How will COVID-19 affect start-up funding in emerging markets?


Start-ups that have performed well during the implementation of social distancing and lockdown measures might offer favourable opportunities to investors amid the uncertainty, while the changing investment environment is set to add impetus for greater collaboration and renewed risk evaluation.

Those who successfully ride out the storm look set to emerge into a more resilient start-up ecosystem.

While the National Venture Capital Association expects a “bumpy ride” ahead for US start-ups, recent results in China and other emerging markets suggest that the outlook could be more positive.

This may partly reflect a demographic shift that was already under way. While the number of new, young entrepreneurs aged 20-34 has increased in the US in recent years, their percentage as a proportion of new entrepreneurs entering the market has dropped from 34.3% in 1996 to 25.5% in 2017, according to a 2019 report from the Kauffman Foundation.

Meanwhile, a World Economic Forum study from last year found that 31.4% of young people aged 15-34 in the ASEAN region were working either as entrepreneurs or in start-ups, while 33.1% aspired to work in the entrepreneurial space.

Many emerging markets have prioritised the growth of their technology segments in recent years, which will feed into a stronger start-up ecosystem. The UAE, for example, was the first country to appoint a minister for artificial intelligence, in 2017.

In Indonesia, the administration’s commitment to boosting digital innovation was signposted by the appointment of Nadiem Makarim, founder of ride-hailing app GO-JEK, as minister of education and culture last year.

While the specifics of government and stakeholder support offered to start-ups during the pandemic has varied across emerging economies, notable examples include electricity subsidies in the UAE and a special fund for high-impact start-ups offered by an accelerator in Egypt.

Reopening the economy: lessons from China

If China’s experiences illuminate the path that other countries may follow, the first start-ups set to experience new funding deals are those that performed well – or even enjoyed growth – during the pandemic. Seed start-ups, on the other hand, may have a longer wait ahead before they see investor interest realised as money in the bank.

As China’s economy began to reopen, e-commerce, educational technology and electronic sports were among the first segments to experience increased capital flows.

New companies and tech firms in China raised more than $2.5bn in March, up six-fold from the month earlier, according to data from the Asian Venture Capital Journal.

Of this, $1bn was allocated to digital education start-up Yuanfudao, while on April 9 venture capital (VC) firm Qiming Ventures Partners closed a $1.1bn fund for assets across the health care and technology space, targeting e-commerce and artificial intelligence developments, as well as pharmaceutical and medical technology services.

Emerging markets top global VC deals

Although China’s Yuanfudao ranked in the top-five global VC deals by value in the first quarter of this year, it was Indonesia’s GO-JEK that occupied the number one spot.

Following its $2m Series A funding round in 2014, GO-JEK has transformed from a ride-hailing app into a “super-app” that now invests in other start-ups. It became Indonesia’s first “decacorn” when it crossed the $10bn valuation threshold in April 2019, and followed this up with a Series F funding round that reportedly reached around $3bn in March this year.

This $3bn positions the company top of all VC deals globally for the quarter, alongside China-based video streaming company Kuaishou, which also raised $3bn, according to KPMG. Two US-based companies – autonomous vehicle firm Waymo and clean energy technology investor Generate Capital – rounded out the top five, raising $2.25bn and $1bn, respectively.

First-quarter fund raising in MENA

Many start-ups in the GCC have been eligible for institutional support since before the pandemic.

This includes Abu Dhabi, whose government last year launched a Dh50bn ($13.6bn) economic development programme, Ghadan 21, or Tomorrow 21, to prioritise the development of start-ups and SMEs as part of efforts to bolster the emirate’s non-oil economy.

One of Ghadan 21’s flagship initiatives, Hub71, is an ICT cluster that offers subsidised office space, housing and health care to seed stage and emergent start-ups that specialise in tech-based solutions.

Hub71 continued to receive new applications during the first quarter, according to local media, as start-ups jostled for a strong position in the post-Covid-19 ecosystem.

