Gulf capital cushions Mena startups but tougher test looms

Gulf investors stepped in to support Middle East and North Africa startups in the first half of 2026 as international participation fell sharply.

The region faces a tougher funding environment in the months ahead, venture capital executives warn.

Mena startups raised $1.35 billion in the first six months of the year, down 22 percent year on year, according to Dubai-based data platform Magnitt.

Deal activity dropped 41 percent to 214 transactions, the weakest first-half performance in at least five years.

Investors said the figures capture only part of the impact from the Iran conflict because many of the transactions completed over the period had been negotiated months before the war began.

“Deal flow visibly slowed in February and March as tensions escalated and the Strait of Hormuz became a flashpoint,” said Amjad Ahmad, managing partner and emerging market adviser at venture capital company 500 Global.

“However, H1 data largely reflects term sheets negotiated six to nine months earlier. The real test of investor appetite is still ahead.”

Rounds are taking longer to complete, particularly at the growth stage, Ahmad said, adding that he expects the second half of the year to be weaker than the first.

The data suggests that venture capital has not disappeared from the region but has become increasingly concentrated.

Two UAE companies, autonomous delivery platform CargoX and AI-native Islamic digital financial platform Mal, accounted for $480 million, more than one-third of all capital raised during the first six months of 2026.

The 10 largest transactions represented 58 percent of all funding deployed, highlighting investors’ preference for larger, more established businesses with clearer paths to profitability.

International participation almost halved during the period, falling from 181 investors to 95.

Meanwhile, Mena-based investors increased capital deployment by 23 percent to a five-year high of $940 million, accounting for more than four-fifths of startup funding.

Lucy Chow, venture partner at LP Pact VC, said the retreat by overseas investors had begun before the conflict as global funds concentrated capital into artificial intelligence opportunities in the US and Europe.

“The bigger worry is the slowdown in early-stage investing within Mena,” Chow said.

Ahmad said the decline in foreign participation explains only part of the slowdown. International investors have historically focused on the region’s largest funding rounds rather than the early and growth stage investments that account for most transactions.

“The bigger driver is domestic and regional investors pulling back on smaller cheques,” Ahmad said.

“That’s arguably the more concerning signal because it points to local risk appetite drying up, not just foreign capital sitting out a volatile stretch.”

He also cautioned against blaming geopolitics alone. Global venture investment has been slowing for more than a year as investors channel capital into fewer, larger AI deals, while lower oil prices before the conflict squeezed Gulf government finances and weak technology market valuations continued to weigh on exit prospects.

The UAE nevertheless strengthened its position as the region’s leading startup hub.

Funding into UAE companies rose 53 percent to $895 million, accounting for two-thirds of all Mena venture investment, despite the number of completed deals falling by more than one-third.

Ahmad expects Middle Eastern startups to continue trading at a discount to US peers, regardless of whether a resolution is found to the Iran conflict, because of structural challenges around market fragmentation and exits.

“This war widens the discount further in the short term,” he said. “Strong businesses will still get funded, just at a lower multiple than a US equivalent.”

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