What’s in store for Mena investment?
More cashing in on corporate venture capital trend
2017 was an exciting year for the region’s investment ecosystem. Despite an uncertain global political environment, the region has seen sustained investment activity, especially in the venture capital (VC) space, with an upward trend in the number and size of deals undertaken. Exit activity has also shown encouraging signs, with eight exits in the first six months alone, signalling a greater degree of maturity in the market. Furthermore, the entry of global players, such as Amazon, whose landmark acquisition of Souq.com was one of the biggest technology M&A transactions in the Arab region, demonstrates the potential of our small and medium enterprises (SMEs) to attract more foreign investments.
Our region’s burgeoning entrepreneurial ecosystem is supported by a young and growing consumer market with high rates of technology adoption. The average number of connected devices per user is 5.4 in the Mena region, which is comparable to Western Europe, where this figure is 5.5. Moreover, mobile data and Internet traffic in the region are projected to grow by a staggering 71 per cent by 2020. The continued emphasis on diversification and development by governments across the GCC has also encouraged the growth of startups, evident from the proliferation of incubators and accelerators, which play an instrumental role in equipping entrepreneurs with the necessary skills to succeed and scale up.
Up until now, venture financing has been driven largely by investments from VC funds in the Arab region. Investor appetite in VC and early-stage investments has consistently been on the rise, representing 61 per cent of deals completed in the Mena region, including eight of 11 deals in the second quarter and four of five in the third quarter of 2017. Interestingly, these investments are also shifting from consumer-driven sectors toward technology and technology-enabled businesses, which now form the major focus for VC investors. While traditional VC is playing a critical role in the region’s investment landscape, we believe that there is a huge opportunity for corporate venture capital (CVC), where established companies can set up their own investment arms that drive value for the parent company.
Globally, well-known corporates such as Intel and Alphabet have leveraged the CVC model for a while now through their established CVC units, Intel Capital and Google Ventures respectively, which have enabled the companies to accelerate technological innovation and increase the scale and scope of their operations. Today, this trend is more widespread, with 75 of the Fortune 100 active in corporate venturing. Moreover, 41 have a dedicated CVC team. In fact, CVC represents nearly a third of all US venture deals and 40 per cent in Asia, reflective of its transformation from a small segment of the VC world to a vehicle for corporates to inject innovation into existing products and services and make their mark in a highly-digitalised world.
In the Arab region, the concept of CVC is still at a nascent stage, however the wave of high-growth technology startups represents an untapped avenue for corporates to recalibrate some of their core sectors and integrate cutting-edge technologies into their businesses. CVC can usher in a new operational paradigm for companies to access new markets, diversify their portfolio, and leap ahead on the sustainability curve. Effectively, it acts as a viable alternative to traditional in-house research and development.
For startups, CVC has two distinct advantages over traditional VC funding. The first is their ability to operate in the capacity of a strategic financial investor by providing domain expertise and access to potential captive businesses. Most CVC units exist to make strategic investments, and financial return is often a secondary factor. Secondly, corporates invest with a long-term view, which creates a more active, resilient and patient source of funding where capital is more predictably available.
The transformative role of technology in today’s business ecosystem is undeniable. As more businesses internalise this imperative to innovate in 2018, we are optimistic that the CVC trend will start to take root across the region, so that we can be prepared for tomorrow’s business environment, support high-impact entrepreneurship and promote qualitative diversification.
71% growth in mobile data and Internet traffic in Mena region by 2020