The Middle-East tech startup space is witnessing momentum like never before in 2021 with funds being poured into the tech startups at an all time high rate. Also, we have already seen new unicorns such as Swvl and Kitopi emerge from the Middle-East further raising the profile of the region as an attractive place for founders to build the next generation of technology businesses. The region, especially GCC has a lot going for it when it comes to attracting new businesses, however, the region also has some unique challenges that make it difficult for ventures, especially in their early days. This article is an attempt to summarize our perspective on the strengths and challenges associated with the GCC tech startup ecosystem.
On a cautionary note, we recognize that GCC is a broad landscape that is not homogeneous and some of the below-mentioned perspectives might not apply to each country / city in the region.
Strengths
- Attractive market fundamentals. The GCC region has a population of over 50 million with a GDP per capita that is well north of $50,000. This makes GCC a sizable and highly affluent market that is approximately 1/6th of the USA and 1/4th of the EU. While other big tech markets such as China and India boast of 20-25x higher population vs. the GCC, the purchasing power of GCC customers that directly translates to higher revenue and margin per transaction as well as significantly higher customer lifetime value makes the region a very attractive market. Furthermore, GCC has nearly 100% smartphone penetration. No wonder that the region has seen a rapid influx of successful startups from all over the world as a key geographic expansion opportunity while creating winners of its own such as Careem, Souq and Noon to name a few.
- Access to BIG Capital. With the presence of KSA’s PIF, UAE’s ADIA and Mubadala, Kuwait’s KIA and Qatar’s QIA and their many investment vehicles, the region is truly home to BIG capital that is in excess of a trillion dollars. While the current GCC startups are able to attract only a tiny fraction of this capital, a large amount of this capital is getting invested in startups around the world; over $500 million per annum as per the latest estimates. In our opinion, the limiting factor for limited regional tech investments by these big capital providers is access to high quality startups that can utilize larger funding rounds as it is not material or cost effective for the big VCs to invest in smaller rounds (Seed, Pre-Series A, Series A and Series B).
- Availability of opportunities. While there are a few established tech players that have emerged over the last decade in selected verticals such as Ride Sharing, B2C ecommerce, Food tech and Groceries, there are several large untapped opportunities that are still there for the taking in the GCC such as Healthcare, B2B ecommerce, Fintech, Auto, Logistics to name a few. Globally there are successful unicorns in each of these verticals and sub-verticals within this set, however, the GCC players pushing the frontiers of these available opportunities remain at an early stage offering opportunities for both investors and new founders to innovate and drive faster growth.
- Availability of Digital Talent. While this used to be a major issue a few years ago, things have dramatically improved over the last 2-3 years and just like the US, China and India, founders can now tap into the highly skilled Digital talent pool in the GCC. This is largely due to the success of the first wave of large Digital ventures – Souq, Careem, Namshi, Noon etc.
Weaknesses
- High starting up costs. We all know the story of Microsoft being founded in a garage and Facebook in university dorms. A similar story is almost unthinkable in the GCC due to the high cost of starting a tech business. Obtaining a business license, commercial office space and immigration status for the expat founding team members, all minimum requirements for establishing a business, often cost over $30,000 upfront thereby creating a significant barrier for young entrepreneurs.
- Access to early stage funding, especially Seed stage and Pre-Series A. While the Venture Capital space has significantly evolved in recent years, most VC firms in the region focus on startups that are already at Series A and beyond. In our opinion, this challenge along with the high starting up costs are the biggest obstacles in the current GCC technology startup ecosystem. As mentioned above, there are a lot of BIG capital providers in the region, however, early stage funding opportunities are often not material or cost effective for them, hence this segment needs to continue to rely on time consuming unstructured and angel funding.
- Fragmented markets. While GCC in itself is a significant market, unfortunately, the six countries that comprise GCC often act as independent markets with their own set of rules and regulations making it difficult for ventures in several verticals to seamlessly expand across the full GCC. In comparison, startups in the USA, EU, China and India don’t have similar challenges to expand across their respective countries / regions.