UAE startup funding to triple to $2bn by end of 2024 as region sees entrepreneur boom

Investment experts, however, foresee a major shift in the funding structure as once-bitten investors looking for safer modes, opting for instruments such as combination of robust cash coupons, contractual return of capital, as well as exposure to the equity growth of the borrower via instruments such as warrants or other similar instruments.

“We expect funding to stabilize around the $2 billion mark in 2024 and then potentially accelerate in 2025 up to $2.5 billion,” Khaled Talhouni, Managing Partner at Dubai-headquartered Nuwa Capital, a leading investment firm focusing on early and growth-stage start-ups, told Arabian Business.

“One consideration that would impact this [the projected funding surge] are national budgets and oil prices, which will affect the pace of deployment and the availability of dry powder,” he said.

Sharaf Sharaf, Fund Head at Amplify Growth Partnership, said the funding landscape will also see a major shift with the end of the cheap capital era, with investors focusing more on strong cash flows than on growth metrics, making companies that can generate steady revenue streams more valuable for funding.

Tech startup funding witnessed a massive plunge in 2023 to reach $638 million, a 65 per cent fall compared to the previous year, according to Tracxn ‘Geo Annual Report’.

Venture funding has, however, has been showing signs of recovery since the third quarter of this year, with some of the ventures raising double-digit capital, going up to $30 million.

UAE startups are estimated to have raised a total of about $690 million in the first 9-month period of 2024.

UAE, GCC funding landscape to see major shifts

Sector experts said the shift in investment strategy would lead to the emergence of winners [startups] in each sector, with them cornering disproportionate amounts of capital in their category.

They, however, said the UAE and the region’s relative wealth and favourable young, tech-savvy demographic position startups well for growth in the innovation economy, leading to attracting increased funding in the coming quarters.

The expected interest rate cut rounds this year and beyond will further accelerate startup funding prospects in the region, they said.

“Broadly speaking, reduced interest rates should help drive capital towards equities and away from debt especially in private markets/alternatives for investors and allocators looking for more alpha,” Talhouni said.

He said the current acceleration of companies heading towards IPOs and exits in the wake of the opening up of the opportunity to go public will also make VCs and PEs to bet on more equity funding for startups, especially with strong growth and profit-making potentials.

Sharaf, however, believed the trend of fintechs raising debt rounds is likely continuing, as fintech business models typically generate predictable revenue, making them suitable candidates for debt financing.

“With equity capital becoming more expensive, debt provides fintechs with a way to scale efficiently without dilution.

“Moreover, as regulatory support for fintechs grows in the MENA region, we anticipate a stronger focus on debt solutions as an effective way to fuel their expansion, especially for scaling digital payments, SME lending, and financial services models,” Sharaf told Arabian Business.

“This will also help investors to adjust their risk-reward trade-off in search of this additional return,” he said.

The Amplify Growth Partnership fund head said though interest rates have fallen, the decline has been marginal.

“While 3-month SOFR (Secured Overnight Financing Rate) rates have fallen from a peak of 5.4 per cent in late 2023, the fall is only by 10 per cent, as current rates are at 4.8 per cent.

“In retrospect, we have seen rates increase by approximately 400 per cent since early 2022,” he said.

Sharaf also said that given the interest rate environment, investors appreciate the combination of robust cash coupons, contractual return of capital as well as exposure to the equity growth of the borrower via equity participation instruments such as warrants or other similar instruments.

“This allows us to offer our investors access to growing technology-driven businesses without their initial investment being reliant on an exit to realise their gains,” he said, adding that this is a safer way to take exposure to interesting, fast-growing companies in the UAE and the GCC region.

Region to see more acquihire, consolidation drive among startups

Notwithstanding the projections of a surge in funding, the UAE and the wider region is expected to see some large-scale failures across the board, triggering a spate of acquihire – buyout of startups for human capital – deals, besides a consolidation drive in the market.

“Most likely we will see some large-scale failures across the board, this is a natural evolution of the ecosystem, as more and more companies get created and then funded, more companies will naturally not make it,” the Nuwa Capital top executive said.

Sharaf said the region will also see the emergence of specialised stage funds like growth funds and debt funds as the ecosystem grows, more and more companies will also require specific capital solutions that are dependent on their requirements and their stage of maturity.

Both Talhouni and Sharaf said the UAE will see entry and expansion of more global investment firms going forward.

“Yes, definitely expect more of the likes of TPG and General Atlantic to continue expanding in the region and other new global entrants to start looking at the region,” Talhouni said.

Sharaf said the UAE and GCC are becoming global hubs for investment, driven by ambitious national agendas, a strategic location, and strong economic fundamentals.

“We expect increased participation from global investors attracted by the region’s growth potential, favourable regulations, and expanding tech ecosystem.