve scale-up level. Scale-up refers to a company that has already validated its product within the marketplace and has proven that the unit economics are sustainable. Most companies achieve this after successful funding rounds and most of the UAE’s largest scale-ups operate in up to 13 countries, said the report.

“Companies receiving the investment will look to grow their businesses on a regional basis with particular focus on the GCC, the region's largest market,” said Mr Faza.

As businesses scale up and establish a regional footprint, they will naturally begin to attract potential acquirers that are interested in a regional multi-country presence, he said. “Thus fuelling M&A activity and exits, and in turn validating the risk taken by the VCs.”

In the UAE, business set up and first-year operating costs for tech start-ups are some of the highest globally, although the low tax nature of the ecosystem means that ongoing costs are lower than in other places, added the report.

Most UAE start-ups are in e-commerce and infrastructure/software as a service domain (69 per cent), while more than half of them (52 per cent) are B2C ventures.

Selim Edde, head of public policy and government relations at Google in Mena, said UAE entrepreneurs still face key challenges such as high operating costs, complex set up requirements and limited cross-border linkages.

"We have recommended key improvement areas in policies and regulations that better enhance the tech entrepreneurship ecosystem in the UAE.

“[These range from] from reduction in set up costs to digital policies that support sustainable operations growth for new businesses, as well as encouraging youth to become entrepreneurs without the fear of failure,” said Mr Edde.

Google commissioned the study in 2017 as part of a six-country study including Turkey, Russia, South Africa, Nigeria and Saudi Arabia.

Given the relatively high costs of employment within the UAE at the early stages of a tech company, Egypt and Jordan are key markets these companies to source tech talent from, the report said.

“Egypt and Jordan markets provide a sizeable pool of talent at a favourable cost. Although the governments have invested to improve the tech and coding skills of the local population, most of these initiatives will take time to be fully realised,” it said.