Expanding to Saudi: A path paved with gold?
Saudi Arabia cemented its desire to become the regional destination for the digital sector after announcing its $1.2 billion Launch initiative last month, designed to support its startup ecosystem and improve the digital skills of its youth. This is in addition to the $15 billion public-private tech fund to develop its digital infrastructure, with the country looking to become a destination for 5G and artificial intelligence development. These initiatives will no doubt stimulate the local ecosystem and attract further international interest to the Middle East North Africa’s (Mena) biggest economy, worth some $700 billion.
It is not just its gross domestic product (GDP) that attracts global interest to the kingdom. Saudi Arabia has Mena’s third largest population (35 million) of whom two-thirds are under the age of 35. With a GDP per capita of about $20,000 and an internet penetration rate of almost 96 per cent, Saudi Arabia is one of the more lucrative and underpenetrated markets in the world for the digital sector, an opportunity that the government is keen to address.
Earlier this year, the government decreed that all foreign companies looking to win public contracts needed to set up their regional headquarters in the kingdom, in a bid to create more local jobs. The impact of this policy will have wider repercussions, particularly on other regional hubs like Dubai, and has spurred noticeable shifts among international companies seeking to do business.
Twenty-five global companies have already signed an MoU with Ministry of Investment of Saudi Arabia (MISA) to set up their regional headquarters in the kingdom. This includes global companies like Deloitte, PwC, and Schlumberger, as well as emerging and active VCs and startups like India-based (and Softbank-backed) hotel reservation startup Oyo, and US-based venture capital firm 500 Startups.
The latest figures from MISA reveal that 478 foreign investor licences were issued in the first quarter of this year, a 36 per cent year-on-year rise and the highest number of licences issued in a quarter since 2005. The majority of the issued licences went to manufacturing projects (117 licences), while retail and e-commerce displayed the sharpest increase overall with an impressive 115.6 per cent increase from the same quarter last year in issued MISA licences.
“In 2014, [Saudi Arabia] wasn’t the most ‘helpful’ place you would imagine someone sending their senior executives to do business in. But what's happened in the last couple of years is that with the Crown Prince changing things not only in the business sector but also in the lifestyle aspect, going to Riyadh might not be as hard anymore as it had been in the past years,” says Nazar Musa, CEO at UAE-based business formation and setup company PRO Partner Group.
The cultural reset that Musa mentions, alongside the continuous multi-billion dollar investments in local projects like NEOM, presents the kingdom as a highly strategic place to enter for both regional and global businesses whose expansions have historically been geared towards the UAE instead.
For startups in particular, Saudi’s opportunity lies not only in its large and lucrative market, but also the influx of venture capital, which has witnessed an unprecedented boom in the country.
“There's a lot of investment in tech companies in the kingdom which lends to us entering the market later this year,” says Mike Menary, co-founder and CFO of UAE-based car subscription platform Carasti, which closed its Series A round earlier in April with investment from Saudi VC firms Net Ventures and Rua Growth Fund.
For UAE startups, Saudi Arabia’s market is often seen as an economic ground to test out a startup’s economic competitiveness and its overall business model. The purchasing power within the country’s huge geography can really boost startups who transition successfully from the rest of the Mena region.
“If you do a good job in Saudi, you can almost be sure to do well in the rest of the GCC”, explains Janardan Dalmia founder and CEO of cloud-based logistic and transportation startup Trukkin, which built headquarters in both Dubai and Riyadh, within months of each other.
Launched in 2017, Trukkin now serves over 200 corporate clients across its three main bases in Riyadh, Dammam, and Jeddah, but its operations span across hundreds of locations beyond these cities. Throughout its five-year journey, Trukkin has gathered investments from local VCs and family offices including Impact46, Emkan Capital, and Al-Madi Family group, raising $10.4 million in total funding.
But for a Saudi expansion to work out, entrepreneurs need to consider various factors that dominate the Saudi market like the role of partnerships, the cost of setting up, and the relatively traditional customer base.
The main challenges for startups looking to expand to Saudi Arabia revolve around the cost of operations, hiring and ownership of intellectual property.
“I think the largest barrier to entry for a lot of companies right now in Saudi Arabia, and other parts of the GCC, is the cost of setting up, registering, and licensing a business. The cost of taking off space can be expensive, and the cost of trademarking in Saudi Arabia, and also in the UAE, is one of the highest in the world,” says Sophie Smith, co-founder and CEO of UAE-based femtech Nabta Health that provides diagnostic services for women about their fertility and overall health.
