Middle East Investment: Venture Funding in MENA by Country and Industry

Region

The United Arab Emirates (UAE): The majority of venture capital Middle East and Northern African (MENA) investments in 2019 were made by United Arab Emirates (UAE) investors, accounting for 62% of total MENA investment.

We expect this trend to continue due to the more robust investment infrastructure in the UAE. Although the percentage of deals completed did not change from 2018 to 2019, the UAE’s percentage of total MENA investment increased 21%. This signifies the continuing growth in UAE investment size.

Egypt: A distant second in terms of total MENA investment (13%), Egypt completed seven more deals in 2019 compared to the UAE, confirming the assumption that due to its size the country is investing less money in more deals.

Saudi Arabia: Rounding out the top three in terms of deal value closed is Saudi Arabia. Saudi Arabia’s position is expected to increase in the upcoming years due to the government’s efforts to diversify the economy.

Industry

Real estate held the top spot in terms of investment dollars in 2019 but did not rank in the top five for deal count. This is a result of the capital-intensive nature of the investments. Fintech remained the leader in number of deals despite the moderate industry slowdown near the end of 2019. These investments include those in blockchain and crypto-related businesses.

Although funding for fintech was number five in terms of investment dollars, these numbers signify an interest that investors like to enter the market early.

E-commerce took second place in terms of funding value (17%) and deals (10%). As the industry continues to grow globally and key players continue to make acquisitions, this is an interesting market to watch. These numbers are bolstered by a $6.2 million seed round investment in the e-commerce wholesale food and grocery marketplace MaxAB.

Delivery and transport realized large growth in investment dollars with 10% growth from 2018. This mimics trends from USA investments as delivery startups continue to compete for the expanding market.

Middle East Investment: Strategies for Bringing Innovation to the MENA Region

Previously, we detailed the recent venture funding the region by industry and country. Now that the Middle East investment landscape has been outlined, we will walk through how to use a joint venture (JV) strategy for bringing innovation to the MENA region.

Paths to Driving Revenue Growth

PwC recently conducted a survey of business executives in the Middle East asking them which activities, if any, they were planning in the next 12 months to drive revenue growth.

Results from PwC survey

Entering a new market or forming a joint venture was identified as a top priority for 83% of business executives in the Middle East.

Additionally, 17% of business executives identified collaborating with a startup or innovative company as a top priority.

These three objectives (entering a new market, forming a JV, or collaborating with startups) presents powerful opportunities for companies seeking capital and financial partners in the region.

Note: J&A utilizes a broad definition of joint ventures that includes distribution agreements, franchising agreements, reseller agreements, and traditional joint venture agreements in which multiple entities own equity positions in a new entity.

Reasons to Consider a JV

Joint ventures can be an ideal investment structure in certain situations, especially in fast-growing markets like MENA. Below are some common advantages associated with JVs.

Components of Successful JV

We have seen great success with North American and MENA JVs in recent years when a clear strategy, detailed planning, and strong execution is at the center of the deal. Below are components of success for long-term value creation.

Define objectives: Starting with the end in mind, defining the objectives and aligning to them will ensure the feasibility and strategic fit of the JV.

Choose the right partner: Due to the collaborative nature of JVs, selecting the right partner is critical to its success. Defined objectives inform selection criteria based on the needs of the partners (i.e. ownership of a critical asset such as presence in a market or intellectual capital). Other selection criteria to support the JV may include company culture, decision making, communication, trust, and financial drivers.

Determine contributions and operating model: Clearly articulating the link between asset contributions and ownership will drive success. Selecting a valuation methodology and layering in industry and region nuances will help guide the contribution discussion. Understanding the level of support, involvement, and key target dates for each company will act as a guide to ensure objectives are met.

For more information on MENA investments, please contact us at jahani@jahaniandassociates.com or visit our website jahaniandassociates.com.

Originally published February 18, 2020. Updated March 20, 2020.
Sources: PWC Middle East CEO survey | McKinsey and Company | Magnitt | The World Economic Forum[/vc_column_text][/vc_column][/vc_row]

MENA Investor Analysis

MENA Investor Analysis: Investor Location

J&A has collected investor data to generate a summary of Middle Eastern and Northern African (MENA) investor location, investment size, investment volume, and investment location. This article provides data and insights on these topics. It is important to know that many transactions in the MENA region are not announced, therefore the metrics here report less activity than what is truly taking place. The date herein is collected from 2000 to 2018.

The United Arab Emirates Makes the Most Investments

• The United Arab Emirates (UAE) made the most investments in the MENA region by nearly double its leading competitor (Turkey) and nearly four times its closest Gulf Cooperation Council counterpart (Saudi Arabia).
• The UAE’s focus on technology and innovation comes as no surprise to people familiar with the region, as cities such as Dubai and Abu Dhabi continue to pioneer free zones and technology-forward cultures through economic incentives.

