What are the benefits & risks associated with venture capital in the middle east?
What are the benefits & risks associated with venture capital in the middle east?
Multifaceted Benefits of Venture Capital within the local UAE (and broader MENA) ecosystem
Capital resources
VC firms in the UAE (as well as accelerators) provide startups with all the resources (financial, infrastructure, regulatory, legal and etc) necessary to survive and thrive in emerging markets.
Expertise, guidance, network and mentorship
These vc firms bring valuable industry knowledge & guidance to startups, helping them navigate challenges, seize opportunities and connect to their network effectively. For instance, Mubadala has a lot of experience in diversified industries.
Economic growth
The successful impact of venture capital can lead to job creation, economic prosperity, and technological advancement in the UAE.
Diversity
Diversity is also evident in the 20+ sectors, ranging from Digital Assets & FinTech to HealthTech, AgriTech and ClimateTech.
VCs have the ability to significantly impact the future of humanity, and therefore there is a concerted effort to explore nuance & emerging technologies to promote a better living for humankind. Vcs are actively shaping it by helping solve today’s pressing global challenges to build a prosperous, sustainable tomorrow for humanity.
Unpacking Risks in UAE's Venture Capital Scene
Lack of experienced VC firms here
Since the country is still an “emerging” market developing its products & services, therefore early-stage startups have higher chances of failure than established companies. One can argue that this is just like in any other region however when compared to mature markets(eg: US), the VC space in the UAE is considered more risky because of lack of experience and therefore could lead to losses for both investors and startups.
And since these early-stage startups are not yet listed on any UAE public stock therefore difficult to sell. On top of that, it can take several years for investors to see a return on their investment, which means a longer investment horizon compared to mature economies.
Regulatory risk
The regulatory environment for VC investment in the UAE is still evolving (mostly driven by Abu Dhabi Global Markets (ADGM) and Dubai International Financial Center (DIFC), which means there is a risk that new regulations could have potential impact on VC investments. One example is when Wise (formerly TransferWise) opened their offices here in the UAE, and then they had to shut down operations due to regulatory mandates that the startup was having difficulty in complying with.
Political risk
Although the country is a politically stable country, given the history of the Middle Eastern and Levant region, there is always a risk of political instability, which could impact negatively on VC firms.
Talent shortage & risk of flight
Since it’s a small country (like literally, NY itself is 46% larger than the entire UAE; or even Delaware which is 1.25 times bigger than Dubai) with limited talent pool, so that can also make it difficult for VC-backed startups to find and maintain (if not increase) their talent density which is crucial for any successful startup to grow and scale.
Talent flight
One of the biggest prevailing risks is the potential of “talent-flight”. The country does not allow permanent residency status (or even the right to stay indefinitely), therefore great talent is always looking for alternate permanent options elsewhere (mostly US & Canada) to work and settle. Although the country has introduced long term visa’s such as Golden Visa which allow 10 years of stay, however it requires a permanent solution.
