For the past few years, Saudi Arabia has done an exceptional job of reforming its business processes and boosting entrepreneurship in the country. Never before has launching a startup been so easy in the kingdom, the government has a plethora of support programmes, the ecosystem is abound with eager investors and regulators are open to learning and developing laws with startups in mind.
The governmental support for entrepreneurship was on display this week at the GEC Riyadh 2022, where investment initiatives valued at close to $14 billion to fund and aid startups and the investment community were announced. This was the first time that the Global Entrepreneurship Network (GEN), a platform that connects entrepreneurs, investors, researchers and policymakers, hosted its yearly congress in Saudi Arabia, pulling in delegates from all across the world.
The event was in line with others that have taken place in the country that seek to establish the kingdom as a global business hub. But this ambition is still some while away as the reality of operating in Saudi is not quite as smooth as the country wishes to portray.
For one, there is a chronic lack of talent in the country, an issue that MISK’s CEO, Badr Al Badr, highlighted in his speech.
“The lack of talent resonated with all, we are focusing our efforts to address the skills challenge which is quite big,” he said. “What startups get out of university graduates is not enough. There is a gap between the output of universities and high schools and what is needed.”
Some Saudi startups have opened offices outside of the country in order to attract talent. Intelmatix, Morn and Noon Academy are among a few that have established product teams in London, which according to one Intelmatix employee, makes it easier to attract good talent especially those who may be reluctant to relocate to the Gulf.
But not every startup can afford to open a base in London or elsewhere and so there has been a push by the government to attract startups to relocate their headquarters to Saudi Arabia. As the Middle East’s biggest economy, the opportunities for startups are substantial. The market has the capacity to absorb competition in almost every sector, its young, tech-savvy population is hungry for digital solutions and there is a great deal of capital in the country. Jordan-born healthtech platform Altibbi, which relocated its headquarters to Dubai a few years ago is now moving its headquarters to Riyadh.
“A big portion of our revenues come from here and there is a big push towards digistiation of healthcare. There is almost zero competition for us here and we are building partnerships with government entities and insurance companies. If we are regarded as a Saudi company, it is easier to build these relationships,” said Jalil Allabadi co-founder of Altibbi, which announced a $44 million Series B to fuel its expansion.
To truly penetrate the Saudi market requires a physical presence in the country, where personal relations and face-time matter.
Abundance of cash
One topic that has captured almost every ecosystem in the region is that of rising startup valuations. In Saudi Arabia specifically, there appears to be more capital than deal flow can handle. The investment initiatives announced at GEC, which included Saudi Venture Capital Company’s (SVC) $40 million injection into Flat6Lab’s Riyadh fund, $27 million investment in Sadu Capital’s early stage fund and SABIC’s launch of its Nasened Fund 2 worth $200 million to support startups in the industrial sector, indicate the growing abundance of capital, which will likely further push up valuations in the country.
“The best technologies come out of the US and China because these two markets are big, homogenous, with one culture,” said Florin P Vasvari professor and chair of accounting faculty at London Business School. “You forget the markets here [in the Middle East] are fragmented with different regulations and laws, so it’s not as easy for a startup to scale up, which means the multiples should be smaller.”
Investors in Saudi Arabia are currently competing with limited deal flow in the country according to Jonathan Ortmans, president and founder of the Global Entrepreneurship Network.
"If you ask me what is the one thing we need to work on the most – I think it used to be venture capital, we didn’t have venture capitalists five years ago now we have more than enough, I think we have more capital chasing less ideas. The reason there are less ideas, is we still have bureaucratic obstacles," said Ortmans.
Part of SVC’s investments have gone towards venture builders and accelerators like Flat6Labs to help create a better pipeline for investors, but as it stands, the region is at risk of a bubble burst according to Vasvari.
“We joke in private capital funds that when we enter the room, we walk backwards because we always try to watch the exits as investors. We don’t have a track record of exits [in the region]. It’s easy to throw money at a startup but very hard to exit,” he said. “When valuations are too high, it really hurts the ecosystem. When the bubble bursts, private capital runs away.”
The loss of capital in global markets should serve as a warning to investors in the region, Vasvari added.
“Capital can fly overnight. It will leave a lot of deals in limbo. A lot of fund managers are one time wonders. When you can't raise another fund, the companies will be left behind” as they will not be able to secure follow-on capital, he explained.
One way to help mitigate this problem is to widen Saudi investors’ mandate to invest outside of the country to gain access to more startups, although that may further spread the issue of high valuations to other ecosystems.
According to research carried out by MISK, 50 per cent of Saudi’s youth are thinking of starting their own business.
“People are changing their way of thinking,” said Al Badr. “But there is a bridge and a gap between thinking and succeeding.”
So far, Monsha’at, the SME authority of Saudi Arabia, has done a great job of allowing Saudi founders to take the initial steps, but it might be time that it takes a small step back and allow the ecosystem to evolve with the help of other (private sector) stakeholders.
No matter how agile and supportive the government has been, it still moves with a sense of formality that sits at odds with the startup culture. This became evident at GEC itself, where ministerial initiatives took precedence over the visibility of startups and logistical setbacks prevented many delegates from accessing the first day of the conference. Part of the issue was the location the event was held at - the Ritz-Carlton hotel which is located in the vicinity of the royal court and so required greater security. Understandable, but startups do not require the pomp of a glamorous hotel, they need access - to investors, to mentors, to other startups and good talent.