The Number of VC Firms Is Increasing in the MENA Region

• Over 50% of existing MENA VC investors were started between 2011 and 2018. The below figure shows the growth of MENA investors by type since the year 2000.
• There has been a steady development of private equity funds in the region. Firms that identify as venture capital skyrocketed since 2011. Angel investors and incubators also increased dramatically in the same period. Venture capital firms, incubators, accelerators, and angel groups make up 80% of new investment firms in the region since 2011.

VC Investments Are Concentrated by Country

• Not surprisingly, the UAE leads the MENA region in the number of investments made and the number of investors within the country.
• The mix of private equity investors, venture capital investors, angel groups, accelerators, and incubators remains fairly consistent among the leading countries. VC firms and angel groups are the two most common firm types.
• Private equity growth is expected to continue as the market matures.

The insights and data herein signify strong growth in a maturing investment region. Next, we will review the amount of invested capital per deal, the number of deals invested in by MENA entities, and investment locations.

MENA Investor Analysis: Investment Size and Volume

In this section, we will analyze the average money raised from MENA investors by round, the number of companies invested in by round, and briefly review where MENA portfolio companies are headquartered. All data is from the years 2000 to 2018.

Investment Dollars Increase as Rounds Advance in Stage

• The amounts raised in early-stage rounds from MENA investors (pre-seed, angel, and seed) are similar to the amounts raised in the same rounds from North American investors.
• Series D and E amounts raised per round were higher on average than North America rounds. This is likely because more popular brands raise money from MENA investors on their way to “unicorn” status. This also reflects the relative scalability of the market due to the consolidation of decision-makers.
• Series F, G, and H were not analyzed due to the limited amount of data available and relative skewing of results.

Investors Make Angel and Seed Investments Most Often

• The number of investments made in angel and seed rounds was more than all other rounds combined. This is likely due to the relatively high concentration of high net worth individuals in MENA countries.
• The number of investments made decreases as rounds advance in stage, though the total money invested in each round increased. This is identical to what is seen by North American investors.
• This data is based on 1,381 investments made from 2000 to 2020.

Investments are Globally Diverse

• Only 32% of companies invested in by MENA investors are based in the MENA region, showcasing a desire for portfolio diversification.
• North American and European companies make up over 56% of MENA investments.
• J&A expects investments in South America and the MENA region to increase significantly over the next five years.

The following section will highlight where investments are located, as MENA investments are more diverse than North American investments. J&A will also highlight regions where growth and opportunity are expected.

MENA Investor Analysis: Investment Locations

As shown in the previous section, investments are globally diverse for MENA investors. The data herein showcases which investments have taken place over the last 15 years. J&A expects strong South American and MENA investment growth due to government initiatives. We also expect Eastern African and Southern African investments to grow disproportionately in deal count five to 10 years from now.

MENA Investors Favor North American Investments by Both Dollar and Count

• North American (NA) investment round sizes are uniquely large, showing a strong value placed by the MENA investor in NA deals.
• Asia is not analyzed due to several exceptionally large investments that skew results.
• Investments by industry were relatively broad, with no single industry commanding a majority of investment dollars.
• J&A anticipates that both the number of deals and the dollar volume per deal will increase for MENA-based companies in 2020 and beyond.

The chart below shows the average investment dollar amount made by MENA investors in each region.

Mapping Deals Over $50 Million Made by MENA Investors Across the World

The map below shows the brands that raised over $50 million and their respective locations.

• North America: Not surprisingly, North America took the top spot with leading tech investments and brand names familiar to everyone such as Lyft, Uber, and Collective Health.
• Europe: Spain, Germany, and the United Kingdom commanded the largest deals with brands like Babylon and Wefox.
• MENA: Most of the deals made by MENA investors were in the MENA region and include brand names such as Careem, TruKKer, and Fetchr.
• Asia: Asia was home to some giant deals, namely Koudai and BigBasket, that were removed from this data set because they skewed results.
• Oceania and South America: J&A anticipates these regions will grow in both investment dollars and size due to advancements made by local technology companies and relative maturing of economies. Both regions are not without struggle. As North American markets become more mature and saturated, Oceania and South America will play increasingly important roles in the global technology landscape.

Key Takeaway: The Importance of Saudi Arabia

It is important to note the anticipated growth of Saudi Arabia in the MENA region. Based on the kingdom’s initiatives and relative wealth, J&A and other authorities expect the Kingdom of Saudi Arabia (KSA) to experience tremendous growth over the next 10 years. Investments in technology and innovation will be a major part of this growth. KSA is relatively small within MENA, but the country’s power in fuel and geopolitical posturing will likely lead to meaningful activity in the near term.

Sources: Crunchbase | McKinsey | International Monetary Fund | World Bank | PwC MENA

Responding to an Economic Downturn: General and Specific Strategies

A potential economic downturn brings both opportunities and risks for businesses. J&A has collected a set of specific and general strategies that business owners may use to evolve and thrive in changing economic conditions. We provide examples of which companies utilized the specific strategies and how the general strategies can be incorporated into a more complex corporate charter.