Today, the cost to obtain a commercial trademark in Saudi Arabia is around $2019, including the cost of filing, publication, and registration; while in the UAE, last year’s official reduction in trademarking fees brought the total from $2504 to around $1864. These don’t include translation fees and IP office fees, which can add a considerable amount to the total.
In comparison to trademarking fees in the US (~$1225) and the UK (~$728), the cost in the GCC can be overwhelming for startups with a number of inventions to register for protection, like the case with Nabta and other tech heavy startups.
Perhaps one of the biggest challenges is a similarly expensive workforce in Saudi Arabia where, as Dalmia explains, the cost of running operations is also high.
“The cost of living is lower than it is in the UAE, but the cost of operations and hiring or workforce is higher. If these things can become a bit better, then companies would be able to trigger a far bigger talent pool in Saudi Arabia. There is no reason for a company to quadruple the workforce here if those costs were lower,” explains Dalmia, who says those high and costly commitments can end up discouraging startup owners from taking risks.
A crucial factor behind the expensive workforce is the strict Saudisation programme (Nitaqat) that demands private businesses to achieve a specific quota of Saudi hires within an institution. Considering the minimum monthly wage of Saudi nationals was recently increased to SAR 5300 ($933), and the recommended nationalisation rate of 15%-100% within an institution, the expenses to run a headquarter or regional office in Saudi Arabia can add up quickly.
Additionally, founders will soon recognise the additional costs behind Saudi Arabia’s recent 20 per cent taxation rate, which for UAE-based startups is especially new.
“One of the challenges [of setting up in Saudi Arabia] might be understanding the tax systems which we don't have in the UAE but are there in Oman for example. So, you need to make sure you are abiding by the VAT payment, and then obviously there is more regional taxation like the zakat as well,” says Musa. “It's just learning and understanding that you might have to pay a tax in Saudi that is already three times the market rate and that eventually there’s no choice around it.”
However, Musa is quick to highlight that startup founders must keep in mind the enormous economic potential of accessing Saudi Arabia’s large market.
“I think startups need to look at the market potential alongside the cost. It's very attractive to say there's no tax in the UAE, not direct taxes, but there's lots of indirect taxes and there’s a market map of only ten million people,” says Musa. “So, looking at the market opportunity against the cost is important, and then of course getting some support on the ground.”
In addition, the country is looking to double its Riyadh population by 2030, Musa adds, to reach a total of 15-20 million people from its current population of 7.9 million. A rather controversial and economically ambitious goal, the decision nevertheless encourages foreign businesses and investors to participate in the Saudi economy.
As both Musa and Menary imply, one of the ways startup founders can facilitate their set up and simplify obtaining future partnerships with local public entities in the kingdom is by registering for multiple commercial activity licences, if applicable.
“Licences with MISA are activity-based. So if you want to do fintech, there is this licence, and if you want to do HR, there is that licence. But let’s say you are trying to approach institutions or funds or government bodies, then the more direct you are in your activity licence, the more opportunity you have to tender for those businesses,” says Musa.
For businesses that are reluctant of the move to Saudi Arabia, they also have the choice to “get a commercial agency relationship and test the water without having to have a 100 per cent ownership” of the local office, according to Musa.
But perhaps the most important factor to consider when trying to boost a Saudi expansion is to set up a regional office or headquarter before the regulation to do so takes effect on a January 2024. While the exact requirements of this new policy are still unclear, MISA plans to grant special incentives and exemptions to support abiding businesses.
Alongside appeasing regulators, expanding startups are more likely to gain the support of local investors if they show interest as well as legitimate cultural understanding of the country’s landscape, explains Dalmia.
“We get a lot of support from investors because we don’t come across as people who have an idea and want to implement it in Saudi Arabia. We have done a lot of on-the-ground research to understand the business not just as a concept but also as a practical system, really trying to feel the pain points that are and what difference we can make,” he says.
Conceptualising Trukkin took two years of ground learning while constantly communicating with legacy transporters and “having tea with truck drivers” to be able to assess the need and the right model, he explains.
“More than 90 per cent of our shareholders are Saudi, and that's why we say we are a Saudi company. We also have family offices [as investors] and having both of them in the cap table is really helpful for any company,” says Dalmia, “You get the perspective of building a company from the ground up from the family offices and the help to achieve fast growth and scale ups from the VCs.”
Operating in a sector that is “primary to Vision 2030” was one of the key points behind the strong support he claims, but the nation-wide, government-backed, entrepreneurial thirst seems to invite a wide range of startup sectors as well as foreign capital.
“I’m very bullish about the opportunity for Saudi Arabia, as long as it continues to grow as it has been in the last two years. The 2024 plan still needs to be mapped out, I think there's not enough detail in it, but the potential of all of it is huge”, says Musa.