(العربية)

On May 18, Wamda Foundation and the ArabNet website released a special report titled "The Impact of the COVID-19 outbreak on the Entrepreneurship Ecosystem in the Middle East and North Africa", which highlighted the situation of startups in the Middle East and North Africa in light of the Coronavirus pandemic in both the region and the rest of the world. The report aimed to identify the impact of COVID-19 on the region's entrepreneurship sector as well as measures that can be taken to relieve financial pressures on startups.

In the introduction, the report presented the macroeconomic conditions in the Arab region. It noted the negative repercussions of the low oil prices that led to major tremors in the economies of the oil-producing Arab countries, the worsening economic crisis in Lebanon, the high prices in Egypt, and the increase of the value-added tax in the Kingdom of Saudi Arabia.
These conditions have driven to the push towards embracing the digital economy for the sake of continued economic growth. For startups in the region, the situation is either catastrophic or a stimulus for growth, in the words of the authors of the report. In the following summary, we will cover the most important points in the report.

Where are startups located?

The United Arab Emirates is still at the forefront of countries in the MENA region in embracing startups and new entrepreneurs. It’s home to 24% of startups in the region, followed by Lebanon, where startups have enjoyed remarkable growth. They account for approximately 18% of the total startup population in the region, followed by Saudi Arabia and Egypt with 14.7% and 13.1%, respectively. By contrast, Iraq and Yemen ranked last with 0.4% each.

What sectors are startups active in?

Perhaps the most prominent repercussions of COVID-19 on the business world are the effects on the fundamental structure of economic activity. Work prospects are temporarily blocked in the face of the lack of demand, whereas new horizons have been opened within other areas that were less active before the spread of the COVID-19 epidemic. The figures reflect these market shifts, with data showing that 6.5% of emerging companies active in the Middle East and North Africa are working in the field of digital medical care, and 6.9% of them are working in digital learning. Both sectors that have witnessed significant growth since the onset of the pandemic. The data also shows an increase in the software solutions sector. This segment accounted for 13.5% of emerging companies active within the region, representing the largest slice of the overall market. Software solutions were swiftly followed by electronic commerce (e-commerce) with 11%. This sector, in particular, has always been at the forefront of a number of emerging companies in the Arab region over the last few years. Lastly, the financial solutions technology sector took third place with 9.4%. It’s tipped to become the fastest-growing business sector over next few years.

The stages of development of startups

According to the life cycle of startup financing in the MENA region, the first phase, known as the Seed stage, accounts for 31.4% of companies, which is the highest percentage of those seeking funding in the region. The second highest proportion of companies were in the initial financing stage (29%), followed by the first financing round at 18%. Those in the second and third rounds of financing represented 4.5% and 2.4% of startups respectively. Those financed by angel investors was about 14.7%, and this percentage perhaps indicates the increasing number of emerging projects reaching the first round of financing. With faster access to financing, startups can scale quicker and compete with established players in the market.

The impact of the epidemic on startups

The COVID-19 pandemic forced people to stay in their homes, directly impacting the travel and transportation sector. A third of the companies active in the transport sector within this region suspended their activities. Consequently, their revenues suffered a loss of around 75 to 100%. Furthermore, 25% of startups in the travel sector stopped operating completely, and 50% of them have subsequently suspended their business activities.

The lockdowns, uncertainty, and negative outlook for the economy have had a negative impact on 71% of startups, with 22% suspending their activities altogether. A further 21% of startups have witnessed a decrease in demand, which has led to large losses. On the other hand, most of the emerging companies in the field of delivery services (e-commerce), digital education, and digital health have benefited from a significant increase in the demand for their services, which has reflected positively on their revenues, particularly in the e-commerce sector.

Financing startups in light of the epidemic situation

The spread of the global pandemic has put a great strain on demand in international markets, which has led to a decline in oil that, in turn, has reduced the available resources of financing for startups. Most of the regional financing operations come from the oil-producing countries, especially the UAE and Saudi Arabia, which were affected by the drop in oil prices. The pressure on financing opportunities exposed most emerging companies to the risks of poor cash flow management. On the subject of financing rounds affected by the impact of the pandemic, the answers of the respondents to the questionnaire can be summarized as follows:

• 6% said that the epidemic affected their financing rounds.
• Of those 49.6% above, 44% said that their financing rounds were either stopped or canceled.
• 8% of the respondents said that their investment environment had improved.
• 1% said that their financing rounds were not affected by the epidemic.
• 5% of respondents said that they are not looking for funding, so they were not affected by funding from the epidemic.

In answering a question about whether investors were involved in the day-to-day operation of their business, the answers were as follows:

• 4% were unsure of the answer
• 1% answered no
• 5% said yes

Emerging companies respond to the epidemic

This section of the report discussed how the emerging companies responded to the pandemic, as the founders of the startups rapidly reassessed their priorities. The discussions were focused on how to expand and grow their products in view of the current situation, as well as adapting the work environment to ensure the continuity of the company’s work.

On the question of how to respond to the pandemic, most of the responses indicated a multifaceted approach, the most important of which was changing the work environment to become remote. Almost two thirds of respondents said that they moved to work from home (WFH) setups in response to the coronavirus outbreak. Other popular responses included taking the option to postpone expansion plans, reduce prices and introduce special offers. By contrast, a number of startups chose the option of reducing the number of workers, reducing wages and reducing working hours. Many other companies had a more positive response by exploiting the situation to launch new marketing campaigns, establish new partnerships with suppliers, and recruit new employees as part of their pandemic response.

When the authors of the report asked about the type of support that could help startups in continuing their businesses, it was found that more than half wished to obtain new investments or grants. The founders (who were included in the questionnaire) expressed their desire to obtain investment, loans, or assignment invoices to support the ecosystem of the startups within the region. The report concludes its findings in two axes, namely the affected sectors and then focusing on the conditions of three countries, the UAE, Saudi Arabia and Egypt. But we will leave our analysis here, and let the reader download the full report from the source.

However, to conclude, we will summarize the three general points contained within this report.

The first point relates to the exaggerated pessimistic view of the macroeconomic expectations, which has been coordinated by many media outlets and local economists. It’s expected that badly-affected companies that have suffered great losses during the pandemic may decide to surrender and sell their shares to major companies at a very low price. The negative expectations for the future of economic growth in the world depends on incomplete data such as the drop in oil prices. Many felt the drop in oil prices would continue; leading to a situation that threatens the whole global economy. However, oil prices have risen since the beginning of May and reached 35 dollars per barrel after the oil producers agreed to reduce production. There’s also been major economic restoration to mitigate the widespread closures, as has happened in China and European countries recently.

The second point relates to the growth in various economic sectors such as the pharmaceutical sector, medical supplies, and the software sector. With the potential for further growth within other sectors, such as the educational sector and the electronics production sector, many investment theaters will continue to expand rather than decline. There are also a number of underdeveloped economic sectors that are expected to have a leading position in the future, stimulated by the achievements of the fourth industrial revolution.

Third and finally, the startups in the region are built on fertile ground, full of investment opportunities and in which competition is weak and startups are encouraged by local governments. All of this leads us to conclude that the negative repercussions of this situation, due to the continued spread of COVID-19, also constitute an opportunity that can be exploited. Companies can use the ongoing scenario to learn how to adapt to the unusual conditions that are associated with low funding and weak demand. For example, many will benefit from the experience of crisis management while observing and learning from other startups that have managed to keep their business running, and in some cases, continued their expansion operations.