The slow rise of deeptech in Saudi Arabia
As the Saudi startup scene continues to set records, business models around advanced technologies or deeptech, are beginning to take ground. Last month, the King Abdullah University of Science and Technology (KAUST), one of the most prominent research universities in the region, became a member of the Saudi Venture Capital and Private Equity Association, an industry body representing the kingdom’s VC sector. Through its KAUST Innovation Ventures, the university hopes this partnership will help evolve the deeptech ecosystem in the country. Last month also saw the Saudi-based investment firm Mulkia Investment establish the kingdom’s first deeptech fund, the Mulkia Cyber Security Fund, in partnership with the US cyber tech VC Paladin Capital Group.
Deeptech innovations are a result of scientific advances and engineering. These innovations tend to be most prevalent in industries like defence, healthcare and energy which require novel solutions to complex issues. BCG/Hello Tomorrow define deeptech as technologies that “can have a big impact, take a long time to reach market-ready maturity, and require a significant amount of capital.” Their definition includes seven key areas of technology, including advanced materials, artificial intelligence (AI), blockchain, drones and robotics, photonics and electronics and quantum computing.
Across the Middle East and North Africa (Mena) region, 31 startups with a deeptech focus raised over $32.5 million in investment in the nine-months to September 2021. Of these, 10 are based in Egypt and 10 in Saudi Arabia, reflecting the strength of the engineering capabilities of both ecosystems. Among the most prolific investors are both KAUST and Saudi Aramco, through its venture arm – Wa’ed.
The deeptech initiatives that have emerged in Saudi Arabia, however, are the exception and not the norm for the country’s deeptech sector.
Active private Saudi VCs still run away from deeptech to opt for tech or tech-enabled startups that typically present applications, integrable SaaS tools, or fintech solutions instead. With the exception of Aramco, KAUST and Mulkia, there remains an overwhelmingly low investor appetite for deeptech as firms fret over the upfront capital and the taxing demand for unattainable tech talent surrounding these startups.
"Deep tech startups can be difficult for investors, as they are often a greater risk and require more time and patience to bring a technology to market and a return on investment," said Kevin Cullen, vice president of KAUST Innovation in a statement at the signing of the partnership with the VCPEA. “Our mission is to support these founders as they work toward solving some of the future's most intractable challenges.”
Like Cullen, the relentless deeptech entrepreneurs are more positive about the value they bring to the Saudi economy and the entire regional ecosystem, encouraged by the increasing flexibility around regulations and the steady but comforting growth of their own businesses.
When Abelrahman Hazem founded the Middle East’s first cryptocurrency staking platform, Nisbah, Saudi Arabia was not as confident in investing in blockchain technology as it appears to be today.
“I’ve been in the blockchain industry for about five years now and the most repeated sentence I've heard is ‘why blockchain?... it's too early, it's too risky, we don't trust it’. So, the first two years when I started, was spent only preaching that blockchain is coming and that it was going to change the entire ecosystem,” he says.
With a global team of founders and “thousands of [crypto] investors” in the first three months of launching the platform, Nisbah is well-established today and has joined the Tezos foundation, a globally-led open-source blockchain system. Tezos has also supported Nisbah with its first funding, investing $100,000 to grow the startup.
Hazem plans to join other global platforms like Consensys and Polkadot and his positivity reflects an entrepreneurial thirst shared among deeptech founders who believe in daring innovative solutions, both in tech and in business structure.
Slow adoption rates
Establishing the Saudi entrepreneurial movement “was slow”, says Abdulrahman Alolayan, the founder and board member of Taibah University’s deeptech startup accelerator and VC Taibah Valley, who points out that the first Saudi VC was established only five years ago in 2018. This presents more gaps than opportunities for the deeptech sector as the kingdom’s efforts were and continue to be confined by its fragmented infrastructure.
“In order to build a real and organic innovation system within Saudi Arabia, we needed different layers and players. In 2018, I remember there were more VCs than entrepreneurs and we did not have the right infrastructure and ecosystem of entrepreneurship. Today, we are witnessing a number of great startups coming out of the system in different areas, but we’re also filling more gaps to allow deeptech startups to organically come out,” says Alolayan.
He believes that the next few years will exhibit a surge in the number of people “quitting their jobs” to work on deeptech projects, acknowledging at the same time that measurable growth will only result if both government VCs and corporates stood by aspiring founders.
“Maybe what we are lacking today within the ecosystem is to give the freedom to employees to allocate 10 or 20 percent of their work hours to work on a project they are passionate about,” says Alolayan. “Also, VC money today goes mainly to e-commerce or logistics because it’s easy to understand and predict their business model, but very few VCs understand and can appreciate the impact of deeptech. This is where government VCs can pave the way for other VCs to turn to this sector. It needs courage and it needs future-looking mindsets, but I believe it will be fruitful not only for the VCs but for the Saudi economy and for the region.”
Alolayan founded Taibah Valley in 2018 as “an innovation vehicle”, starting with its blockchain lab after training at a university faculty in New York. He then established IoT, AI, and AR/VR labs in partnership with global companies like Huawei.
The company has been leading a yearly deeptech competition called “Taibah Invents” in which 40 per cent of last year’s applicants were located outside Madinah, and 10 per cent were foreign. Taibah Valley invested in a few winners, including EyeNak, a customisable HR solution generating “10 million in sales,” according to Alolayan, and used by organisations like Monsha’at and Movenpick.
‘Innovate then regulate’
For any deeptech ecosystem to thrive, it requires a robust education system to develop talent and provide the platform for research and innovation, investment in R&D, a mature VC industry willing to take the risk and invest.
Saudi Arabia certainly has the universities that can become a focal point for deeptech innovation and the country continues to file the highest number of patents in the region, with 7400 in 2019 according to the World Intellectual Property Organisation, but it lags in the monetisation and commercialisation of research and IP. Anecdotally, Wamda was told by several university-affiliated researchers and entrepreneurs that much of the scientific research in local universities and research institutes generally in the Middle East, has little commercial value, and that counting patents issued is a poor way to measure monetisation due to structural issues with the incentive and promotion process within these entities.
To enable deeptech innovation, government policies therefore need to be conducive to commercialisation, with a strong framework for protecting and enforcing IP rights.
“There was a slogan in Saudi Arabia called ‘innovate then regulate’. We need to exercise this slogan better and we need to give the right assurance to founders to be able to work freely on their projects, and then the regulation will be responding to their creative business model,” says Alolayan. “We are seeing some progress around this and we are hoping for more.”