There was also success in terms of fundraising. The value of VC investments in start-ups in the MENA region, excluding Israel, reached $277m during the period – marking a marginal increase of 2% over the year earlier – according to MAGNiTT, a Dubai-based data platform and online community for start-ups in the region.

However, a statement accompanying MAGNiTT’s report notes that MENA deals normally take around six months to complete, meaning that a weightier impact of Covid-19 and falling oil prices on the region’s VC activity may yet be realised.

Within the region, the UAE accounted for 51% of the total funding value, followed by Egypt (27%) and Saudi Arabia (10%).

In terms of the number of deals, Egypt accounted for the lion’s share, with 37%, followed by the UAE’s 25%.

Meanwhile, in terms of opportunities by sector, financial technology leveraged the highest number of deals, with 15% of the total, followed by delivery and transport, and e-commerce.

At the same time, the region’s largest ever agriculture technology investment was announced in Kuwait on April 6, amid concerns over the pandemic’s impact on food security.

Kuwaiti fund manager Wafra International Investment Company is set to invest $100m in regional start-up Pure Harvest, which produces pesticide-free fruit and vegetables in high-tech, climate-controlled greenhouses.

While headquartered in Abu Dhabi, the funding will allow the company to expand into various markets across the region.

Financing for African start-ups

As another heed to caution, start-up accelerator AfricArena anticipates that a slowdown in the second and third quarters will cause start-up funding across Africa to drop by as much as $800m this year.

Nevertheless, OBG recently spoke to Iyinoluwa Aboyeji, co-founder and general partner of Future Africa, which seeks to provide new, sustainable sources for the region’s tech start-ups, about the potential for innovation during challenging times.

He said that two of the company’s top portfolio companies – software engineer training firm Andela and payment solutions provider Flutterwave – were founded during crises.

Furthermore, regional media reported that the fund’s first deal secured full financing, to the tune of $100,000, within three days in April – another positive sign for financing African start-ups during the virus-induced economic slowdown.

“In the midst of the ongoing crisis, a broad swath of investors is being attracted to venture capital funds, with a significant domestic component,” Aboyeji told OBG, citing young investors, the diaspora and institutional investors as three groups that have shown notable interest in opportunities in Nigeria.

A ‘wait and see’ approach

As companies pivot, many VC firms have diverted their attention away from new deals and turned inwards to reassess the risk within their pre-existing portfolios.

As well as adjusting their runway analysis, this will likely include a re-evaluation of supply chains and geographical locations; heightened emphasis on trust, informed to some extent by consideration for employees and working conditions during the pandemic; concessions to reflect changing consumer behaviour; and the reconsideration of the duration of sales cycles.

Where VCs and their portfolio clients leverage greater cooperation during the pandemic, it may be unsurprising to see a legacy remain in the form of wider engagement going forwards.

While specific projections for start-up financing vary by market and by analyst, there is a consensus that those businesses providing services that have fulfilled a specific need during lockdown measures are likely to remain a safer option; it remains to be seen whether economies will experience a substantial rise in cases as they begin to reopen, and thus whether they will be forced to re-implement stricter measures.

As events continue to unfold rapidly, the global nature of the Covid-19 outbreak provides players of all levels with lessons to learn from countries further ahead on the pandemic trajectory – as well as from past crises.

This includes authorities, as they seek the most appropriate strategies to balance economic and health risks; investors, who may otherwise be inclined to adopt a ‘wait and see’ approach and can now hedge better informed bets; and start-ups themselves, as they reorganise their businesses strategies.

While the full impact on the emerging market ecosystem is yet to be seen, we can expect to see a more robust foundation for the start-up landscape on the other side.

“No sector is immune and no sector is doomed. It is all dependent on how entrepreneurs take advantage of opportunities and react to the crisis,” Aboyeji told OBG. “This is a crucial time for start-ups to pivot.



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