??Less deals, more drought?
Hey ya’ll,
As we settle into H2, we’re looking back on?six predictions ?we made for MENA’s VC ecosystem in 2023. Let’s track how right (or wrong) we’ve been so far:
? Portfolio value will decline
Against the backdrop of rising interest rates and increasing inflation globally, we have seen a significant slowdown in capital deployed. Startups that raised in 2021-2022 at frothy valuations are now raising flat or down rounds regardless of stage. Fewer companies meeting ambitious valuations has resulted in stagnant portfolio value and a disruption (or a correction) to MENA’s traditional VC model by forcing a shift towards pitching realistic valuations. Public tech companies have seen a?70+%?decline in valuation which is now reverberating down to private markets. Take a look at Coinbase - despite being up over?200%?in the first half of the year, they are still?~67%?from their peak in December of 2021. We’re expecting (and beginning to see) a similar decline in valuations for private companies in earlier stages across MENA and beyond.
At the same time, earlier this year, global investor Tiger Global opted to sell part of its?$40B?portfolio into the secondary market, marking down the value of its investments across all its VC funds by?33%,?resulting in a?$23B?decline in value . They dropped money into deals rapidly and hiked up valuations, only to be heavily impacted by?last year’s volatile tech market. With fewer companies going public, investors are turning to the secondary market to find an out.
Now, despite regional VCs being less eager to follow the same path and close deals at inflated valuations, they have ironically had to fundraise on the unrealized or ‘paper’ value of their portcos. Funds that are currently fundraising and don’t have a strong track record, as well as emerging funds, have faced challenges in raising capital. This will prove to hurt the ecosystem as early emerging fund managers are hungry to prove themselves, have often founded startups themselves, and research has shown that a fund’s best performance is usually in its first few years of operation, equipping them with the expertise to capitalize on companies that account for the majority of value creation.?
?? We are still witnessing big institutional players, such as SVC, who have mandates to deploy cash,?drop those 8 figures ?into developing the ecosystem despite the decline. The point here is, money will eventually trickle down but the way it trickles down will be unique.?
? Investors will continue to invest and deploy
Dealflow and the total amount of capital deployed YoY is down. This is despite mega-deals such as Egypt’s MNT-Halan reaching unicorn status following a?$400M?round, KSA’s Floward raising?$156M,?and e-grocery platform Nana with a record?$133M?Series C round, all within one month in H1. In fact, these three deals?accounted for almost half ?of MENA’s total funding in the first half of the year.?
MENA recorded a?42%?YoY decline in funding and a?49%?decline in deals ?in H1 2023 compared to the same period last year, which has kept up with trends seen in the US and other international markets. VCs deployed?$39.8B?into US-based startups in Q2 2023 , down?48%?YoY from last year's?$76.6B, with the number of funding rounds remaining consistent for the same period a year ago. For us at Modus, we hold the same mindset that we did at the beginning of the year - we are continuing to search for the right deals during the down cycle and other investors should do the same. They’re out there, and as the year goes on and we move out of the summer months and funding drought, we’re hopeful of witnessing an increase in good deals and solid startups that are pitching realistic valuations and raising healthy cash once again.
??Business fundamentals prioritized by founders and investors
Companies have been tightening their belts and not looking at growth at all costs. Founders know cash is available, but the current environment of macroeconomic challenges in which cash is being deployed is encouraging them to build better startups. This has resulted in a shift where startups are focusing on positive unit economics, building?profitable revenue streams,?acquiring loyal customer bases, and being led by resilient and resourceful founders?- all metrics that will serve as a foundation regardless of market conditions. Equally, FOMO is a thing of the past for (most) investors. Personally, we don’t want to jump on the bandwagon, we don’t care for the name and numbers game. We’re here to invest in startups that are not only profitable, but are sustainable, de-risked, and led by great founders and team players, even if it takes longer to close these deals. We’re confident that despite the stark drop in funding and portco value in H1, this behaviour will continue over the remainder of the year, allowing the ecosystem to mature.
??Increased competition to get on the cap table
With good business fundamentals, comes a struggle to get a seat at the table. The VC tug of war is still early and hasn’t quite peaked yet. With the disparity between cash available and the number of worthy investments attainable, when they are found, there’ll be competition to get on the table. Funds that raised in 2020/2021 and have paused or slowed investments over the last year will feel the pressure to deploy these funds. We haven't quite seen this happen yet, but the window to invest will close, and as this will impact the possibility of raising future funds, we predict the pressure to deploy will come to fruition over the next 6-12 months.
???This will likely lead to a pivot in geographical scope. Funds will look to adjust where they’re investing and target new markets to deploy cash.
???Web3 will develop and stabilize
Has it developed? Yes. Has it stabilized? No. Despite the region creating favourable conditions for the growth of Web3, including an attractive regulatory environment (namely in the UAE),?DIFC Innovation Hub launching the?Dubai AI & Web 3.0 Campus ,?and Hub71 earlier this year announcing ‘Digital Assets ’, a dedicated ecosystem?with more than $2B of capital committed to fund Web3 startups and blockchain technologies, the industry is yet to stabilize with an increasing amount of Web3 tools now moving over and being powered by AI.
???With that being said, what we didn’t predict for 2023, is the emergence of ChatGPT and the speed at which AI tools could steal our jobs.
Our team of operational experts shared insights on how the platform and overall AI/deep tech can automate a startup’s early-stage journey of building from the ground up, and ultimately adversely impact the Venture Building (VB) model (our bread and butter).?Our VBs consist of?6 key functions ?- strategy, tech, product, design, research, and marketing. Learn?how AI is (or is not) affecting these teams .?
? Venture Building will be widely adopted
With our finger on the pulse of all things venture building in MENA, we’ve noticed an increase in demand for the VB model and the value-add that comes with it. From emerging innovation ecosystems such as Central Asia and North Western Africa to regional family offices, corporates, and impact funds, these players are beginning to understand that VB is the?key?to unlocking a de-risked pipeline of investable companies. However, there’s still a large educational process that needs to take place to?bring the ecosystem and the global tech scene up to speed ?on what venture building is, the knowledge gaps it fills, and the systematic support it?provides. With half of the year still left to go, we’re happy to take that responsibility on board.??
Summing up:?It’s clear current economic conditions have heavily impacted the ecosystem and as it attempts to recover from the slump, over the next 6 months, we expect to see more deals, realistic valuations, increased pressure on funds, and even more AI.
Modus Board
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Until the next one,
Modus