Go Big Or Go Home: More Middle Eastern Boldness Is Needed To Break "The Scale-Up Ceiling"
VCs investing in the region have been right to be cautious so far, but now it's time for them to show a little Middle Eastern boldness of their own.
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In the Middle East, as little as 10 years ago, entrepreneurship and striking out on one's own was seen as unusual and even taboo. How times have changed. Today, startups and entrepreneurship have grown into key drivers of sustainable growth for almost every economy across the region.
In Saudi Arabia, for example, SMEs now constitute a staggering 99% of businesses and provide 64% of total employment. In the UAE, the SME sector represents more than 98% of the total number of companies and contributes some 52% of non-oil GDP– a figure they want to increase to 60% by 2021. In Bahrain, during the first half of 2020, SMEs claimed a record 47 public tenders worth a combined US$21.8 million– despite the confidence-denting influence of the pandemic.
The urgent region-wide requirement for rapid economic diversification called for boldness. Governments, the private sector, and individuals responded. Across the region, we witnessed a paradigm shift: longstanding norms were broken as citizens throughout the Middle East stepped up to meet the changing needs of the times.
Despite the rapid emergence and growth of entrepreneurship, cultural resistance to the digital economy remained. The Middle East's preference for cash had stretched well into the digital era, with even local tech startups having to accept cash payments. Then crisis struck. In the face of COVID-19, the most significant global public health emergency of the 21st century, governments across the region rapidly imposed stringent lockdown and quarantine measures. For a second time, the Middle East stepped into the unknown, and adapted. In a region known for its vast shopping malls and inventory-heavy businesses, digital payments surged.
Related: Why The COVID-19 Crisis Could Give The MENA's Female Entrepreneurs An Edge
Now, once again, Middle Eastern boldness is needed. Startup scenes across the region have thrived, and steadfastly navigated the unpredictable waters of the COVID-19 era. However, it seems that Middle Eastern innovation has hit a ceiling. As research from New York data analytics firm CB Insights makes clear, only one Arab country –the UAE– can currently make the claim to be home to its own unicorn company. 30 countries can also make this claim, with some, like the US, boasting as many as 235 Unicorns. So what's holding us back?
The growth of VC communities across the region has been an integral pillar to the emergence of our dynamic startup ecosystems. And even in the face of the pandemic, VC interest in the Middle East has continued to grow. Despite global funding falling to its lowest level since the global financial crisis, research from MAGNiTT tells us that the first half of 2020 saw a record $659 million invested in MENA-based startups– representing a 35% year-on-year increase. And yet while funding into the region continues to grow, it has understandably become more cautious. Investors are turning their attention to lowerrisk, later stage startups. More money is being invested, but more sparingly. This is a positive step in the evolution of Middle Eastern VC, but now it is time to move to the next step.
Investors and fund managers in the region have shown their willingness to write cheques up to a Series B or Series C level. But for Series C and Series D, a larger cheque is needed. A larger risk appetite is needed too. This reticence is posing a hurdle to Middle Eastern innovation, holding back our startups from making the leap to the coveted unicorn status. This region is a voracious consumer of innovation, and has the means to buy it and bring it over. But we need bolder funding to really grow our own.
We have the infrastructure, we have the talent, and we have the demand. The region boasts one of the world's youngest and fastest growing populations, the world's highest internet growth rate, and accounts for 10% of global mobile app traffic and revenue generation. Smartphone penetration stands at well over 10%. VCs investing in the region have been right to be cautious so far, but now it's time for them to show a little Middle Eastern boldness of their own.
Related: The Role Of Soft Facts In Investment Decision-Making