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The venture capital ecosystem in the Middle East and Northern Africa (MENA) region experienced a notable contraction in 2023, with a 23% reduction in funding and a 34% decline in the number of transactions closed. This pullback is largely attributed to growing caution among investors, in response to global economic trends like rising inflation and interest rate hikes. Additionally, there has been a shift towards smaller funding rounds, with investments below US $1 million increasing by 8%. This marks a significant change from previous years, where larger rounds were more common.

Amidst these conditions, the global pressure on tech valuations has not spared the MENA region, further underscoring the growing demand for non-dilutive and alternative capital solutions. These dynamics set the stage for the emergence of venture debt, an important financing tool for early-stage, high-growth startups that have typically raised equity. Venture debt can serve as a complementary funding source that enables them to access a structured loan/financing without diluting their equity.

The Growing Appeal of Venture Debt

Venture debt is rapidly becoming pivotal in MENA’s startup financial landscape, with remarkable growth since 2020: It reached $757 million in 2023 — a staggering 50-fold increase from 2020 levels, and an all-time high. This surge is accentuated by the rising percentage of investors from outside MENA, which jumped from 20% in 2021 to 47% in 2022. This trend underscores the increasing allure of venture debt, and signals immense potential for MENA startups to expand and yield substantial returns for investors.

The landscape of venture debt in MENA prior to 2021 was characterized by minimal activity, signaling that the use of this financial instrument is still nascent in the region. This lack of traction was due in part to limited knowledge about venture debt among businesses, and the small number of available funds. But it was also driven by minimal interest in this approach among founders, as there was a stigma associated with incurring debt, with many perceiving it as a sign of distress rather than a strategic financial decision. However, changing market dynamics and longer fundraising cycles have led to a reevaluation of debt financing among founders. This perception is evolving as founders seek to mitigate equity dilution and navigate a challenging fundraising environment without resorting to down rounds — i.e., selling additional shares of equity at a lower price than the company sold them for in its previous financing round.

Strategic Shifts and Financial Discipline

The strategic adoption of venture debt in MENA signifies a broader shift towards alternative financing models that balance the desire to maintain equity with the need to instill financial discipline. Structures such as revenue-based financing — in which investors receive a percentage of the company’s ongoing gross revenues in exchange for their investment — are also starting to be recognized as viable alternatives for startups seeking non-dilutive capital: They offer flexibility, as repayment is tied to the startup’s performance, despite the variability in revenue. Such financing options provide a much-needed departure from the aggressive growth-at-all-costs approach, promoting a more calculated use of capital in which costs are closely aligned with expected returns.

Expanding alternative financing is crucial for developing a robust, diverse and sustainable entrepreneurial ecosystem in the region. As highlighted in Village Capital’s report “Unlocking the Pipeline: MENA,” by diversifying funding sources beyond traditional venture capital, startups can evolve strategically and attract capital well-suited to their specific needs. This approach is particularly relevant for startups with high social and environmental impact, which may demonstrate significant growth and impact potential but may take longer to develop a scalable strategy that aligns with the return expectations in traditional venture capital.

As the financial ecosystem matures, alternative structures are set to play an essential role in shaping the future of startup financing in the region, ensuring a balanced approach to managing growth and financial health. However, a key challenge persists: How can more startups discover these alternative financing options and make informed strategic decisions to capitalize on the benefits they offer?

Bridging Gaps with Capital Explorer

With the rise of venture debt, there is a prime opportunity to raise awareness around other alternative structures. This is where solutions like Capital Explorer, Village Capital’s latest free online tool, can make a difference.

Capital Explorer aims to bridge this knowledge gap by providing entrepreneurs with an interactive platform to explore the broader spectrum of financing options. It empowers them to make informed, strategic decisions that align with their business mission and vision. By spotlighting alternative financing paths, such as revenue-based financing, venture debt or crowdfunding, Capital Explorer guides founders through the complex funding world with greater confidence and clarity. This knowledge is a pivotal enabler of this transition, allowing entrepreneurs to take a more informed and strategic approach to securing funding.

Advantages of Alternative Financing 

Alternative financing offers a wider range of opportunities for startups to secure capital, often with more flexible terms and greater focus on their mission. By venturing beyond traditional funding, startups can drive innovation globally, not just in MENA. Here’s why:

• Alternative financing expands capital access by serving startups and businesses that do not meet the strict criteria of traditional lenders.
• With more financing choices available, entrepreneurs can reduce their equity dependency, allowing them to retain more ownership and control of their enterprises.
• A more comprehensive range of financing options enables businesses to take risks on innovative ideas that might be too risky for traditional lending, promoting industry growth.
• Alternative financing can be more inclusive, providing opportunities to underrepresented groups and fostering diversity and equity in entrepreneurship.
• Options like revenue-based financing align lender and business interests, promoting sustainable growth and healthier business models.
• Venture debt and revenue-based financing offer flexible repayment structures that help businesses manage cash flow and growth, while crowdfunding can also validate business ideas and attract early customers.
• Diversifying funding sources makes businesses more resilient to market changes or disruptions.
• Alternative financing supports broader economic growth by driving entrepreneurship, job creation and industry diversification.

By embracing these options, businesses can find the right financing fit and contribute to a more dynamic, inclusive and innovative economic landscape. 

A New Chapter in the Emergence of Alternative Financing

The shift towards diversified funding sources, including the rise of venture debt, is crucial for shaping MENA’s economic future, enhancing resilience, fostering innovation and supporting diverse entrepreneurs. The emergence of venture debt as a significant funding resource reflects the region’s economic maturation, characterized by a more sophisticated array of financial instruments, broader access to capital, and a more robust support infrastructure that enhances strategic funding and risk management. 

MENA’s startup ecosystem, bolstered by increased investment and a growing number of success stories, shows substantial potential. We look forward to seeing how this momentum further influences the expanding alternative financing sector.

Reem Goussous is the Chief Growth Officer at Village Capital; and Dunya Bashiti is the co-founder and CEO of Capifly. 

Photo courtesy of RDNE Stock project.