Early stage startups are continuing to captivate investors in the MENA region, according to industry experts and trend reports. Pre-Seed, Seed and Pre-Series A rounds have emerged as a sweet spot to invest, with many young companies securing higher investments than more experienced players.
According to industry statistics, MENA markets have seen a YoY increase in yearly median seed valuations, most notably in 2023 where there was a 75% surge. This has also trickled into 2024, with most deals made in January of this year also directed to pre-Seed and Seed stage startups. This peak in investor interest can be linked to several factors, including economic conditions, limited risk, and diminished late stage funding. .
In this article, we will delve into the attraction behind early stage startups in the MENA region. Along with discussing the statistical evidence supporting these claims, we will also dive into the potential reasons behind this surge of growth.
Read on to find out more.
Early Stage Investment At a Glance
In early 2023, investment data platform MAGNiTT forecasted an increased deal flow towards startups in their early stages, specifically Seed or Series A rounds. Termed a sweet spot for potential investment, the platform based this prediction on the yearly round size evolution in MENA, which showcased the percentage of investment attributed to smaller rounds as progressively increasing each year.
Startups that had a clear vision with a proven product-market fit and clear monetization path were prophesied to be the most attractive. Late stage startups, on the other hand, were forecasted as being less popular choices to invest, possibly due to a lack of liquidity in the market
Recent data reflect this prediction to have been true, with reports of 44% (126 out of 286) of all deals being in the $0K-$1M round size bracket circulating the internet. In fact, this is the only segment that saw the biggest increase in participation by number of deals. This increased appetite from investors for early-stage investments is an interesting development, as it comes after years of consistent declines.
Such a shift towards early stage investment has also resulted in higher valuations for early-stage startups. Average valuations of Seed rounds in MENA saw a 28% rise by the third quarter of 2023, a clear indication of investor preference towards smaller deals.
Why Investors Played It Safe
One major reason for early stage startup preference was investor’s motive to ‘play it safe’. The startup funding winter did not spare the MENA region over the past year, with economic factors like high inflation and geopolitical uncertainty causing waves of unpredictability to strike the market. Investing smaller amounts in Pre-Seed and Seed rounds allowed investors to minimize risk of loss.
Many investors were concerned with the way valuations were being set for later stage startups. Investment in late stage startups is typically done in the hope that a company will either IPO or exit at a higher value than that invested. It is a big ticket with a big return covered in a relatively shorter amount of time (2-3 years). This is in contrast to an Angel investment in a smaller staged startup which can be a long haul bet taking anywhere between five to eight years for a positive exit/payoff.
However, with valuations all over the place in the market, along with predictions anticipating a record number of exits and acquisitions in 2023, many investors opted to shift downward in their stage investment to manage any unprecedented low returns. As a result, the segment of the market that has seen growth with relatively stable valuations is early stage (Pre-Seed ,Seed, Series-A) companies.
The Drop in Late Stage Investments
Lack of international investor participation this year was a major bummer for late-stage rounds. International investors have always taken the lead in late stage funding in the past, with big names like Sequoia and Tiger Global investing ticket sizes of $25-$100 million. Due to economic conditions like interest rate hikes and geopolitical unrest in the region, such investors have instead chosen to focus on their own portfolios and home markets.
This has resulted in an increased dependence on local funding. As the MENA region is still growing, there are not so many companies that can do such a large check size, which ultimately result in a drop in late-stage investment overall. In fact, reports show that MENA-based investors were responsible for 80% of late stage funding in 2023.
Future Expectations
The current economic climate is the best time to invest in early stage companies, and we expect this increased investor interest in smaller round sizes to continue forward into the next year. A month into 2024, this is already being reflected by recent data. Approximately $53 million out of the $86.5 million in funding raised in January 2024 was directed towards pre-Seed and Seed stage startups. Of this, $39 million alone was raised in Pre-Seed rounds across 8 deals, according to Digital Digest.