Last year we outlined several trends we expected would take place in 2020 – rise in foodtech, growth of e-commerce and the year that e-scooters would finally get regulatory approval across the region. We did not have the foresight for a pandemic, nor did we anticipate the speed at which these trends would come to light. The digitisation that analysts expected to take anywhere between two to five years, happened in the space of a few months as a result of the coronavirus.
While the pandemic brought about economic devastation, regionally, demand for e-commerce boomed, cloud kitchens proliferated, companies that enabled businesses to digitise flourished. The pandemic cemented the move to online and this trend will continue this year. We will see greater acceleration of edtech as more governments become comfortable with homeschooling, more productivity tools that enable flexible/remote working and hiring, while on-demand services across various sectors will continue attracting customers. However, simply replicating the offline experience online will no longer be feasible, greater innovation is necessary as consumer habits have altered, perhaps permanently.
Although several vaccines have been approved and are now being administered around the world, a return to life pre-pandemic is unlikely to happen anytime soon. Several countries are now battling new, more contagious strains that have pushed whole cities back into lockdown. Technologies that help to prevent the spread of the virus will continue to emerge, particularly in contactless and touchless tech, which are already becoming part of daily life. From simple innovations like the “hook” and a rise in contactless payments, to more sophisticated biometric technology, there will be more experimentations to avoid touching surfaces (which will be a risky endeavor in the years to come).
This staggered state of the world presents an opportunity for a new breed of technologies that bring people together. As the pace of economic recovery and a return to normality will differ per country, we are likely to see a hybrid world that attempts to combine the virtual with the reality and technological innovations will become more sophisticated in order to provide a seamless experience for both.
The need to adapt to this hybrid world and innovate will not only apply to startups, but the wider ecosystem too, accelerators and incubators will need to rethink their business models to remain relevant and survive.
This year has seen an unprecedented rise in the number of venture capital (VC) firms in Saudi Arabia and greater interest from the region’s family offices and large corporations keen to get sufficient exposure to the technology sector. Startups are increasingly viewed as a quick route to innovation and portfolio diversification by the larger retail and commercial conglomerates. We expect to see the sovereign wealth funds continue to pursue startups, especially abroad.
“Pandemic-proof” will become a prerequisite for many investors going forward. Their hesitancy at the beginning of this pandemic became evident over the past few months and will likely play out into the first quarter of this year. But this hesitancy will dissipate as they become more comfortable with bigger cheque sizes especially in the Series B stage and beyond. Following on from Instashop’s $360 million acquisitions, we will also see more exits this year, as well as failures from startups who struggle to adapt – a sign of a maturing market.
In terms of pipeline, Saudi Arabia will be the market to watch and the country will churn out more deals than before and could replace the UAE in terms of total investment value.
Ripple of e-commerce
The remarkable growth of e-commerce was a boon not only for the SaaS companies that enabled offline retailers to establish an online presence, but also for the wider ecosystem including the logistics and delivery sectors, and this will continue in 2021.
Consumers in the Middle East and North Africa (Mena) are now more comfortable than ever with making purchases online and customer retention will remain the focus of online retailers. This need for customer retention has also spurred the growth of super apps. From Careem and Halan to temtem and Yassir, on-demand mobility startups have shifted to become platforms with a variety of e-commerce offerings, including food, grocery and pharmacy delivery. This has been a way to offset the losses of the mobility segment, which will continue to suffer as remote working becomes a standard offering. Beyond e-commerce, these super apps are also establishing a presence in the financial technology (fintech) space with closed loop digital wallets that allow their customers to transfer credit and eventually, if regulations allow, cash out.
In light of the growth of e-commerce and emergence of super apps, we will likely see more innovation in digital payments and financial inclusion as well as greater adoption of buy now pay later among retailers and consumers. Overall, regulators will need to catch up to this acceleration of digital commerce in all its aspects while financial regulators will come under greater pressure to choose between the innovation that startups bring and protecting their incumbent players resisting disruption.
The UAE and Bahrain both normalised relations with Israel in September 2020 in a move that the two GCC countries hope will lead to economic prosperity. While interest from both sides has piqued and conversations and partnership are being struck, it is as yet unclear how this budding new relationship will pan out and affect the GCC’s startup sector. Given the GCC’s focus on consumer technology, there is little opportunity for Israeli startups to offer products or services that are not already available to consumers here.
However, Israel’s startup ecosystem is one of the most advanced in the world, with more than 8000 researchers per million inhabitants, the country tops global rankings in research and development spending as a percentage of gross domestic product at 4.2 per cent. The country is a global leader in artificial intelligence, cyber security, agritech and fintech and while that presents an opportunity for UAE-based investors, there is a sense of hesitancy and worry among some UAE-based startups who feel that Israeli technology and expertise will outstrip theirs.
Competition for startups
The need for innovation and to be at the forefront of technological change is one of the biggest takeways from this pandemic. The role that startups play within this has been paramount and we are already seeing governments and cities across the region launch a plethora of incentives and new licences to enable and facilitate entrepreneurship. Regulators are also becoming more engaged, keen to continue accelerating the digitisation brought on by the pandemic.
Competition is heating up between the major hubs, namely Dubai, Abu Dhabi and Riyadh in attracting startups and while on the face of it this may seem positive, it risks the introduction of protectionism, which will disadvantage the wider regional ecosystem.
To thrive in this (ongoing) pandemic world, startups will need more flexible licensing, the ability to work remotely without the need to take out office space, access to finance and a regulatory landscape that enables them to operate cross-border.
No matter how much we may wish it, the pandemic is not yet over, and this year will be a variation of 2020, with more uncertainty, more innovations and more startups proving the value of the entrepreneurship sector.