Saudi VCs: where we are, where we’re going [Opinion]

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“We do not have enough venture capital investors in Saudi”, is a common theme heard from entrepreneurs across the kingdom.

Saudi Arabia, the largest market in MENA in terms of GDP, was ranked third in VC investments in the region, according to the MENA Private Equity Association 2015 report. This totalled only about a third of UAE volume of investments.

But success stories are there, which show the way to potential exits.

Startups graduating from Badir, the government-backed incubator managed by King Abdullah City for Science and Technology (KACST), have collectively attracted more than $20 million in investments and passed $80 million in market value, ending 2016. Still, this is a drop in an ocean when compared to venture capital investments regionally and globally.

Only a few Saudi startups have received funding, and fewer have been acquired.

Morni, an on-demand roadside assistance app, has raised $1.1 million in funding. Another is Falcon Viz, a 3D aerial survey and mapping tool that has also raised $1.1 million. Lastly, Hunger Station, one of the first online food ordering portals in the region, was acquired by Foodpanda (Rocket Internet then, now owned by Delivery Hero) for an undisclosed amount.

Yet local investors are still skeptical and not as attracted to venture capital as they are to real estate, stock markets and private equities. Why? Let’s talk some history, culture, and recent announcements.

The roots of the saudi investor

“If you didn’t become wealthy from real estate in Saudi Arabia, you’re not really wealthy”, I was once told by one of the wealthiest individuals in the kingdom.

Real estate is the oldest form of investment among Saudis, and still the most popular today. This comes from its safety element, and the growing wealth created from infrastructure and housing developments through the years.

Most wealth is concentrated among real estate investors, who are shrewd by experience and risk averse when it comes to investments.

But Saudis more generally aren’t averse to trying new investment ideas.

In the early 2000s stocks caught on. A surge in stock investments caused the Tadawul index TASI (the Saudi stock exchange market index) to rise rapidly and then crash from its highest point of 20,634 in 2006 to below 5,000 in 2008.

Even the crash in 2006 didn't completely put Saudis off stocks. (Image via Argaam)

Still, Saudis did not lose faith. The stock market this year has a market cap of about $400 billion and is considered among the most popular investments in Saudi Arabia.

Over in private equity, mergers and acquisitions (M&A) activity is growing. In 2015 alone, Saudi Arabia’s domestic M&A transactions increased to $1.75 billion from $279 million in 2014, according to KPMG.

Both public and private equity markets were supported by the rapid establishment of local investment firms during and after the 2006-2008 stock market crash. Most were either spun off from local banks or founded by ex-bankers and experienced individuals.

In venture capital, Saudi had 17 announced deals in 2015, compared to only two announced deals in 2014. The volumes, even though they’re relatively small, are modestly increasing:

Image via Private Equity Association report 2015.

Venture capital, a child with a bright future

Most of the recent venture capital efforts have been driven by corporate investors such as Altayyar, one of the leading VC investors in the kingdom, and angel investors.

Unlike local private equity firms and stock brokers, independent Saudi venture capital firms are almost non-existent. However, this is expected to change as successful corporate investments, such as Careem by Altayyar and STC Ventures, and the government’s aggressive push to revitalize SMEs encourage Saudis to consider the sector.

In support of Saudi Arabia’s Vision for 2030, the government established the Public Authority for Small and Medium Enterprises to empower SMEs across industries, helping them with hurdles from business licensing to access to capital in terms of banking facilities and funding. Moreover, the government committed approximately $1.06 billion in the form of a fund of funds into both private equity and venture capital, to be distributed and deployed to and by specialized private firms in the kingdom.

Takamol Holding, a government owned private company from Ministry of Labor and Social Development, has initiated the $533 million Musharakah program, private equity and venture capital loan program with attractive interest rates and repayment plans.  

The Saudi Capital Market Authority (CMA), has opened up a new bourse for SMEs to go public (IPO). Among the rules to encourage firms to list on the SME market is a minimum capital requirement of $2.67 million, significantly below the $26.7 million floor for listing on the main market.

Investors need education

“What’s so special about you? I can get a low wage worker doing the same things you do”, an angel investor once told a prominent Saudi entrepreneur during an investment pitch I attended.

“They do not value the team in a startup”, is a comment I have heard several times when asking entrepreneurs for their thoughts of Saudi investors.

How investors think about a startup’s team, their commitment, talent, and conviction needs to change.

Their understanding of how venture capital works, too, needs to be established, as it was with other investment types explained above.

Saudi entrepreneurs have been on a mission for years educating investors, but can they do it alone? Of course not. Local VC firms need to be founded, and regional ones need to be more active by opening local Saudi branches.

The good news is that the trajectory is clear, slow, but steady.

Saudis, whether corporations or angels, have been increasing their exposure to the startup market. If anything, this is a great opportunity to establish local VC firms and start raising local funds, especially with the strong support from government initiatives and loosening regulation.

Feature image via Wamda Capital.

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