The Middle East's venture capital ecosystem faces a paradox: despite deep pools of capital, startups struggle to secure the funding needed to scale. Bloomberg's Laura Gardner Cuesta discusses the implications with Joumanna Bercetche on Horizons: Middle East and Africa.

The Middle East's venture capital ecosystem is experiencing a paradox, with startups finding it difficult to access late-stage funding despite the presence of substantial capital from sovereign wealth funds and family offices. Interviews with regional venture capital funds and companies reveal a funding gap at the Series B stage and beyond, attributed to high demand for capital, a pullback from international investors, and a lack of exit track records for startups.

While there are signs of change, such as new funds targeting later-stage investments and increased activity from local players, the transition is expected to take time. Industry leaders suggest that addressing this funding gap is crucial for enabling more startup IPOs in the region and supporting the growth and development of the local startup ecosystem.

Decoding the Middle East's late-stage venture capital gap

Despite a strong first quarter for startup funding, the Middle East venture ecosystem faces a unique paradox. The region's sovereign wealth funds and family offices wield trillions of dollars, but startups are struggling to access the funding they need to scale. Laura Gardner-Cuesta is Bloomberg's Middle East equity capital markets reporter and joins us now. Laura, I've got to say, this is, I would say, a surprising observation because we always talk about the region being awash with capital from the likes of these sovereign wealth funds, these family offices. So why is it the case that for some of these startups, it's difficult to get late stage funding? Yeah, no, absolutely. It's something that you wouldn't initially think about, but we interviewed a few VC funds and companies based in the region, and they noted that they're seeing there's a funding gap at the late stage, so series B onwards. And there's a few reasons they cited. One of them is that, yes, there is a lot of capital in the region, but there's also a lot of demand for this capital. So we've seen sovereign wealth funds invest in regional allocators, but it's still comparatively small compared to other global investments. There's also been a pullback of international funders in recent years. So there was a peak in 2021, 2022, but this has since pulled back a bit, and they're more focused on things like tech, AI, and a lot of this is in the US, so this means that there's less going around for Middle Eastern companies. And finally, there's also a lack of exit options, or rather exit track records, because yes, we've seen a wave of IPOs in the region, but a lot of this has been from either state-backed companies or we've also seen a lot of longstanding family-run businesses. We're yet to see a wave of startup IPOs, if that makes sense. So that also gives investors a bit of concern, like where their money is going to get stuck. So yeah, I think it's a combination of things. Sure. Yeah, that is interesting. Obviously exits are trickling down across the whole landscape. What would you say the risks are for the Middle East venture capital ecosystem if that funding gap, specifically at the Series B stage and beyond, is not addressed? I think, again, speaking to companies, it doesn't mean that not accessing the Series B funding means that you won't be able to IPO in the Middle East, but we spoke to Property Finder CEO and he said one of the concerns he had is that it might not, essentially companies that are getting ready for an IPO, getting ready for an exit, if they don't have this access locally, it could just stunt this growth and development. So I think there is a risk there in general. We are seeing signs of change. There's recently been an announcement by Beko Capital that's known for Series A funding. They've started a new fund for later stage capital. We're seeing some new players come into the market. So Riyad Capital recently announced they led a round for quick commerce firm Ninja in Saudi. So we're seeing this change. We're seeing some funds being announced, but it's still going to take some time. So I think ultimately what it means for the companies, if we really want to see a wave of startup IPOs in the Middle East over the next two, three, four years, it will be more helpful if you have this capital locally.

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