Is Saudi Arabia the next startup haven?

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SOURCE: Khaleej Times

March 20, 2017

It’s no secret that Saudi Arabia has long been known as the centre of oil. Ever since commercial-grade crude was discovered in Dammam back in 1938, the kingdom’s economy has become heavily-reliant on the commodity, one which has spurred economic prosperity and fuelled a huge chunk of the world’s oil needs.

It’s also no secret that the kingdom cannot rely on oil as it used to, given all the circumstances and conditions of the market. Riyadh has mapped out reforms to its strategy, which requires tapping into other industries that won’t be directly affected by any kind of oil shock.

And in this day and age, what better sector to tap than the one that, in its own right, can be compared to the way oil powers several industries: technology.

But we’re not talking about tech in its purest form; rather, Saudi firms have set their sights on investing in the rising army of startups.

Not a one-way street

All roads apparently lead to a larger technology market in the Middle East.

Markets and Markets reported that the region’s cyber-security sector will reach about Dh10 billion in 2019, double the $5 billion it was just in 2014.

A Bank of America Merrill Lynch report, meanwhile, pointed out that the smart city projects being incorporated in the Middle East – in Saudi Arabia’s case, in King Abdullah Economic City – “have good prospects because of strong and stable economies and high construction rates”.

“In the ‘Autonomous Age’, Arabian Gulf governments are at the forefront of adopting global innovations, integrating smart cities and the Internet of Things and Services,” Keith Kaplan, CEO and co-founder of US-based think-tank Tesla Foundation, said at a recent event.

Saudi Arabia wants to transform its Public Investment Fund (PIF) – one of the world’s biggest sovereign wealth funds – into a major player in the tech space. The plans already gained traction when, in October last year, the PIF announced that it will be partnering with Japanese tech giant SoftBank Group to create a technology investment fund worth a whopping $100 billion (Dh367.3 billion).

Whether it’s returning the favour or not, investing in technology is the obvious trend now. Several studies have shown that Silicon Valley firms have their sights firmly on the Middle East, a market that is teeming with potential.

This is the obvious reason why Saudi firms are taking their acts to startups – and with good reason, aside from the financial rewards that await. listed down five reasons why startups are better than more established businesses: agility, team chemistry, less bureaucracy, competitive pricing and personality.

CB Insights’ Business Social Graph mapped out the relationship between Saudi investors and their target companies. It showed that between January 2012 to January 2017, firms from the kingdom have done quite a lot in either investing in a startup or totally acquiring it.

The study was able to churn out five key points:

Saudi Aramco has already invested beyond oil: Surprise. As the oil titan is being prepped up for what is potentially the world’s largest initial public offering at a mind-boggling $2 trillion, but its venture arm, Saudi Aramco Energy Ventures, is already the second most active player, making 20 investments in that five-year period. Some of them are beyond crude and into – you guessed it – startups, including gas-conversion firm Siluria Technologies, big data specialist Maana and enterprise solution builder Wearable Technologies.

Clean energy: There are 24 deals involved in oil, energy and drilling, with at least 12 directly related to clean energy. National Petrochemical Industrial participated in the financing of Siluria Technologies. Riyadh Valley Company was more active in this space: it has been involved rounds of funding for solar energy capture and storage company Sol Voltaics ($12.5 million), Japanese electric car firm GLM ($14 million) and solar commercialisation specialist BeamReach Solar ($36 million). Additionally, King Abdullah University of Science and Technology’s Kaust Innovation Fund was in two rounds of financing (totalling $1.2 million) for Nomadd Desert Solar Solutions, a maker of automated solar panel-cleaning robotic devices.

Ride-sharing: Of the 70 deals pertaining to technology in the period, 16 are directly for the mobility sector. Saudi Telecom Company and Al Tayyar Travel Group were involved in a $350 million round of funding in the fourth quarter of 2016 for Uber rival Careem Networks, one of the newest members of the elite unicorn group. Uber, however, got their share first; the PIF, in the second quarter last year, was in a $3.5 billion private equity round for the sharing economy pioneer, which remains the world’s most valuable unicorn at $68 billion, way ahead of second-placed Chinese mobile phone firm Xiaomi with $48 billion. And not to be left behind, Lyft also received some, well, lift from Kingdom Holding Company when it participated in a funding that totalled $497 million.

Private jets: The Saudi Royal Family was involved in a number of rounds totalling $155 million for private-jet mobile marketplace JetSmarter, another unicorn with a value of $1.5 billion. Fact: rapper Jay-Z has also pitched in to this startup.

No place like home: While Saudi investors have their fingerprints all over the world, majority of their cash is still in the Middle East and North Africa region. Mobily Ventures, the investment unit of Etihad Etisalat, invested in four Mena companies, including the UAE’s delivery app Fetchr and Saudi Arabia’s online food-ordering platform Hellofood. Seed investor Flat6Labs, meanwhile, had 30 deals in the kingdom and all of them are related to technology, and was the most active in the report.

Saudi Arabia’s rising activity in the startup space could just be the beginning of bigger things and more investments to come. With more tech firms proving their worth with their unique offerings and viable business models, it may just be a matter of time before the kingdom becomes a full-blown oasis for startups.

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