The Q1 2023 MENA Industry Venture Investment Brief, published by MAGNiTT, examines the impact of the ongoing global economic challenges on the performance of three of MENA’s top-ranking industries.
The report provides a comprehensive overview into the evolution of MENA’s industries (FinTech, E-Commerce/Retail, and Transport & Logistics) and includes a quick review of each industry’s venture funding evolution.
The MAGNiTT report shows that the first quarter of this year saw significant upheaval in the global financial sector, and high inflation rates have made it impossible for an economic soft-landing scenario to materialise. Although the Federal Reserve’s actions of continuously amplifying interest rates, which were followed by some Central Banks in the region, may have caused inflation to retreat, underlying price pressures remain sticky.
Looking at the landscape of the venture capital ecosystem in the MENA region, the MAGNiTT report confirms that it is experiencing a sluggish start in 2023, with funding declining by 13% YoY, and deals plummeting by 55%. The macroeconomic environment continued to drive up the cost of capital, leading to a more conservative investment approach, which further cooled down the market.
This trend was reflected in MENA’s top industries, including FinTech, Transport & Logistics, and E-Commerce/Retail, which witnessed yearly declines in transactions and funding, except for the impact of the MEGA deals closed for FinTech and E-Commerce/Retail.
Unfortunately, the Transport & Logistics industry suffered the most during the first quarter of this year. Given the challenging market environment, investors remain vigilant and cautious while making investment decisions and this is reflected clearly in both deal flow and funding evolution.
Fintech
The MAGNiTT report explained that fintech in the MENA region grew remarkably over the past years. The five-year CAGR of capital deployed in 2022 reported 77% highlighting the rapid expansion of the industry in the region. The focus on enhancing and automating several financial services, including Payment Solutions, Neobanking, Lending, and Capital Market Services, has contributed to the industry’s success.
It is true that FinTech in MENA performed similarly to the region overall, as capital deployed in the industry edged down by 9% YoY in Q1 in 2023 and deals retreated to less than half their Q1 2022 levels. The decline in funding for rounds less than $100M by an annual 64% is a significant concern, especially considering that these rounds make up the majority of FinTech deals in the region.
Overall, while the Q1 results may not be as promising as previous quarters, it is essential to consider the broader economic context in the region and the impact of the ongoing global economic disturbances. The FinTech industry has shown resilience in the face of challenging circumstances and continues to be a realm of interest for investors in the region.
E-commerce
It is interesting to note the continued growth of E-commerce/Retail in the MENA region, driven by the increasing number of internet users and the rise of mobile access. The COVID-19 pandemic also played a significant role in accelerating the adoption of online shopping, as people looked for safer and more convenient ways to purchase goods and services. However, despite the impressive growth of the sector, challenges affecting the VC ecosystem have impacted investment and the growth of E-commerce/Retail in the region.
The two MEGA deals that closed in Q1 2023 for a total of $289M are certainly of added value to the sector, but it is important to consider the broader context of the industry’s funding landscape. Ignoring these MEGA deals, the non-MEGA deal funding level in Q1 2023 was the lowest since Q3 2020. This suggests that while there were still some significant deals, overall investment activity in the E-commerce/Retail sector in the MENA region has slowed down.
The decrease in capital deployed in less than $100M deals by 82% YoY in Q1 2023 indicates that investors may be more cautious or selective in their investment decisions. The fact that the number of deals fell by 68% YoY to their lowest level since Q4 2018 further underscores this trend.
Transport & Logistics
The MAGNiTT report indicates that Q1 2023 was the lowest funded quarter for T&L since Q3 2019 (or Q3 2022 if we remove the impact of the MEGA deal in that quarter) suggests that the ongoing financial vulnerability had a more significant impact on the industry compared to the pandemic era and its consequences.
Overall, while Q1 2023 was a challenging quarter for the Transport & Logistics sector in the MENA region. The fact that out of 11 deals closed for T&L in Q1 2023, seven were of round size $0M-$1M, indicates a risk-averse nature of investment in the industry. This trend may reflect a cautious approach by investors who are wary of the ongoing economic pressures and uncertainties.
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