The venture capital and private equity landscape in the MENA (Middle East and North Africa) region is experiencing dynamic shifts, driven by rapid technological advancements, evolving investor demands, and unique regional priorities. A recent panel featuring prominent figures in the MENA investment scene offered a glimpse into these transformations, highlighting key trends for founders and investors.

Michel Friedman, General Partner at Reflect Ventures, highlighted the compelling growth narrative in emerging markets across Africa, MENA, and South Asia. “These countries have been growing a lot faster over the last 10 years than more established markets like the United States and Europe,” he observed. This accelerated growth creates a continually expanding “pie,” offering companies significant opportunities for quick expansion, even by simply maintaining market share.

A crucial driver within these regions, according to Michel, is logistics and supply chain. The exorbitant costs of inter-regional transport (e.g., from South Africa to Mozambique) underscore a universal understanding of the need for improved logistics capabilities. This focus is evident in initiatives like China’s Belt and Road and new regional transport routes, indicating that “everything is logistics.”

Johan Kragbaek, Co-head of Partner Relations with Greenstone Equity Partners, a leading fund placement firm in the region, shed light on the evolving relationship between fund managers and investors (LPs). Post-COVID, there’s been a “massive rebalancing,” with LPs demanding greater transparency and liquidity. This pressure is forcing General Partners (GPs) to innovate their offerings, moving away from traditional 12-15 year lock-up structures, particularly for family offices and ultra-high-net-worth individuals.

A significant trend is the rise of co-investments, now accounting for “around 15 or 20% of the entire private equity allocations.” LPs are also consolidating their relationships, with “86% of them in the next 5 years will be reducing the number of fund managers that they work with,” putting immense pressure on GPs to stand out.

Johan also noted the growth of private credit funds in the region, now a “growing asset class for sure,” attracting more institutional portfolios and prompting credit fund managers to establish offices and licenses in regional hubs like DIFC and ADGM.

Nikolas Fotilas, Partner for Gulf Investor Circle Group, shared insights into the AI era’s influence on startups. While the MENA region historically mirrored Western trends, there’s now a stronger focus on local consumer needs. However, the “big buzz” around AI has led some companies, particularly in traditional sectors like banking and telcos, to simply “request like, ‘bring me an AI startup’ just because we have to tick AI box.” This often occurs without a clear understanding of its application.

A key shift is the commoditisation of foundational AI models. Startups that previously aimed to build their own Large Language Models (LLMs) are now being “leapfrogged” by others leveraging democratised tools. Nikolas also noted a trend of “startups that don’t even exist yet” claiming to offer full AI media platforms, highlighting a need for greater substance over hype.

Walied Albasheer, General Partner of Intuitio Ventures, further elaborated on AI’s role: “We see right now AI become an infrastructure.” With most publicly available data already consumed by LLMs, the future focus is on acquiring new, non-published data from sources like IoT devices, hardware, and health devices. This will lead to significant challenges around data sovereignty and privacy.

Walied also highlighted the emergence of companies with incredibly high revenue per employee, with some new AI companies exceeding US$1 million in annual revenue per employee. This trend significantly reduces the staff required to achieve product-market fit, posing a challenge for VCs in amending their theses.

The shift towards leaner, more efficient teams in startups is evident. Nikolas observed that while IT development teams can scale down with AI, the need for expert architectural design remains crucial. Management teams, particularly in growth-stage companies, are becoming “much more sophisticated,” with a rise in second-time founders and experienced startup managers.

The question of outsourcing IT versus in-housing is a key consideration, impacting legal structures and the flexibility to pivot, which is common in early-stage ventures. Time to profitability expectations vary widely by sector, with some AI and big data plays potentially being profitable “from day one,” while fintech or telco plays have different time horizons.

Walied reiterated the importance of revenue per employee as a crucial signal. He also emphasised “founder to market fit” – the founder’s deep functional and operational understanding of the business, especially as tech becomes more accessible. The trend is moving from “human to AI orchestration,” demanding founders to be “ahead of the game” in operational understanding.

As technology development becomes commoditised, assessing defensibility is paramount. Walied highlighted AI defensibility as a critical gate for founders, given the rapid advancements. He also pointed to quantum defensibility as the next frontier, expected to “turn the table completely” in the next 3 to 5 years, ushering in “a complete different era.” The pace of change means “every 3 to 6 months the entire potential business foundations have the potential to change completely.”

Maarten ter Keurst, Managing Partner at Natural Ventures, an Abu Dhabi-based VC, shared his insights on water and food security. Unlike Western markets where this is often seen purely as an “impact play,” the UAE and broader Middle East prioritise security – “what can we do here in the region to provide food security for the country?”

While early investments in vertical farming were prominent, there’s now a realisation that this may not be a comprehensive solution. The focus is shifting to harder challenges like securing proteins and carbohydrates, moving beyond “flashy things” to concrete contributions. Digital solutions like sensor and satellite data are rapidly transforming the sector, alongside biologicals and alternatives to traditional herbicides and pesticides.

The panel concluded with visions for 2030:

Maarten ter Keurst: In water and food security, three key trends will dominate: the availability and interpretation of high-quality data (beyond just AI, including sensor and satellite data), resiliency against climate and weather to ensure independence from other countries, and resource recovery – extracting critical minerals like rare earth metals, magnesium, and lithium from sources like seawater and mining waste.

Michel Friedman: The next five years will be defined by the history of AI and the “competing need for data sovereignty, model sovereignty, sovereignty over just the execution of AI in your country.” This will clash with potential US restrictions on compute availability to prevent it from reaching countries like China. The interplay between owning and trusting AI models and the technical capacity to build and control them will lead to a “huge competition.” The ultimate winners will be those who master “technical and energy dominance.”

Johan Kragbaek: In five years, the private equity and venture capital space will need a “lot bigger room.” He foresees continued growth in alternative investments, particularly among family offices and ultra-high-net-worth individuals, who are seeking more accessible and liquid structures. Fund managers are increasingly establishing a local presence in the MENA region to prioritise relationships with these investors, supported by regulatory bodies like DIFC and ADGM. This aims to bring private markets closer to the “investor-friendly terms” of public markets.

Nikolas Fotilas: The legal structures behind AI, particularly concerning data and customer privacy, will become properly established in the next five years. He anticipates a significant increase in growth-stage VCs and investments in the region, bridging the current gap where few VCs write tickets above US$10 million. He hopes to see a significant increase in the number of unicorns and successful exits from the MENA region, catching up to other global hubs.

Walied Albasheer: Looking ahead, Walied sees a powerful convergence: “a mix between Web3, AI, and hardware.” Data will be the “main important asset,” with a continuous flow from robots, autonomous cars, and other physical devices. This will lead to “a lot of conflicts and war on data” amidst de-globalisation. He predicts a major shift as current LLMs begin to integrate data from major proprietary sources like YouTube and Tesla.