UNITED ARAB EMIRATES: An Introduction to Venture Capital & Emerging Companies

The venture capital (VC) ecosystem in the Middle East and North Africa (MENA) is undergoing significant transformation, shaped by global economic pressures, evolving legal landscapes, and government initiatives. Although the MENA VC ecosystem is relatively nascent compared to Western markets, it is rapidly establishing a unique position globally, attracting investors and founders. This overview provides legal practitioners with insights into the economic, legal, and political forces shaping the MENA VC sector, particularly in the UAE, highlighting opportunities and challenges for founders and investors.

Current Economic and Political Dynamics: The UAE and Saudi Arabia Remain the Principal VC Markets

The MENA VC ecosystem has been affected by global economic trends, particularly following the pullback from the venture asset class in late 2022 and early 2023. This global correction, prompted by rising interest rates and overvalued tech companies during the 2021–2022 “bull market”, has led to more risk-averse behaviour. Nevertheless, regional venture markets remain relatively robust from the perspective of the availability of capital, particularly for earlier stage deals. Undoubtedly, the currency crisis in Egypt has weakened appetite for investments there; however, Saudi Arabia and the UAE remain the principal venture markets in the region.

Saudi Arabia has become a leading player, rising to the top in MENA funding in 2023 with USD1.4 billion, up from USD60 million in 2018. This growth is attributed to the government’s Vision 2030, which launched funds, incubators and regulatory reforms such as the establishment of the Saudi Unicorns Program and government-backed institutions like the Public Investment Fund (PIF). These are designed to support high-potential tech start-ups, attract private capital and create a favourable funding environment. Regulatory reforms by the Capital Market Authority (CMA), including new frameworks for fintech licensing and private placement, have further improved the funding environment.

The UAE has leveraged government-backed initiatives to attract start-ups and investors, such as Hub71 in Abu Dhabi and the Mohammed Bin Rashid Innovation Fund (MBRIF). In 2024, the UAE saw a 9% increase in deal count, reaching a record 188 deals despite global VC market declines. Legal frameworks in free zones like the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) offer strong common law protections – supported by fast-track licensing, venture-building platforms and regulatory sandboxes – which have made the UAE attractive to international investors seeking enforceability and capital mobility.

Regarding fund formation, the DIFC and ADGM VC fund manager regimes support fund managers with an efficient and cost-effective regulatory regime, offering light-touch regulatory requirements, streamlined licensing, and lower capital thresholds, all designed to nurture early-stage investment activity while maintaining international standards of compliance.

Capital markets in the UAE have also undergone reform, with initiatives to modernise exchanges like the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM) to attract tech and high-growth company listings. The region witnessed seven companies raising USD6 billion through initial public offerings (IPOs) in 2024, including this year’s largest global tech IPO, Talabat.

The Legal Framework and its Complexities: Clashing Civil and Common Law Systems and the Role of UAE Free Zones in Two-Tier Structures

A key challenge for VC investments in MENA is the fragmented nature of the region’s legal systems. The 22 countries in MENA each have distinct legal frameworks, and many operate under civil law, which contrasts with the common law systems in the USA and UK, creating unique challenges for VC agreements. The common law tradition of respecting the terms freely negotiated between contracting parties (including shareholders) sits uncomfortably with the traditionally didactic civil law commercial companies’ regulations.

• Contractual flexibility: Civil law systems impose stricter rules on contracts, limiting the flexibility necessary for VC deals. This contrasts with common law, which offers greater predictability due to reliance on precedents.
• Investor protection: Key investor rights like anti-dilution provisions and liquidation preferences are not always clearly enforceable in civil law jurisdictions. This creates risks for minority shareholders, as civil law often requires founders to maintain majority control, potentially complicating future funding rounds.
• Corporate governance: Civil law frameworks impose rigid governance rules, which can be challenging for VC-backed start-ups that require greater flexibility in shareholder agreements and company management.

To navigate these legal complexities, many investors and start-ups set up a two-tier structure: a holding company in common law jurisdictions like DIFC, ADGM, or Delaware, with local subsidiaries operating under civil law frameworks. This structure provides stronger investor protections while addressing local legal requirements.

The adoption of standardised legal documents, such as the National Venture Capital Association (NVCA) and British Venture Capital Association (BVCA) models, harmonises practices across the region, despite regional differences in legal systems. However, choosing the wrong legal domicile for a holding company can lead to unintended tax and compliance issues, particularly when a company’s intellectual property (IP) is based outside the USA leading to difficult and often expensive requirements around transfer pricing and other considerations.

