STV Report Reveals a $20B Funding Gap in MENA’s Growth-Stage VC Sector
STV, a technology investment firm in MENA (Middle East & North Africa), released its latest report projecting a $20B funding gap for the region’s venture capital (VC) growth-stage sector. The report estimates a need of ∼$25B for growth-stage funding in MENA in the next five years, of which only $5B is available today, revealing a large gap of $20B that stands in the way of the region realizing its full potential.
The report further explores the reasons behind the current gap in capital availability and highlights that the average AUM of a growth-stage VC fund is much larger than that of an early-stage fund. This necessitates larger capital allocators such as sovereign wealth funds (SWFs), pension funds, endowment funds, as opposed to early-stage funds that mainly target high-net-worth individuals (HNIs) or family offices. However, institutional investors have rigid internal policies requiring fund managers to have a proven track record in terms of exits and realized returns. Such a track record does not exist yet for MENA growth-stage funds, simply because the industry is still too young and has yet to see the necessary number of divestments. In addition, international investors, who were quite active previously and make up 50 percent of investors in late-stage deals, have retreated from the region by the first half of 2023 as their participation dropped to 28 percent.
Luca Barbi, General Partner and COO at STV commented, “What we are seeing is that on one side, more capital is needed to fuel growth-stage companies and enable them to achieve successful exits, but on the other side, successful exits are needed to generate the positive track record that would allow VC investors to raise additional capital. There is a material risk of market failure driven by such a detrimental circular reference. This is why an intervention in enabling allocation of more capital to growth-stage VCs would be critical”.
The MENA venture capital sector experienced a significant breakthrough in 2018 when a handful of institutional investors began actively supporting numerous technology companies. Over the past five years, this has resulted in the funding of more than 2,000 startups, with over $9.0 billion in equity investments. Presently, there are ~220 companies that have successfully secured Series A or later funding rounds, which are referred to as 'growth-stage' in this report.
Luca believes that despite this higher capital requirement, the risk profile of growth-stage ventures is significantly lower, which presents an excellent and unique opportunity for investors to deploy larger tickets into companies with a lower risk profile that can deliver attractive returns within a relatively short time frame of 2-5 years.
The MENA growth-stage companies span across several sectors with the majority of them focused on eCommerce, FinTech and Logistics. These sectors have the largest TAMs in MENA and are the ones with the highest likelihood to accommodate large-sized winners.