In spite of Covid-19, UAE venture funding is a buyer's market

Investors are getting comfortable with the idea that the pandemic is not cataclysmic

There is always a natural ebb and flow of venture capital investment in the UAE and the larger Arab World, but over the past two years – and even during the pandemic – there has been a steady increase in interest and funding in technology start-ups.

This phenomenon is worth understanding.

The acceleration began in 2019 and can be attributed, perhaps unexpectedly, to the drop in oil prices and regional unrest a decade ago. Regional governments have been faced with reduced budgets and high unemployment, especially in the under-30 segment of the population, and technology offers solutions to both of these issues.

Meanwhile, traditional businesses and government cannot create enough jobs for our future generations alone. Governments have reacted by increasing support for the growth of SMEs by providing more funding, reducing set-up costs and red tape and promoting entrepreneurship, especially tech start-ups.

The use of technology for government services has also been on an upswing, increasing efficiency and coverage and offering a better service level with real-time feedback and data. Government-sponsored technology platforms have also been instrumental during the pandemic, allowing remote interaction.

Starting in late 2019, the UAE witnessed an uptick in funding that has resulted in increased valuations for technology start-ups, especially newer ventures pursuing seed and Series A funding. This market dynamic has been mirrored in Saudi Arabia as well.

Before the onset of the Covid-19 crisis and because of the increased liquidity, the UAE technology ecosystem was a “seller’s market”. Start-ups could demand high valuations and local VC investment firms were working to catch up to these expectations and competing for the top transactions.

Once the pandemic took hold, VC investments paused as the industry was assessing the impact and length of the crisis. Some technology ventures were adversely affected by Covid-19. Many more, however, actually benefitted – especially in sectors such as e-commerce, last-mile delivery, grocery delivery, logistics, e-payment, Healthtech, Edtech, Cloud/SaaS, content streaming and gaming. And so from a demand perspective, technology has been a clear beneficiary of the crisis.

Starting in late 2019, the UAE saw an uptick in valuations for tech start-ups

Can anyone imagine what would have happened to global economic activity if not for the availability of technology solutions?

However, due to global uncertainty, negative investor outlook and “bad vibes” in general, VC investments have lagged. It was difficult to conclude investments without performing in-person due diligence. In a perverse way, even regional technology ventures that were in benefitting from the crisis with sharp growth in demand, have been financially stressed because of the lack of working capital funding as an alternative to more expensive VC funding.

In the last two months, funding levels for technology ventures have stepped up, as the market got more comfortable with the idea that the pandemic is not cataclysmic and as demand in certain sectors recovered. The VC industry shifted to a “buyer’s market”. Start-ups facing cash crunches have adjusted down their valuation expectations therefore attracting more VC investors. At the same time, remote and virtual transaction closings have increased, especially for follow-up funding rounds of established technology start-ups.

I expect to be back to “normal” levels of VC technology funding in the first quarter of 2021. At the VC fund I help to manage, we are encouraged by the current upward trend.

However, I would like to highlight what became more apparent during the Covid-19 crisis. The overall funding available for VC technology investments is still very low in the Arab world. As a percentage of GDP, we are way below India, for example. Even though the level of VC funding has increased – mostly fuelled by governments to promote better services and employment growth – the funding has focused on the early stage segment, including seed and Series A funding. In contrast, the more advanced segment of the VC market, those in the Series B, Series C and beyond stages, is still vastly underfunded.

The Arab world lacks viable alternative funding sources for technology start-ups. Our region does not provide adequate levels of working capital and debt-type financing solutions, and there are no “venture debt” types of financing solutions or funds. Meanwhile, this pandemic has been a boon for the technology sector. Consumers and businesses have understood that local technology solutions are available, accessible and mature. They offer clear operational and financial benefits, even beyond this crisis.

Rabih Khoury is managing partner and chief exit officer at Middle East Venture Partners, a venture capital fund

Rabih Khoury

Rabih Khoury

Rabih Khoury is managing partner and chief exit officer at Middle East Venture Partners, a venture capital fund