Five years into the Saudi Vision 2030 programme, venture capital (VC) funding in Saudi Arabia has risen to an all time high with a recorded $151.9 million in investment raised across 88 deals in 2020. This marks a 124 per cent rise from 2018 to 2020, and a huge increase from the recorded pre-Vision rate of only $7.9 million in funding.
Most of this growth can be traced back to 2018, when the government sought to empower the entrepreneurship sector, ease foreign direct investment (FDI) regulations, and launched two fund of fund ventures - Monsha’at-backed Saudi Venture Capital Company (SVC) and the sovereign wealth fund (PIF)’s Jada fund of funds. This was also around the time when mobile operator Saudi Telecoms Company launched its $500 million fund, STV, making it the largest tech fund in the Middle East and North Africa (Mena) region.
“Our ultimate success is really to have diverse VCs that are addressing different sectors, different stages, and different geographies to make sure that they are really filling the financing gaps for startups across sectors and stages and regions,” says Nabeel Koshak, CEO and board member of SVC.
Committed to investing $1 billion in VC funds and startups, SVC has so far invested in 17 venture capital firms and 63 startups across various stages and sectors, including Saudi’s largest edtech platform, Noon Academy. It has also allocated 10 per cent of its fund to angel networks. SVC's "one condition" for VC fund managers is to allocate some of their investment to Saudi-based companies.
This sort of government backing has been essential for the growth of the VC sector in the country. The number of active Saudi venture capital firms, both private and government, has now reached 40 in total, with the majority of VCs located in the central and eastern regions.
“The US has [had] 50 years to invest in the tech ecosystem, if not more. Silicon Valley invented venture capitalism whereas here in Saudi, it’s relatively new. But there’s a lot of support from the government and that opened up the VC asset class and made it a hot topic where everyone wants to come in, as they see Careem and Jahez in Saudi, for example,” says Turki Aljoaib, co-founder and managing partner at Rua Growth Fund.
According to Rakan Tashkandi, founder of Riyadh-based venture builder Flow Ventures, government involvement gives investors the confidence to “venture into startups and support the ecosystems”.
You can see a lot of family offices and ventures want to jump into the bandwagon, it’s a good thing, it shows confidence and the way to move forward,” he adds.
And while Saudi VCs still face a complex regulatory process when trying to register their firms locally, the fast pace in which governmental bodies are working to update, and even degregulate the regulatory framework to satisfy both startups and VCs is working well to help the kingdom catch up to other venture market players according to Koshak.
All this has benefitted Saudi Arabia’s startup ecosystem which has become the fastest growing venture market in the Mena region. Last April, startups in Saudi raised the highest amount of funding in the Mena region with a total of $122 million in investment, most notably secured by the buy now pay later (BNPL) fintech Tamara with a $110 million series A round funding led by UK-based Checkout.com.
Investor interest is currently focused on the financial technology (fintech) sector, which has grown from just 10 registered fintech startups in 2018, to a total of 155 in 2020. In the first quarter of this year, fintech startups based in Saudi Arabia raised in excess of $127 million, a whopping jump compared to the $23 million raised by fintech startups in the country from 2015-2020.
Yet despite this growth, there is still a lack of VCs and investments going towards sectors like edtech and agritech according to Ali Abussaud, founding managing partner of Khobar-based HALA Ventures.
“I don’t think there are so many VCs in Saudi, yes the number is increasing but if I were to talk about the supply versus the demand, I wouldn't say the market is saturated,” he says. "The market is still a little raw, you will find certain sectors being fueled because investors understand these sectors while other sectors are still not being funded. This produces a gap because no matter how many VCs are in the market, it is still not enough to fuel every startup."
There is also a shortage in growth-stage financing as the regulatory framework surrounding such investment can start becoming complicated.
“Sometimes, later stage VCs will require some of its companies to be registered in specific jurisdictions,” says Koshak who highlights SVC’s acknowledgement of the gap in late-stage funding. SVC is currently backing both HALA Ventures and Rua Growth Fund who provide larger ticket sizes for scale-ups.
Part of the problem is also a lack of deal flow in various sectors according to Koshak, which SVC is looking to resolve by funding venture builders.
“We are backing funds that are backing deal flow creation, for example a fund that is backing accelerators and startup studios or any programme helping deal flow creation to enhance the deal flow for VCs in the early stage and late stage,” he says.
Going beyond Saudi
As Saudi VCs become more confident and eye up deals elsewhere in the Mena region and beyond, they are likely to play a more significant role across the region.
Funded by both Jada and SVC, HALA Ventures focuses on investing in the GCC, Egypt and Jordan with a particular interest in early and growth-stage investment rounds. The VC’s portfolio currently holds 13 startups across various sectors, including the Saudi-based fintech startup Tamara, Dubai-based virtual event platform Eventtus, and the Abu Dhabi-based edtech platform Lamsa World.
“When we decided to launch this fund, the main jurisdiction and our target was the GCC but given our track record and what we were seeing, we still believe that Egypt and Jordan will become very important players when it comes to the deal flow and the talent acquisition and other factors,” says Abussaud.
Interest in funding cross-regionally or even internationally comes in accordance with the investment patterns of Saudi Arabia’s governmental entities. International investment in Saudi Arabia, which constituted only 3 per cent of PIF’s assets under management (AuM) in 2017, jumped to a total of 30 per cent in 2021, expanded in regions across North and Latin America, and Europe among others. PIF is also the main investor in UK-based tech-focused Softbank Vision Fund, the world’s largest tech-focused venture capital fund, with $45 billion.
If Saudi startups are aiming to become high-growth companies, explains Koshak, their rise in their local economy is not enough to achieve such market domination. Cross-regional expansion is hence necessary and this has translated into a need for local VCs to forgo “country-focused” funds and offer “regional-focused” investment instead.
“I think the nature of this industry is cross-country,” says Koshak. “Most of the VCs won’t succeed without cross-country activities, so general partners (GPs) and fund managers are from different countries, or limited partners (LPs) investing in these funds are coming from different countries...And we’re seeing some of these funds actually helping Saudi-grown companies to scale regionally and globally, and also helping regional companies to scale in Saudi Arabia."