The last decade has seen tremendous growth in funding in the Middle East, especially led by Dubai. However, in 2022, valuations fell, and investors switched focus, and mergers and acquisitions (M&A) increased.

This trend is expected to continue in the short term, 2023 and 2024, as valuations are expected to continue to correct until they reach pre-pandemic levels. As Global Ventures’ Noor Sweid put it, “M&A will also continue to serve as an alternative to raising funds in an illiquid market. This will consolidate the ecosystem overall, and it will result in a more robust and stronger market on the flipside of this downturn.”

Post the correction period and consolidation phase, a more robust and stronger market is expected at the end of this downturn cycle. As investors will prioritize their portfolio, they will continue to be relatively resistant to large-scale investments, and therefore, later-stage deals will be less likely.

This addresses the later-stage funding gap noted throughout the Dubai’s Venture Capital Ecosystem report. Instead, investors expect to see an increase in seed stage to early Series A investments, especially in businesses that have strong unit economics, and a clear path to profitability.

“We expect the next five years to consolidate the ecosystem, and for many startups to emerge stronger, [and this] will also be supported by a focus on profitability and robust unit economics,” Sweid says. In addition, she says that she continues to expect “continued interest from international investors in the region, the early days of which we are seeing today.”

Dany Farha from BECO Capital agrees. “We’re seeing continued interest from international investors, which indicates we’re on the right track,” he says. “In 2022, three out of the top five investors in the MENA ecosystem, from a capital deployed perspective, were from outside the region. Nevertheless, 2022 valuations suggest that competition for investors in growth stages is still low. The average MENA Series A valuation in 2022 was nearly 8% below that of US rounds. However, the average MENA Series B valuation in 2022 was nearly 21% below that of US rounds. We need to see both local growth-stage funds and more international investors fill this funding gap.”

It’s in such a landscape that the UAE has issued the Dubai Economic Agenda (aka D33), which is focused on diversifying its economy. As such, the next decade looks very exciting for stakeholders who are already in this region- as well as those who are expected to make a move.

To get the lay of the investor landscape across Dubai and the wider MENA, and for insights provided by the investors backing the startups and scaleups that are changing the face of entrepreneurship in the region, check out our report, Dubai’s Venture Capital Ecosystem, by clicking here.

This article was originally published on Lucidity Insights, a partner of Entrepreneur Middle East in developing special reports on the Middle East and Africa’s tech and entrepreneurial ecosystems.