With Saudi Arabia’s Vision 2030 placing a strong emphasis on innovation and technology, the Kingdom’s tech start-up sector is beginning to come of age. The past decade has seen the ecosystem evolve quickly, and the recent launch of a range of new funding programmes should see it gain momentum in the coming years.
Recent Performance
According to ArabNet, a Beirut-based tech business platform, Saudi Arabia accounted for 18% of “digital” (i.e., technology) start-up investors in the MENA region by number in 2004-16, ranking only behind the UAE, which, with its more developed private equity (PE) and venture capital (VC) segment, accounted for 33%. In the 2004-16 period, Saudi Arabia had two active angel networks, four seed funds, nine accelerators, nine VC funds and two corporate investors active in digital investments. Nonetheless, the country remains behind regional leaders in terms of dealmaking in the sector, with 94 deals in 2013-16, compared to 234 in the UAE, 118 in Jordan, 101 in Egypt and 100 in Lebanon. The value of the sector’s dealmaking has fluctuated, rising from $31m in 2013 to $57m in 2014, before dropping off to $14m in 2015 and $5m in 2016. The market is still small enough that single deals can shift a year’s figures significantly.
“We saw a considerably slower year in 2016 for many because a multitude of MENA VC funds were raising their own funds during the year,” Racha Ghamlouch, senior programme manager at ArabNet, told OBG. “We also witnessed the launch of Vision 2030, which caused a halt on some budgets and uncertainty for people, which was later overcome as the year progressed. We already see an uptick in investments in 2017.”
Easing Constraints
ArabNet lists four main reasons why tech start-ups have not gained as much traction in Saudi Arabia as in other markets in the region. First, investment has usually been geared towards lower-risk sectors such as energy and health care, which also provide big ticket returns. Second, risk aversion also applies to potential entrepreneurs. With secure public sector jobs widely available, and talented young Saudis eagerly sought by multinationals and big local firms, the incentive to start new businesses is lower. Third, the education system has not traditionally been geared towards entrepreneurship, instead emphasising skills that will ensure secure employment. Lastly, regulations have proved a hindrance, unlike in Dubai, which has forged ahead with creating a fertile environment for start-ups. All of these factors are shifting, however. As investors seek new opportunities, the government is ramping up support for entrepreneurs, and regulators have sought to promote foreign investment and ease regulation on funds (see ICT chapter).
“Saudi Arabia is a prime market for investments in traditional sectors such as health care, infrastructure and oil and manufacturing, while also providing regional VCs with many limited partners,” Ghamlouch said. “Saudi investors are interested in lower risks and bigger ticket sizes. However, that is changing and we’re seeing more PE and traditional investors set up funds for start-ups.” Recent major deals include the $2m raised by e-commerce platform Dokkan Afkar in a funding round closed in May 2017, SR6m ($1.6m) invested by state oil supermajor Saudi Aramco in smart-system developer Smart Control and the August 2016 acquisition of online food ordering portal Hungerstation by the UAE’s foodpanda. In November 2015 media platform Uturn received a $10m investment from Beirut-based Leap Ventures. Ghamlouch adds that the sector is likely to get a boost from the May 2017 establishment of a $500m VC fund STV, by government-owned Saudi Telecom Company, a fund specifically focused on technology start-ups. STV is the largest institutional technology VC fund in the Middle East.
Badir Programme
STV’s launch is likely to add new momentum to a segment that has evolved rapidly over the past decade. The government-backed King Abdulaziz City for Science and Technology broke new ground in Saudi Arabia’s start-up ecosystem in 2007 when it founded the Badir Programme for Technology Incubators. Previously, there was no domestic network of angel investors or of incubators and accelerators, no true seed funds existed and there was little regulatory infrastructure for start-up finance. The word badir means “to initiate”, and the programme indeed established the government as a leading player in the sector, which it maintains to this day.
