How will Saudi’s diversification affect startups?
Just a few days into 2016, Saudi Arabia deputy crown prince Muhammad bin Salman made waves when he said the kingdom was exploring a public offering of Saudi Aramco stock, the world’s most valuable company.
The planned 5 percent sale could see the oil giant valued at over $2 trillion, and may account for as much as 60 percent of the funding bin Salman wants to use to support entrepreneurship and new industries.
That plan is to use future oil revenues as well as the proceeds from the public offering to turn the country’s sovereign wealth fund, the Public Investment Fund (PIF), into the largest in the world and to fund Vision 2030 programs to diversify the economy away from oil.
How this will affect the local startup landscape, however, is yet to be seen.
Saudi’s new lead investor
The PIF has a dual-mandate in diversifying Saudi’s economy. On the one hand, the goal remains to develop the local economy through investing in Saudi business, and on the other it is to diversify the kingdom’s portfolio through increasing the share of its portfolio that’s invested in foreign entities from 5 percent to 50 percent by 2020.
This year saw the PIF begin tackling the second part of their mandate through several large announcements, among them the purchase of a $3.5 billion stake in Uber, a partnership with Japan’s Softbank for a new $100 billion fund, and a $500 million stake in Mohammad Alabbar’s new ecommerce site Noon. This week Saudi Telecom Corporation (STC), of which the PIF owns 70 percent, announced a new investment in Careem valuing the UAE ride-sharing app at $1 billion.
This series of investments represents a break in tradition for the PIF, moving away from more conservative investments in established technologies and industries towards startups, albeit only global and established ones so far.
In the kingdom, the PIF will be investing directly into the ecosystem through a $1.1 billion fund announced in August that will help the country’s VCs increase funding for Saudi startups.
While funds like this are positive signs of Saudi Arabia’s commitment to SME growth, access to capital will continue to be an issue for Saudi entrepreneurs. In October news came of the PIF’s plans to scale back its role as a domestic lender, which could cause some concern for SMEs as in 2015 it accounted for as much as a fifth of all lending with over $27 billion on its books.
Lead with a vision
Oil money will also fund the Vision 2030 goals, one of which is to increase SME contribution to GDP from 20 percent to 35 percent.
To begin to realize the goals outlined in Vision 2030, Saudi Arabia released in June the National Transformation Plan (NTP), a list of targets and objectives for the next five years. The NTP aims to create 450,000 non-governmental jobs by 2020 through strengthening partnerships with the private sector, maximizing domestic output across a range of sectors, and the digital transformation of public and private organizations.
The Saudi public sector currently accounts for more than 70 percent of employment and 45 percent of government spending. If these plans can do what prior ones have not - reduce public sector employment and spur the private sector - it could very well be the greatest boon to the Saudi economy going forward.
The NTP identifies several key areas Saudi Arabia can target for improvement. The Ministry of Communications and Information Technology is to improve its performance in the UN’s Conference on Trade and Developments B2B and B2C ecommerce rankings, along with upgrading broadband infrastructure to improve the IT sector. The Ministry of Commerce and Investment is to “boost the culture of entrepreneurship” by creating frameworks to lift the number of Saudi companies from 50,000 to 104,000 by 2020.
The total budget for the NTP initiatives specifically targeting startups and SMEs amounts to nearly $500 million in funding through to 2020.
Oil-based startup economy
The diversification plans will themselves be at the mercy of oil: PIF funding will still be entirely reliant on oil revenue streams for the foreseeable future.
Past plans to diversify the Saudi economy have usually resulted in the development of downstream oil resources, in the form of petrochemical industries or refineries, instead of developing wholly different sectors.
The news of an Aramco IPO came in a year that saw the lowest oil price in more than a decade, Saudi’s record $17.5 billion bond sale, and a landmark OPEC decision to suspend oil production at certain levels.
In that context, the Aramco IPO has often been cast in a negative, even panicky, light even though using oil revenue to diversify the economy has long been a tenet of Saudi Arabia’s economic policy.
SMEs as the new economy
This focus on using SME growth as a driver for private sector improvement and the diversification of the economy can only be good news for Saudi Arabia’s startups. It shows the government's commitment to improving access to capital and upskilling its workforce as it strives to create almost 3,000 new jobs in startups by 2020.
A major driver for these initiatives to promote SME growth has been, and will continue to be, based around the development of a knowledge economy in the kingdom.
Institutions such as the King Abdulaziz Center for Science and Technology (KACST) and the King Abdullah University of Science and Technology (KAUST) will continue to play a major role in the development of that effort, both in educating new generations of Saudi entrepreneurs and in serving as a breeding ground for innovation and a focal point of support institutions and funding opportunities.
The news of a public offering of shares of Saudi Aramco came as a surprise to many in the region, but when it does eventually list on exchanges worldwide it could be a huge benefit to Saudi entrepreneurs.
Feature image via Wikimedia Commons.