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Venture capital deal-making in the Middle East has collapsed to a five-year low amid the Iran war, jeopardizing the growth of startups that are an engine for jobs, innovation, and non-oil revenue.
The number of deals in the Middle East and North Africa in the first half of 2026 plunged 41% year-on-year to 214, while funding fell 22% to $1.35 billion — two-thirds of it raised in the UAE — according to venture capital data platform Magnitt. International investors, who had started to outpace local backers in recent years, are retreating: Their share of invested capital more than halved from a year earlier.
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The geopolitical turmoil makes it a harder environment in which to make investments, but the region’s venture capital funds are also facing constraints from their limited partners, whose capital is pooled to create the funding vehicles that invest in startups.
“Sovereign wealth funds and fund-of-funds haven’t scaled to match startup capital demand. Corporates, already managing credit concerns, are focused inward. And family offices have kept deploying capital, but internationally into AI rather than regionally,” Magnitt CEO Philip Bahoshy told Semafor. Investors are trending toward AI, security, and defense, concentrating funding into fewer, larger deals worldwide, he added.
Because venture deals typically take six to nine months from decision to close, the figures from the first half of the year were largely locked in before the conflict, according to Magnitt. “The data has not yet caught up with sentiment,” Bahoshy said, and he predicted the decline could extend into 2027 if the war in Iran does not soon conclude in a peace deal.
The path for a startup to exit and provide returns to investors is narrowing at the same time, according to Magnitt. Merger and acquisition activity fell 56% year-on-year to 16 transactions, and local bourses, while flat on the conflict, have missed the AI optimism lifting markets elsewhere, dimming IPO prospects for the region’s larger startups.
Bahoshy said he is looking to the conference season starting in September for a shift in momentum, when mega-events like GITEX in Dubai and FII in Riyadh typically result in a flurry of deals. Magnitt is tracking three metrics to begin predicting a recovery, Bahoshy said: The return of international investors, more early-stage deals, and exits.