How a stronger US dollar will affect Middle East start-up funding

The National

16-02-2025

The expected strengthening of the US dollar as President Donald Trump returns to office for another four-year term will have a mixed effect on start-up funding in the Middle East, according to analysts. The dollar has been volatile in recent weeks as tariff threats from Mr Trump and a reciprocal approach by those threatened by levies continue to dominate headlines. Early this year, the currency jumped to a two-year high, and Mr Trump's policies of proposed domestic tax cuts and tariffs are expected to restore the competitiveness of US manufacturing and further fuel these gains. The US Federal Reserve has also indicated that it will be more cautious in cutting interest rates this year to help curb inflation. For start-ups in the Middle East, the impact will be mixed. Countries that have their currencies pegged to the dollar, such as those in the Gulf, will feel a minimal effect. For venture capitalists, the region's stable inflation and robust economic growth are more attractive than volatile markets in the wider Mena. 'For economies that have their currencies pegged to the US dollar, like the GCC for example, the impact will be much smaller than other countries,' says Mohamed Hussain, an investment adviser. 'But for countries that have a floating or flexible currency, like Egypt, the impact is expected to be bigger.' The Egyptian pound has been devalued by about 70 per cent since 2022, and inflation has reached over 25 per cent since January 2023. While the devaluation could make investments in the country more affordable and perhaps even more attractive, the economic situation could also be a deterrent for investors. 'Although investors could find it attractive to invest in such markets, because of cheaper valuations and cheaper operational costs, it's important to remember that most of these companies would still need to operate in their local market,' Mr Hussain says. 'So, in most cases, their revenue will be in local currency, which could be a disadvantage, and therefore for these companies, it's important to consider revenue diversification.' According to Mr Hussain, investors are looking for exponential growth. This means that start-ups need to increase profit margins while keeping costs constant. In flexible currency markets, this can be challenging since costs constantly fluctuate. 'Investors are looking to maintain solid profitability and sustainability of the company in US dollar terms, which can be challenging in such markets,' he says. Milkup, a young Egyptian AgriTech start-up that recently graduated from 500 Global MENA, wants to start generating revenues before raising funds. It aims to approach Egyptian VCs since its operations are locally based, but it also believes that fund-raising rounds in the country would be considered too small for outside investors. 'GCC investors are looking for a $600,000-$700,000 round, where they will participate with two or three entities,' says Mohammed Nasser, co-founder of Milkup. 'If you ask them to give you $50k, it's not really within their remit. This is a counter intuitive challenge that Egyptian start-ups are facing at the moment, because they're so cheap, because operating costs are so cheap, finding a suitable venture capitalist partner from the GCC is ironically a bit of a challenge, because the amounts we're raising are so low.' Despite this, Egypt still ranked third in the Mena region in terms of start-up funding last year, mainly because of its large market size, according to data platform Magnitt. In 2024, start-ups in the country raised $329 million, with Saudi Arabia first ($750 million), followed by the UAE ($613 million). Start-ups in Lebanon raised $510,000 last year, a 54 per cent decrease compared to the previous year, according to Wamda. Investment challenges are leading many start-ups, such as Swvl, Podeo, Intella and Sideup, to relocate abroad, setting up their headquarters in the Gulf, particularly in the UAE and Saudi Arabia. Some are moving their entire teams, while others are maintaining back offices where operations and talent costs are cheaper. Avo Manjerian, co-founder at Schedex in Lebanon, is now piloting his start-up in the UAE and plans to enter the market in the second quarter of this year. The company, which was set up in 2020, offers automated employee management and shift scheduling software as a service. With the local economy hit with hyperinflation, banking restrictions and more recently the war between Hezbollah and Israel, he is now prioritising sales and profitability. 'It is very difficult to fundraise because Lebanon is considered a very high-risk country,' he says. 'You're in a war zone and this is why we stopped fund-raising. We didn't even think about it from the start of the year and instead we focused on sales and growth,' Mr Manjerian says. 'We were growing 40 per cent month over month, then when the war came suddenly, we woke up and saw that our revenue decreased 80 per cent overnight.' Mr Manjerian aims to fundraise later this year after the UAE expansion. Looking ahead into 2025, Magnitt expects increased funding in the region as interest rates cool down. If the Fed implements additional rate cuts, it could encourage more investment into riskier asset classes, such as start-ups. 'What we've seen globally and in the region in the last few years, is a pull-out of investments in venture capital towards other asset classes, and we expect that as interest rates come down, we're going to be seeing the bottoming out of the venture capital slowdown, and more appetite for investments,' says Philip Bahoshy, chief executive of Magnitt. International capital accounts for about 30 per cent to 40 per cent of venture funding, and investors like SVC, Jada Funds of Funds, Dubai Future District Funds (DFDF) and Mubadala, among others, are some of the main drivers for investments in the region, he says. 'The reality is that it's still stimulated at a local perspective.' Mr Hussain also agrees that local investments are helping build and develop the region's start-up ecosystem, since seasonal investors can pull out their money and leave anytime. 'Despite anything that is happening in the short term, if the belief in the long term is that the region is going to grow and that there is opportunity here, which is the case, then investors will continue to invest in the region,' he says.