Brunswick Review The Resilience Issue

Digital Oasis

Top tech talent and ideas have come to the Middle East, yet major investors have been slow to follow. That may be changing.

For its first ever acquisition in the Middle East, Uber announced its $3.1 billion purchase price for Dubai-based ride hailing app Careem, the region’s first unicorn (a private company with a valuation in excess of $1 billion).

The move reinforces a growing trend wherein early-stage tech investors in the Middle East are able to achieve successful exits in the hundreds of millions or even billions of dollars, something not seen in the region’s nascent tech ecosystem until only recently.

Home to a growing startup scene, the wider Middle East and North Africa (MENA) region has a young population (roughly 60 percent is under the age of 30), a smartphone penetration rate of 64 percent, and a need for tech-enabled basic solutions such as transportation and financial services.

The region’s startup environment is still young, but in some areas it is already ahead of more established markets. 

For example, approximately 25 percent of MENA startups are run by women, a figure higher than the US industry average, according to The Economist.

But many foreign investors still view the Middle East as a source—rather than a destination—for technology investment. 

Middle East funds have invested heavily into tech abroad, including into US companies such as Slack, Uber and WeWork. The most high-profile investor is the SoftBank Vision Fund, the $100 billion technology fund that includes Saudi Arabia’s Public Investment Fund (PIF) and Abu Dhabi’s Mubadala Investment Corp. as major backers.

Governments working to change this dynamic of outbound investment have tried to court entrepreneurs through a wide range of initiatives, the rationale being that tech offers significant investment potential and is also integral to the future of the region.

Numerous national strategies and economic visions for Middle East governments place technology at the heart of efforts to modernize and diversify the region’s economies away from hydrocarbon revenues. In Dubai alone, the government’s $8 billion smart city initiative aims to develop more than 500 tech-driven projects by 2021. Saudi Arabia has gone so far as to begin planning for a $500 billion smart city of the future, NEOM, which has already added tech heavyweights Masayoshi Son and Marc Andreessen to its advisory board, according to CNN.

The most common concern for foreign investors is a lack of a pathway to a successful exit.”

However, while talent and ideas have come to the region, major investors have been slow to follow. Of the top 20 global economies for inbound tech investment, none are from the GCC, a group of Arab states that form the economic powerhouse of the Middle East. The most common concern for foreign investors is a lack of a pathway to a successful exit, as typical routes are through an IPO or to position a company as an acquisition target.

As the Middle East’s capital markets have been quiet in recent years following the 2014 downturn in oil prices, an IPO may not be investors’ preferred route.

That leaves exit by acquisition, a strategy becoming more commonplace, as evident in the Uber deal as well as Amazon’s 2017 acquisition of UAE online retailer souq.com. The $580 million acquisition remains Amazon’s most expensive overseas transaction, and was the first time a major Western brand completed a
globally significant acquisition of a regional tech player. The Amazon deal also sparked inflows of $3 billion in tech investments into the region.

Industry stakeholders no doubt hope Uber’s doubling down on the Middle East will be a catalyst for investment into its technology sector. However, for the industry to attract more investment into the region, companies and governments will need to clearly articulate the benefits the Middle East offers industry investors.

James Allan is a Director based in Dubai.

Illustration: Fabio Consoli

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