Three Reasons Why VCs Should Be Investing in Tunisian StartupsDespite being a small market in itself, the Tunisian VC opportunity should not be overlooked.

This article was co-written withYehia Houry, Managing Director, Flat6Labs Tunisia.

In 2019, Tunisian startups raised more from investment funds than the previous three years combined. Andthe COVID-19 crisis of 2020doesn't seem to have stopped this growth: agritech startup NextProtein announced the closing of their EUR10 million Series A investment, the largest VC round raised so far in the country, in May 2020.

Tunisia, in spite of being a small market of 11 million people and suffering from sluggish economic growth that followed the Arab Spring in 2011, is growing to become an innovative and vibrant VC market. The country's footprint within the innovation space across the region is growing quickly. By around the same time last year, Tunisia had made it to the prestigious list of top five MENA countries in terms of number of investment deals, quite an achievement given that the country had never even made it to the top ten before.

The three compelling reasons that are making the Tunisian VC ecosystem stand out of the MENA region are: deep innovation potential, an active startup community that is driving innovation-friendly changes in its legal and economic structures, and a unique access to European markets.

UNIQUE ENGINEERING TALENT THAT IS DELIVERING REAL INNOVATION

With 39% of its population under the age of 24, and a well-educated and increasingly urban population, Tunisia is considered one of the most innovative countries in Africa and the Arab world, ranking 52nd globally in the 2020 Bloomberg Innovation Index. Tunisia has long been known as the talent pool of Europe, but with increasing opportunities locally, the impact is finally starting to be felt at home.

Focus has increasingly shifted towardscapitalizing on the country's human capitaland making sure it's equipped to tackle 21st century challenges. Since its foundation four years ago, GoMyCode, a fast-growing coding school rapidly becoming the fuel of talent for emerging Tunisian startups, trained 5,000 developers across the country, opened up three local offices in less than a year, launched in Morocco and Algeria a few months ago, and is increasing the pace with plans to open up in Egypt, Nigeria, and Bahrain in 2021.

The results are starting to show, and Tunisian entrepreneurs are beginning to stand out on a global level thanks to their innovation and deep technology. Headquartered in London, Tunisia-founded Instadeep raised US$7 million last year, was recently nominated as one of the 100 most promising artificial intelligence(AI) startups in the world, and recently partnered with global healthtech leader BioNTech toleverage AI to support the discovery and developmentof novel immunotherapies, including COVID-19.

AN ACTIVE COMMUNITY DRIVING POLICY CHANGE, BOTTOM-UP

Major innovation-enabling regulatory improvements have taken place in Tunisia in the past few years. In 2018, the government passed the Startup Act, a legal framework designed to spur innovation demand and foster entrepreneurship with a broader vision to develop the country into a "Startup Nation" at the crossroads of the Mediterranean, MENA, and Africa. To date, close to 400 ventures have received the Startup Label across a wide range of industries.

The Startup Act of Tunisia paved the way for multiple proposals in other African countries, including Senegal, Rwanda, Kenya, Ethiopia, and Uganda, who are jumping on the bandwagon and are in various stages of passing their own versions that reflect growing interest in improving the enabling environment for startups and investors.

Locally, the Startup Act is creating a domino effect of regulatory changes across different government entities, effectively enabling a broader strategy to position the country as an innovation hub by leveraging an emerging tech scene to improve economic development. For example, the Tunisian Central Bank has just launched their much-awaited regulatory sandbox that aims to stimulate the fintech industry.

Tunisia is moving forward, but the concern is that it may not be moving forward fast enough compared to other emerging markets that are attracting more capital. What may help accelerate the process are parallel initiatives to the regulatory improvements such as the $200 million donor-supported fund of funds currently taking shape, a concrete, tangible effort that has the potential to revolutionize the investment landscape of Tunisia for years to come.

Related:Bottom-Up Policymaking: A Look At The Origins Of The Landmark Tunisian Startup Act

UNIQUE ACCESS TO EUROPEAN MARKETS AND BEYOND

The proximity of European markets has long been only accessible to basic Tunisian exports such as olive oil, textiles, phosphates, and chemicals. It is only recently that entrepreneurs are starting to take real advantage of European opportunities by leveraging low-cost high-impact talent in Tunisia, and targeting European and global markets.

Expensya, a Tunis-founded but now Paris-headquartered startup that developed a SaaS for expense management, has more than 5,000 corporate clients across 100 countries with outlets in France, Germany and Spain. It managed to attract investment from ISAI, a $175 million fund that invests in early-stage technology businesses in France, as well as one of leading French VC firms, Seventure Partners.

Barac, a London-based cyber security venture founded by Tunisians, has acquired major clients such as Barclays Bank and has received widespread industry recognition, being selected to join the prestigious government-run cyber accelerator programme. Using its expertise in AI and behavioural analytics, Barac has developed a platform targeting the banking sector that detects malware hidden within encrypted traffic, without the need for decryption.

Tunisian startups' expansion doesn't stop at Europe. Cognira, a US-based venture with an advanced retail-focused analytics platform founded by a Tunisian entrepreneur, was last year billed as one of Atlanta's fastest growing startups.

But these companies were only able to scale and compete globally, thanks to the grit of extremely resilient entrepreneurs, toughened by their migrant journeys and multi-cultural professional experience. For most entrepreneurs, the jump across the Tunisian border is a long, arduous administrative road that has left many in the ditch.

THE TUNISIAN VC OPPORTUNITY:MIGHTY BUT TOUGH

Despite being a small market in itself, the Tunisian VC opportunity should not be overlooked. However, the current macroeconomic context creates several barriers to growth for early-stage companies. As the startup ecosystem is still new, most ventures blooming are at an early stage of maturity, representing the highest risk of failure without sufficient business support.

Banks dominate the financial system with high collateral requirements and cost of capital, and alternative sources of funding remain risk averse, focusing instead on later stage enterprise. Growth capital for early-stage companies remains scarce post seed funding, representing a key gap in the funding landscape.

Administrative hurdles to conducting business remain, but the pendulum is slowly moving in a positive direction. The time to invest is now, while the investment opportunities are still affordable, especially compared to the rest of the region's ballooning valuations.

Related:Tunisian Startup Forum Focuses On Opportunities For MENA Investors And Tunisia Entrepreneurs