The increase in entrepreneurship and start-ups in the region has been happening over the past decade as revealed by Arabian Business in the latest trends shaping the region’s start-up ecosystem
Financial technologies and e-commerce businesses dominated the market in the Web 2.0 wave, while blockchain and cryptocurrencies are slowly growing in the region
In the post-pandemic economy, it feels like start-ups are launching almost daily in unprecedented numbers, but the Middle East entrepreneurial ecosystem has been steadily growing for almost a decade now, explained Walid Hanna, CEO and founder of MEVP, a venture capitalist firm.
Talking exclusively to Arabian Business, Hanna looked back at the evolution of start-ups in the region and the major trends that dominated each phase until today.
He also shared what venture capitalists look for when deciding whether to invest in a business or not and what challenges remain in the ecosystem.https://www.arabianbusiness.com/startup/why-we-are-never-too-old-or-too-young-to-be-an-entrepreneur/embed#?secret=Azh8pDLw27
What can you tell us about the regional landscape for start-ups in the post-pandemic economy?
The increase in entrepreneurship and start-ups in the region has been happening over the past decade.
We [at MEVP] began our journey back in 2010 and, at that time, we used to see one or two start-ups a week, while now we receive three or four business plans a day, so the multiplier has been enormous in terms of the number of start-ups.
This has been the case post-Covid as well. When the whole ecosystem realised how important technology is during the pandemic, it gave a boost to our portfolio of companies and they grew faster and it also gave a boost to potential entrepreneurs who left their jobs to start their own businesses.
Why do you think fuelled this growth in the pre-coronavirus days?
It’s a natural progression that happened across the US, Europe and China over the past two decades and since there’s always a lag with the Middle East, it’s finally happening here now.
If you look at the penetration rates in internet usage or mobile phone usage, the Middle East has typically been lagging, the exception being countries like the UAE. But, now they’re all catching up.
What are some of the trends you’ve seen among regional start-ups, in fintech and tech in general?
Trends have been evolving over the past decade as well.
Originally there was the Web 1.0 wave, which was only content-based such as browsing the internet for cooking recipes, for example.[Start-ups] were making money, but it was based on reading, there were no interactions or transactions involved.
Then it evolved into Web 2.0, where we saw a lot of financial technologies, e-commerce sites and software-as-a-service for enterprises. We’ve invested in 60-plus companies across those verticals.
We’ve also seen a lot of mobility plays, such as Uber, and we’ve seen that model [replicated] across tuk-tuks, motorcycles, electric scooters and trucks which, in a way, is good for the environment.
Within fintech, we’ve seen a lot of sub-verticals, such as the Buy Now, Pay Later model, which is a big trend at the moment – there are around ten [such start-ups] in the region and we’ve invested in an Egypt-based one. But there are so many other trends within fintech, including micro-lending, SME-lending or treasury solutions; payment solutions in general.
The hype over non-fungible tokens and cryptocurrencies, the whole blockchain business model, has evolved tremendously over the past couple of years and is just starting to pick up in the Middle East. We’ve seen two NFT marketplaces and a couple of blockchain business models. It is still quite limited, although I expect it to grow much faster in the next three years.
How do you identify the companies you will invest in?
Just as they say “location, location, location” for real estate, it is “people, people, people” for start-ups.
If a start-up is at the earlier stages, the best thing you can look at is how investment-ready the business is and how qualified the founders are with relevant experience. We look at how dynamic, hardworking and motivated they are.
We look at the total addressable market and try to understand if it’s big enough and if they are really answering a pain point that is large enough to make serious money. This is because we are not interested in a small niche in a tiny country. For example, if a start-up is trying to solve a small issue in a country like Lebanon and the issue is not the same in Saudi Arabia and the GCC, then we are not interested.
We also look at the business model and the unit economics to see if it is viable, meaning we try to find out if the cost of producing, marketing and selling whatever product is worthwhile. If you look at the cost of acquiring a user and realise that the margin you are making out of this one product is inferior to that, then it is not worth it.
We also look at how robust and scalable the technology itself is and the stack they use. We invest in tech start-ups only.
Growth is key to our assessment of technology companies. We don’t do seed capital so when we invest in Series A, we can already witness a traction behind the start-up. If the traction is interesting, we get interested but if it is not already interesting, we don’t invest.
What are the challenges that remain for entrepreneurs in the region?
It depends on the country. In the GCC, there are no currency risks because they are pegged to the dollar, but if you look at currency in Egypt, they got really hit by the devaluation about three years ago.
There is also a political risk because of the region’s instability and relationship with its neighbouring countries.
Enablers are becoming better and better, but we still have some issues with the banks, for example. Opening up a bank account for start-ups is very challenging across the region. It takes ages and a lot of KYCs.
Five years ago, the logistics were very poor. Even the online payment systems were very poor so it was difficult for start-ups to thrive within that environment. This has been enhanced over the past couple of years but, for some reason, many customers here still want to pay cash-on-delivery and not use credit cards online. Penetration is increasing in terms of card usage but it is still lower than the global average.
Other than that, the ecosystem has evolved well and the enablers have followed. I would say the only challenge that remains is for fintech companies in terms of licence and regulations. Government regulations are making it easier by offering sandbox licences, but other than that, the regulatory framework is quite limited. The process is very slow but will happen one day I am sure.
Exits are happening, but still at a low rate where selling the start-up is difficult. There are more investors from outside the region looking at the region, which is positive, and the big regional conglomerates have also started to acquire start-ups so the trend is good but the numbers are still behind.
We have good start-ups and we want to sell them, but buyers are scarce. We should expand our horizon of buyers towards the global market, such as China or the US.