This year will be the year of reckoning for startups across the Middle East and North Africa (Mena) as global inflation continues to rise and the cost of living impacts purchasing power. 

We will likely see more failures this year as startups struggle to raise capital. While the total amount invested in startups increased in 2023, compared to the previous year, this was a result of several mega deals and debt rounds in the buy now pay later (BNPL) and super app space. Without the debt financing, investment in Mena startups last year dropped by more than 30 per cent. 

Regional investors are likely to remain wary this year and cautious in how much, and where they invest. The trend of lower valuations, down-rounds and restructuring will continue this year. Startups that are not well funded will not survive unless they are profitable. Revenues will shrink or stay the same to conserve cash. Back to basics will be even more important this year.

Battle of the BNPL 

The region’s latest new unicorns, Tabby and Tamara, have demonstrated the importance of market need in order to succeed. Both are providing a payment solution in a part of the world where there is limited access to credit. Globally, BNPL is struggling, with valuations slashed and consumers curbing their spending, but regionally demand for this form of payment is likely to rise. Competition between the two will no doubt increase, especially now that Tabby has relocated its headquarters to Saudi Arabia, where Tamara was founded. The need to differentiate, to win over merchants and encourage customers to choose them will only intensify.

These two startups have also demonstrated the re-engagement of Western investors like General Atlantic and Wellington Management with big ticket sizes, as well as newcomer to the region J.P. Morgan, which backed a $700 million debt round for Tabby. This reflects a renewed interest in emerging markets and an avenue for later stage funding for the region’s startups. 

The continued rise of Saudi Arabia

Over the past few years, Saudi Arabia has worked hard to improve regulations, establish entities to support entrepreneurship and encourage its own population to explore startup opportunities. Despite the challenges that remain - it has performed exceptionally well and has now become the go to destination for regional talent and startups looking to relocate their headquarters or scale beyond their own markets. The pull of Saudi Arabia will strengthen this year, of which the knock-on effect will likely be more enticing government plans from other countries in the region to attract and maintain their own startups. 

The UAE will maintain its position as a startup hub for the region and it will be these two markets that drive the startup sector this year. Egypt, despite being a powerhouse of good startups and ideas, has lost its lustre, with investors hesitant to invest in a market that has faced such economic difficulties in the past couple of years. 

Qatar on the other hand is another market worth watching. Its government has increased its focus on enabling entrepreneurship and with events like Web Summit in February, it indicates a growing recognition of the importance of technology and innovation in diversifying its economy, traditionally reliant on gas. 

Gaza war

The devastating war has killed more than 20,000, among them members of the startup ecosystem. The reaction of Silicon Valley and other investors and founders based in the West has been disappointing to say the least. This has prompted many within the Mena ecosystem to look inwards, support one another and forge new partnerships from within the region instead of relying or hoping for US or European investment and partnerships. 

The governments of the region were already looking more to the East for new economic opportunities, this year, the startups will follow. 

Generative AI

After the launch of OpenAI’s Chat GPT, artificial intelligence became more than just a buzzword. It has now become a tool within organisations to enable efficient operations. We saw several regional startups integrate Chat GPT into their operations, essentially becoming “wrappers”. Such models are unlikely to be sustainable moving forward, especially if OpenAI enables the functions they provide within the app itself. Concerns over privacy and bias in generative AI will likely become more prominent this year, drawing greater attention to the need to have more localised, regional tools. 

Cleantech

For the first time, serious discussions and investment commitments have been made to fuel the growth of the cleantech and climate tech sectors in the Middle East. Up until now, regional investor interest in the cleantech sector has been minimal, but this could change with new funds dedicated to the space.