By mid-2017, Badir had supported more than 200 start-ups, and aims to have created 600 start-ups, generating 3600 jobs, by 2020. The organisation operates several incubators across the Kingdom, with two in Riyadh and others in Taif and Jeddah. The programme is open to all Saudi entrepreneurs with early-stage technology-based projects, including those with promising product concepts. Badir operates two streams, first supporting entrepreneurs in development, including through seed funding in accelerators, and then helping them find funding for expansion. The first part of its remit includes business consultancy, providing office and laboratory space, secretarial and administrative services, as well as support with business planning, financial modelling and pitching. The organisation has a range of incubators targeting different sectors: ICT, biotechnology and advanced manufacturing technology. It also operates a technology incubator in Taif, in the Western Province. Badir’s leading success stories include restaurant management technology developer Foodics, founded by young entrepreneurs in Khobar in 2013, which completed its first successful funding round in September 2017, raising SR15m ($4m).
Developing Programmes
In 2009 Badir established the Saudi Business Incubator Network (SBIN), helping pool resources and administrative capacity between incubators and creating a unified system of regulations and operating standards. This was followed by the establishment in 2012 of Sirb, an angel investor network designed to help boost early-stage funding and push innovative businesses from the concept stage to series-A financing. Badir’s partners in the network include King Abdullah University of Science and Technology, Jeddah Chamber of Commerce and Industry, College of Business Administration and Dar Al Hekma University in Jeddah. In 2015, having acknowledged that some entrepreneurs had issues with intellectual property, the organisation established an inventors’ office to help Saudi entrepreneurs apply for patents. This was followed in 2016 by a “transfer inventions to market” accelerator, which addressed another bottleneck in the system – uncommercialised intellectual property.
Badir is now in the process of rolling out its “soft landing” programme to encourage foreign entrepreneurs to bring start-ups to Saudi Arabia. It aims for 20% of overall incubated start-ups to be established under foreign ownership. The initiative intends to harness technology and talent from around the world, enriching the domestic start-up environment, and supporting economic development and diversification, much the same as California and Berlin have done successfully. Foreign investors will gain access to the large, growing and tech-savvy Saudi market, with support on contacts, logistics and information to help them understand local conditions – hence providing a “softer landing” in a complex and unfamiliar environment.
Other Players
Another important player on the start-up scene is the Riyadh Valley Company (RVC), founded in 2010 by King Saud University, with the aim of supporting the development of a knowledge-based economy. The company launched a VC fund with initial capital of SR229m ($61m), which has invested in a diverse portfolio that includes educational technology, biosciences and ICT systems. While established by a public sector university, part of RVC’s mission is to help develop an environment in which private sector investors will take on an increasing role. RVC is one of a growing range of funds in the tech-focused start-up space. One of the earliest was N2V, established in 2007 by National Technology Group – the region’s largest ICT conglomerate – with a broad range of investments in segments including e-commerce, social media, games and mobile apps. In 2011 Aramco founded Wa’ed Ventures, a $200m venture fund focusing on companies with technologies of strategic importance to the energy giant, with the additional aim of localising innovative industries and supporting entrepreneurship.
Musharakah
In January 2015 government-owned investment company Takamol Holding for Business Services, in partnership with the Human Resources Development Fund – a government agency – launched the Musharakah programme, which aims to support financing organisations in investing in budding start-ups and small and medium-sized enterprises. The scheme matches investors’ funds with a loan guaranteed in full by Takamol. The scheme works by partnering an investor with a lender or sharia-compliant financier. The “investor participant” may be a VC, PE, debt or mezzanine financing fund. Banks and other financial institutions can participate by applying to be a “lender participant” or by forming consortia with investment partners to participate. The Musharakah programme’s guarantees make it a highly attractive proposition for investors. In a March 2017 note, Saudi investment bank Jadwa Investment said that Musharakah would dovetail well with the launch of the Nomu parallel stock market, which aims to attract SMEs. The launch of both indicates that the government is keen to develop a clear path of development, from start-up to listing. The aim of the scheme is to boost innovative SMEs in Saudi Arabia, supporting economic diversification, value-added industries and job creation for nationals. Through bringing in foreign investors, Musharakah also aims to strengthen knowledge and technology transfer.
The first Musharakah deal was signed in August 2016, with Silicon Valley-based Blue Vine Management establishing a Saudi investment arm to manage a SR600m ($160m) fund focusing on high-tech manufacturing, sales and distribution. The fund has SR300m ($80m) from private and institutional investors, backed by a further SR300m ($80m) from Banque Saudi Fransi, guaranteed by Takamol. By mid-2017, the programme had selected a total of five funds to participate in, with guarantees worth SR1.1bn ($293.3m) being awarded.
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