When in February 2022 the war in Ukraine broke out, its impact on the Middle East and North Africa (Mena) at the time remained unclear, but almost a year since fighting began the effects are now visible. The most affected market in the region has been Egypt, the world’s largest wheat importer, which relied heavily on Ukrainian and Russian wheat supplies. The country swiftly devalued its currency and has since suffered from rising inflation and a slowdown in economic activity. Over the past few months, we have seen this reflected in the startup ecosystem, with investors pulling back, reports of mass lay offs and the failure of several of startups, notably Capiter and Brimore.

The fear and uncertainty that the ecosystem faced at the start of the Covid-19 pandemic seems to have returned, this time caused by the Ukraine-Russia war, which has led to a rise in global inflation, the fall of public markets and an oncoming global recession amid a backdrop of lingering supply chain issues. This bleak outlook will continue this year and regional investors will remain more hesitant.

The level of investment will continue to slow down across Mena with average cheque sizes becoming smaller. The investment boom and high startup valuations we witnessed after the pandemic and last year is unlikely to continue into 2023. Investors will be far more cautious with their funds and startups will have to justify their valuations at every stage. Startup valuations are likely to go back to pre-pandemic levels and those that fail to recalibrate or demonstrate a clear path to profitability will struggle.

The arrival of global investors like Sequoia Capital and Softbank was a vote of confidence in the region’s startups, but the current global situation will see them retreat. The impact of the rise in inflation which led the US Federal reserve to raise interest rates, and thus collapsing the public markets has resulted in the end of "free money". This has in turn led to massive write downs of privately held startups, among them Klarna the highest valued startup in Europe and Instacart in the US. Mena will slip back into being a low priority market for them and they will instead focus on their home markets. As a result, we are likely to see more failures this year especially those of high cash-burn startups, more consolidation and fewer big exits, particularly by global players. In fact, where US companies accounted for seven of the 39 acquirers in 2021, last year, this fell to just three. UAE and Saudi Arabia-based companies have become the most active exit targets for the region’s startups, a trend that is likely to continue this year.

While last year was the year of going public and SPACs, the dream of going public in the West is over for the region’s startups. The freefall of SWVL’s valuation on the NASDAQ highlighted just how demanding and tough the public markets can be. For the local exchanges this presents an opportunity to open up to startups, but they will need to overcome several liquidity and regulatory issues before startups can list.  

The regional family offices that so enthusiastically embraced startups and VCs will also retreat, particularly the ones that are exposed to global markets. These family offices will be much more patient when deploying funds this year, whether directly to startups or as LPs to the region’s funds, which will leave VCs with some difficulty in raising funds this year. The biggest source of capital for investors will likely be the sovereign wealth funds, especially Abu Dhabi’s ADQ and ADG as well as Saudi Arabia’s PIF. This year will also see Qatar’s Investment Authority (QIA) become more active in the region. After several years of a diplomatic fallout, the success of the World Cup has helped the country come back into the fold.

Saudi Arabia might avoid the carnage that is happening in the rest of the world. The country has benefitted from the rise in oil prices and its ecosystem in turn has benefitted from a host of new investors in the space. Last year, the country enjoyed this influx of capital into its startups, propelling Saudi startups to become serious players across the region. Last year, 11 of the 44 regional acquisitions were made by Saudi startups including FOODICS’ acquisition of Jordan’s POSRocket and Nomu-listed Jahez acquiring The Chefz for close to $173 million while PayTabs and Unifonic both acquired Turkish startups following sizeable investment rounds.

Saudi Arabia’s open banking policy will propel the country’s fintech sector to new heights. This will push other countries in the region to update their fintech regulations and we will see much more active regulatory bodies licensing fintech companies this year. But regulators will likely be extra cautious when it comes to cryptocurrencies, which will remain on the margins particularly after the dramatic fall of FTX.

Dubai however, will maintain its position as the global hotspot for crypto, Web 3 and the metaverse, attracting a vast array of both startups and investors in this space.  

The state of the startup ecosystem in Mena in 2023 will depend largely on how the global economy and war in Ukraine pans out. Resilience will be key and the founders who can navigate their startups through a tough economic climate will be the ones who will build the next wave of successful startups in the region. Those who emerge from this crisis unscathed, will be the ones who years from now will contribute the most to the region’s ecosystem.