The UAE introduced its first federal corporate income tax (CIT) in June 2023 to align with OECD standards. In 2024, the UAE Ministry of Finance and Federal Tax Authority issued detailed guidance clarifying taxable thresholds, free zone exemptions, and qualification conditions for investment funds, providing businesses and VC investors greater certainty and transparency regarding the UAE’s evolving tax regime.

Key Trends and Activity Levels

The MENA VC landscape in 2024 reflects recalibration and growth.

• Funding and deal activity: The UAE’s total funding dropped by 8% in 2024, while the number of deals rose by 9%, highlighting a shift toward smaller, earlier-stage investments. Saudi Arabia led the region with USD750 million in funding, though mega-deals (those over USD100 million) decreased in frequency, reflecting a global trend. The return of larger deals like Eyewa’s USD100 million round in Q4 2024 show renewed investor confidence in late-stage opportunities.
• Deal Sizes and valuations: The USD1 million–USD5 million deal size dominated UAE transactions in 2024, reflecting a preference for Seed and Pre-Series A rounds. Seed valuations in the UAE dropped by 64% in H1 2024, signalling a market correction. Meanwhile, Saudi Arabia saw a 2.3x increase in Seed valuations, reaching USD31 million.
• Industry trends: Fintech remains the leading sector in the UAE, with impressive growth seen in enterprise software and AI. We note the UAE is making a concerted effort to ensure it is a key player in AI and is investing significantly in its AI infrastructure.
• Investor dynamics: The UAE has attracted diverse investors, with international participation rising by 23% in 2024, especially from the USA and UK. Local investors are playing a larger role, consolidating blocking rights in contrast to more distributed approaches in the USA and UK.
• Exit environment: Exits in the UAE decreased by 45% in 2024, but the country continues to dominate the regional exit landscape. Secondary share sales in Saudi Arabia offer liquidity options for early-stage investors and founders, allowing them to de-risk with control.

Potential Hurdles and How to Overcome Them

The MENA VC ecosystem faces several hurdles, legal and cultural, that must be addressed for long-term success.

Navigating legal disparities

MENA’s fragmented legal environment requires careful market selection to minimise legal challenges. Using a two-tier structure with a common law holding company can mitigate investor rights and governance issues. Specific investor rights (eg, minority veto rights, anti-dilution, and liquidation preferences) require careful negotiation and legal structuring to ensure enforceability. Legal counsel is essential to draft clear agreements that outline voting rights and governance structures – and that align with company goals, particularly when dealing with share transfers or secondary sales.

Addressing behavioural and cultural obstacles

Distressed situations can trigger emotive and defensive behaviours that undermine company value. Lawyers play a vital role in guiding stakeholders through these crises, keeping them calm and focused. Cultural attitudes toward leadership transitions can be a challenge, particularly regarding founders stepping down from CEO roles, which is sometimes the natural next step as companies professionalise. Investor mentorship is crucial to navigate these transitions effectively.

Mitigating talent shortages

The tech talent shortage remains a significant challenge in MENA. While government initiatives aim to address this gap, visa reforms are also in place to attract global talent.

Strategic Insights for Founders and Investors

Enhancing success in the MENA VC ecosystem requires:

• Value beyond capital: Founders should seek investors who offer more than financial backing – mentorship, strategic guidance and industry expertise are crucial for navigating the region’s challenges.
• Patience and adaptability: the MENA VC ecosystem is maturing, but growth takes time – investors and founders must be adaptable and prepared for volatility, and prioritise transparent communication.
• Thorough due diligence: investors must look beyond financials to assess behavioural traits in founding teams, including their ability to listen, credibility and role understanding.
• Leveraging legal counsel: lawyers are key to crisis management, offering strategic insights and valuable experience while ensuring agreements are robust enough for MENA’s complex legal environment.
• Strategic exits: while IPOs are gaining traction in the UAE and Saudi Arabia, M&A remains the dominant exit route – secondary sales also provide liquidity options for founders and investors.

Conclusion

The MENA VC ecosystem is at a pivotal stage. Despite challenges from legal complexities and global slowdowns, the region demonstrates resilience and growth potential. Government initiatives, a growing pool of diverse investors and a focus on early-stage investments are key drivers of this growth. To succeed, investors and founders must understand the nuances of the legal landscape and be proactive in mitigating cultural and behavioural challenges. As MENA continues to mature, it is poised to become a leading hub for global VC, with significant opportunities in sectors such as fintech, AI, and “deep tech”. Investors and founders alike have a unique chance to be part of this transformative ecosystem, investing in ideas that could reshape industries worldwide.