The Middle East and North Africa (MENA) region is one of the most digitally connected in the world. Around 88% of its population is online daily, and 94% of people in the region own a smartphone. Digital consumption is similarly high in some countries; Saudi Arabia, for example, ranks seventh globally in social-media engagement, with an average of seven accounts per individual.

Despite this sizable appetite for online content and services, key digital sectors remain nascent, and the region’s entrepreneurship potential is yet to be fully tapped. Across MENA, only 8% of small and medium enterprises have an online presence - 10 times less than in the US Only 1.5% of MENA’s retail sales are online, which is five times less than in the US. Research by Digital McKinsey suggests that the Middle East has only realised 8% of its overall digital potential, compared with 15 % in Western Europe and 18% in the US.

However, we believe the region is at the start of a new S-curve. MENA is experiencing a startling growth in both the number of successful start-ups and the amount of investment funding available to them. Start-ups are scaling by adapting their offerings and business models, from digital music to digital logistics, to serve local needs. Examples of this abound, from Fetchr using GPS technology to power delivery in a region with few addresses to Fawry using a local network of retailers to anchor its payment network and overcome barriers in the fintech space.

Start-ups are enjoying startling increases in investment
Image: McKinsey / MAGNiTT

Moreover, the number of investors in the region increased by 30% from 2015 to 2017, while total funding increased by more than 100% in the same period. Corporate venture capital (CVC) funds, in particular, are rapidly emerging in the evolving MENA investment ecosystem. In 2015 and 2016, 14 significant CVC funds entered the MENA market. The number of CVC assets under management grew by more than 2.4 times from 2012 to 2016, reaching 20%of total venture capital assets under management in the region.

Through items from targeted, venture capital-like investment funds to structured incubator and accelerator programs, public institutions are also playing an increasingly key role in the MENA start-up ecosystem. Recent examples include the establishment of Fintech Factory in Egypt, FinTech Hive in the United Arab Emirates, and National Fund for Small and Medium Enterprise Development in Kuwait.

Overall, the ecosystem supporting the growth of MENA’s start-up landscape has been falling into place. However, distinct gaps remain for investors in properly identifying potential in new business models and in scaling chosen start-ups. We recommend investors in the start-up space adopt the following six best practices to unlock the potential of entrepreneurship in the MENA region:

1) Develop robust investment theses that leverage local context.

2) Capture and proactively engineer network effects.

3) Invest at scale.

4) Manage performance with a patient, programmatic growth mind-set.

5) Secure investment independence in governance to win the right talent.

6) Monitor key performance indicators in line with the value-creation model.

Local MENA entrepreneurs have demonstrated they can be innovative and bold in meeting changing demand. The appropriate adoption of best practices in venture investing can create significant value for investors, promising new businesses, and the regions’s entrepreneurship ecosystem.