Specific Strategies for Responding to an Economic Downturn

Consider International Expansion

Global economic conditions affect areas of the world differently. In times of pandemic, strong governments will be able to respond in ways that hold or rejuvenate investor confidence and capital markets in ways more democratic governments do not. J&A expects this confidence to be reflected in countries with more centralized political power by continued investment in core industries, such as food and security, as well as an increase in special situation investments.

Licensing

Starbucks famously increased its revenue growth by opening more licensing opportunities for the brand during the 2000 recession. This is also an effective way to expand internationally.

Leverage a Part-Time Workforce

Talbots hired more than twice as many part time workers as its competitors before and during the 2000 recession. This allowed them to maintain a high amount of marketing during the recession and emerge as a leader during recovery.

Focus on Selling Products and Services of the Future

Verizon switched from selling phone minutes to more expensive broadband services during the 2000 recession. Cost per customer acquisition often increases during an economic downturn while sales decrease, creating a very risky cash position for companies. Firms should double down on products and services of the future that customers are already paying for.

Reduce Costs Early to be a Resilient Company

In addition to the above specific strategies, companies can incorporate more complex thinking into their corporate charter that includes debt financing, better inventory management, and diversification. J&A identified which of these strategies should be part of the conversation with your financial and banking advisors.

General Strategies to Prepare for and Manage a Potential Economic Downturn

Lean Inventories

Focusing on having the right inventory levels will reduce the amount of needed committed capital and can lead to the ability to pay suppliers more quickly. This combination will drive to securing more favorable contact terms.

Deliberate Cost Reductions and Productivity Increases

Being prepared to preemptively cut costs as the economic downturn steepens will support the ability to refocus spending. A delicate combination of reduction in spending at the right time will support positioning through the downturn. Ensuring the right resources are fully utilized will ensure quality talent is retained and offer the ability to capitalize on opportunities during the downturn.

The Bottom Line

Companies that perform best in an economic recession do two things well. First, they strategically position themselves before a recession becomes a reality (as identified in the above specific strategies), and second, they react definitively and swiftly to cut costs and streamline operations when the recessions begin.

Originally published April 7, 2020.
Sources: Harvard Business Review | McKinsey and Company
Graphic taken from: McKinsey Quarterly, May 2019
Find more about us at jahaniandassociates.com or contact us at jahani@jahaniandassociates.com

Digital Health: The Competitive Advantages of Tomorrow’s Healthcare Companies

Digital Health: Competition for VC Dollars

Digital health is an exciting area, ripe with growing Medicare reimbursements, new technologies, and a real potential to improve the frustrating healthcare consumer experience in the USA.

Jahani and Associates analyzed over 200 M&A transactions and equity investments in digital health from 2013 to 2016. Our results showed a 20% decrease in investment funds per company in 2016 versus 2015. Despite a 604% growth in Medicare reimbursements from 2006 to 2016 and a 62% increase in telehealth consultation over the same period, digital health companies must carefully develop their competitive advantages to both increase access to capital and decrease their cost of capital.

By analyzing companies that maintain competitive advantages such as Welltok, SnapMD, Pager, and Teladoc, we elicited two opportunities for creating value:

There are opportunities for digital health returns, but companies must respond to a saturating market by focusing on improving the customer experience while at the same time optimizing the business model of existing healthcare giants. Jahani and Associates (J&A) recommend digital health companies focus on four major intangible assets to accomplish the value goals listed above:

1. Optimize member access via subscription contracts, members per client, providers per network, and the visits offered to members based on contracts.
2. Create a revenue model driven by customer engagement. Digital health companies are much closer to their consumers than traditional healthcare companies.
3. Create a scalable and flexible business model that responds to seasonality, subscription fee, and access fee changes.
4. Consistently provide regulatory compliant solutions in response to existing and expected reforms such as HIPAA 1 and 2, HITECH, ACA, and BPCI.

This is all predicated on the business’s ability to identify, develop, and monetize intangible assets.

Digital Health: Reviewing Competitive Advantages in the Marketplace

J&A mapped a selection of these digital health companies onto a four-quadrant plane to understand how they fit in the marketplace. We considered both the scope of care delivery (for example, an urgent care company versus a software analytics company) as well as headcount and financial size of the business. A summary and description of our findings is presented below.

Quadrant 1: Social Players

These digital health companies typically have a large customer base, but are relatively lean due to the simplicity of their products. These are socially themed companies like FitnessKeeper and b.well.

Quadrant 2: Analytics Leaders

These are software companies whose businesses provide automation, simplicity, and streamlined data solutions for other players in the complex healthcare ecosystem.

Quadrant 3: Agile Players

Our research indicates that these digital health companies are largely transitioning to quadrant four, Tomorrow’s Healthcare Providers. They have strong customer relationships and are starting to scale.

Quadrant 4: Tomorrow’s Healthcare Providers

These are the dominant players of today and tomorrow. These digital health companies have the ability to scale, are generally profitable, and have strong brand recognition. They continuously evolve by providing new and innovative solutions to the market or by acquiring other innovative companies.

Originally published August 2017. Updated July 2018.
Sources: Crunchbase | McKesson 10K | PwC Money Tree Report | Pitchbook | Bloomberg