The venture capital market in the GCC has gained momentum in the last 12 months, boosted by a much deeper start-up ecosystem, government and private initiatives and increased attention from international investors, said an industry expert.

“With over 109 players currently investing in the technology start-up sector across its various stages, from incubation to angel investments all the way to providing VC growth and late stage capital, the market will trend to consolidation,” explained Dany Farha, chief executive officer of Beco Capital, a regional venture capital firm.

“The industry will shake out the weakest links and reduce the number of players over time. For the rest, they will be riding an ascending trend supported by their sound investments in growing tech companies, their existing dry powder and exits.  More money will flow to fewer top performing VC investors and ecosystem builders over time as capital allocation pursues the best performance.”

Beco Capital’s proprietary research shows that of the 109 private players operating in the VC sector in the region, there are 19 regional and seven international VC firms. In addition, there are 10 players in growth/late stage investments.

Also, 12 regional conglomerates have set-up VC businesses. Other operators include micro VCs (6), incubators/accelerators (14), Angel Groups (11), Angel investors (14) and Tech Acquirers (16).

Farha said that the VC asset class is still vastly underfunded in our region, advocating more allocations from sovereign wealth funds (SWFs), family offices (FOs) and institutional investors to the best VC firms.

“This will accelerate the creation of our ecosystem, build local tech success stories, ensure that Mena participates in the tech revolution, contribute to a better region and therefore a more stable and prosperous region and, ultimately, provide investors with outsized returns in the process,” said Farha.

For this to happen, the size of the VC firms and funds under management has to grow to enable SWF’s and institutional investors to participate given their minimum investment sizes.

“Even if we add government and private inflows from these players to the sector, the overall contribution of VC in the economy is still minimal, but this is changing,” said Farha.

Regional VC investments are currently a fraction of those in the US ($52 billion), China ($15.5 billion), Europe ($10.6 billion), India ($5.2 billion) and Canada ($1.4 billion). This is against a backdrop of a collective Arab regional GDP of $2.85 trillion registered last year, with the Arab World ranking among the top ten largest economies; larger than that of India, Russia or Brazil.

Despite the current market fragmentation, Dany Farha says that he sees the regional ecosystem growing.

“There will be more VCs being started by government and by private initiatives but, over time, money will mainly flow to major and better performing local VCs with a solid track record”, he explained. “The market is still nascent, but there is a lot of excitement and activity around it. Once it takes off, it will soar. We will be the next big international tech boom story, following in the footsteps of India. When Mena hits its tipping point, it will have its ‘India moment’”.

International VCs have slowly started to converge on the region, having already started investing in some tech companies. However, Beco Capital’s CEO expects them to be coming in droves in five years’ time when the market matures and local VCs have established their track records with unicorns in the making and exits thereof.

At the moment, The “Big Four” VC players are scouting the market to deploy the US$ 150 million dry power remaining from their US$ 250 million coffers raised over the last three years. Beco Capital has raised about a quarter of funds committed so far this year, with a mandate to support tech start-ups in the UAE, Saudi Arabia, Egypt and Lebanon with growth capital, operational improvements and overall value creation.  

“VCs offer growth capital.  Start-ups are all about scale and hyper growth, anything else is not a start-up. It’s just a new business that might be a great business but isn’t about scale but about dividends,” he says.

Beco Capital, which has acquired stakes in Careem, Propertyfinder and Bayzat, said that not all of the dry powder will go to new investments.

Farha explained: “There are a handful of tech start-ups that have already proved to be ‘titans-in-the-making’ and an average of 40% of the existing venture money in the reserves of the ‘Big Four’ will be deployed as follow-on growth capital to create value in these portfolio companies ahead of an exit. The rest will be growing the start-up pipeline.”

These “titans-in-the-making”, as well as others, have already attracted the attention of international VCs, with major players making a number of investments in tech start-ups in the region, Farha said. – TradeArabia News Service