Driven by Saudi Arabia’s unprecedented growth in its startup ecosystem, the Kingdom’s venture capital funding increased by 72 percent last year compared to 2021 with investments reaching $987 million across 144 deals, according to MAGNiTT.
However, the leading startup and venture capital data firm cautioned that, as global economic uncer- tainty and investor fatigue rises, the venture market might be most vulnerable to taking a hit.
Philip Bahoshy, founder of MAGNiTT, said he believed that venture funding will begin to see a decrease in growth rate this year but Saudi companies will compensate via mergers and acquisitions.
Rise in M&A activities
“We will continue to see a record number of M&A activities,” he said. “Companies that are unable to raise funds will potentially merge and well-funded companies, specifically in Saudi Arabia, will look for inorganic growth by acquiring companies in other geographies.”
M&A activity is also driven by exits and initial public offerings as Bahoshy stated Saudi companies will start to go public in the local market more than in other Middle Eastern countries.
“Well-funded companies in Saudi Arabia that are supported through government initiative funds are likely to become acquirers of startups, than being acquired,” he added.
In 2022, the Middle East and North Africa region saw 17 M&A compared to 41 in 2021 while Saudi Arabia alone witnessed 10 M&A transactions last year compared to five the year before, a 100-percent increase. “I anticipate a country like Saudi Arabia that has very specific government initiatives, support for startups, and fund of funds will continue to deploy capital and grow year on year,” Bahoshy reiterated.
Bahoshy went on to say that international companies and corporates will also start to make acquisition moves in the region because of low valuations.
Bahoshy added that other geographies in the MENA region will witness a slight decline in funding activity driven by two main reasons: the lack of liquidity and geopolitical challenges.
“When you compare 2022 to 2021, you see a slowdown in that aggressive growth, driven by parallels to global economics where increased inflation has driven to increase interest rates, a slowdown in the public markets transpiring into lower valuations, and a slowdown of liquidity in the private markets, not completely dissimilar to what’s been seen at a global level,” he further explained.
Growth in Saudi venture markets
Saudi Arabia managed to grow when leading venture markets in the region witnessed a downfall in investments in 2022 like the UAE’s 20 percent year-on-year decrease in funding.
Bahoshy explained that Saudi Arabia’s rise in these tough times was mostly powered by government focus on startups and the support provided by funds and companies which will also decide the Kingdom’s continued growth.
“It is very much driven by how many companies will be raising $50 million, $100 million, $150 million and being able to raise that level of capital in this challenging economic environment that we’ll see that growth year on year,” he added.
Industry prospects
In 2022, the financial technology sector, also known as fintech, was the industry of choice for investors attracting almost 25 percent of the total startup investments in the Kingdom. Bahoshy expects fintech to continue to dominate the funding space in Saudi Arabia with the launch of financial develop- ment initiatives and the activation of open banking.
“As a standout industry in 2023, I anticipate it will remain financial services, however, what you do tend to see is in this type of environment, the software as a service enterprise solutions industry remains extremely appealing for investors,” he stated.
Bahoshy added that sustain- ability, healthcare and educa- tion will be growing sectors in the upcoming year as these sectors are ripe for disruption and development.
Last year, edtech, short for educational technology, saw a 2,000-percent increase in funding year-on-year while information
technology solutions witnessed an 819-percent increase, according to MAGNiTT’s 2022 report.
Upcoming trends
As the region opens up to the world, more international investors are putting their cash in companies and startups that are making the ecosystem more attractive.
Last year, international investors made almost 44 percent of all investments in the Kingdom with Emirati investors making 16 percent and US-based funds amounting to 11 percent.
Bahoshy anticipates the international investor trend to grow even further as more countries will direct their capital into Saudi Arabia and the region.
“I expect there to be a slowdown from international investment in our region from the US and potentially Europe,” Bahoshy stated. “However, I predict regions like Southeast Asia, Japan, China, now that the COVID restrictions have been removed and travel has been eased, to direct their capital into Saudi Arabia and the region given there is a natural affinity for our region.”
He added that as the region is rich with sovereign wealth funds more capital will be deployed from the Middle East to global and local entities.
Bahoshy believes that 2023 will be a tough year for the startup ecosystem given global economic uncertainties but added that the market will start to pick up pace by the first quarter of next year.
“Effectively for the next six to nine months, I think that it’ll be a real slowdown in investment activity, which will continue into the end of the year, and that the pickup will only happen in the first quarter of 2024,” he said.
Moreover, the slowdown in investment activity is set to hit late-stage and early-stage ventures but it will not have much of an impact on series A-stage startups.
“The sweet spot that we anticipate is in the series A or late seed stage, that’s a ticket size between $1 million and $5 million of investment because it’s not super early, where it’s risky. Companies are likely to have shown product market fit and have had to focus on monetization, if not positive unit economics,” Bahoshy explained.
