SOURCE: Deal Street Asia
January 17, 2016
Shiwen Yap January 17, 2016 Saudi Arabia has formally launched a new ICT (information, communication and technology) fund for startup ventures worth SAR500 million (~US$133 million), known as Riyadh Taqnia Capital. The fund was unveiled at the ArabNet Riyadh 2015 tech conference in mid-December 2015, the funds partners include Riyadh Financial Capital, the General Pension Fund, General Investment Fund nad several other state-linked funds. First reported in Geektime, the fund will have its headquarters (HQ) in Saudi Arabia’s capital city of Riyadh, the international unit will be based in and operate from 3000 Sandhill Road in Menlo Park, California. According to the firm, aside from ICT investments, the fund will also explore investments in the spheres of energy, sustainability and advanced materials. This is aligned with geographic considerations of the fund, with the website explaining: “Because the majority of science and technology innovation takes place in developed economies such as the US, Western Europe, and Japan, Taqnia Investments will make numerous investments in early stage companies in developed innovation ecosystems such as the Silicon Valley.” Adding that the portfolio envisages a focus on technologies relevant to Saudi Arabia (i.e. water desalination, oil and gas exploration and production technologies, renewable energy), it will also maintain a diversified portfolio to ensure suitable risk management and sustainable financial returns in the long term. According to its website, the venture fund “…seeks to be a major player in the Kingdom’s innovation development ecosystem, by supporting and investing in suitable local and international R&D that would fuel the growth of selected technologies…” that can lead towards technology leadership, sustained economic growth, and self-reliance for the desert kingdom. Operating on the premise of making investments that are of strategic interest to Saudi Arabia, the target is also aimed at growing the innovation ecosystem and venture capital sector of a country known mostly for its oil & gas industry. Additionally, it desires to focus on small and medium enterprises (SMEs) engaged in slow organic growth but require access to capital they cannot secure from banks.
Challenges ahead However, with the kingdom’s conservative reputation and traditional resistance to dissent – argued to be a necessary element to innovation – this fund may have some way to go in building a self-sustaining innovation ecosystem. Despite China’s commitment towards and investment in research & development activities, its innovation ecosystem still lacks behind that of the US. Saudi Arabia’s economy has been heavily petroleum-based since its founding, and the inception of a government-backed venture fund reflects a shift towards developing a more knowledge and service-based economy, given the finite nature of hydrocarbon resource reserves and suspicions of Saudi Arabia overstating its oil reserves. Ranking among the top five of the world’s biggest oil producers, Saudi Arabia’s petroleum sector accounts for roughly 80 per cent of budget revenues, 45 per cent of GDP, and 90 per cent of export earnings. This is notwithstanding the challenges that building a startup ecosystem face in the cultural arena. The Middle Eastern entrepreneurial content portal Wamda notes in an opinion piece by entrepreneur and startup adviser Nader Ajami, commenting upon a misreading of Saudi Arabian entrepreneurship, that: “We can all agree that entrepreneurship, both as a culture and a mindset, is slowly but surely growing in the Kingdom.” Ajami added, “However, one must also realise that a country with a landmass ironically roughly the same size as Greenland is home to many varying yet thriving mini-ecosystems stretching from coast to coast.” Ajami also noted the challenges that Saudi Arabian entrepreneurs encounter, particularly in the different approached required by investors in dealing with small & medium enterprises (SMEs) and entrepreneurial ventures, given that entrepreneurial startups tend to be highly illiquid, high-risk venture capital assets. He observed: “SMEs tend to be very precise and sustainable about how they operate, fully aware who their customer is and what need their product/service addresses. Startups, on the other hand, tolerate risk more; look to build growth quickly and work hard to remain relevant in the minds of its customers. This affects how support is mobilized and deployed, and why many entrepreneurs end up having an unfulfilling experience.” He contributed that observation that banks in Saudi Arabia did not acknowledge ventures smaller than an SME, while private debt financiers adopted a one-size-fits-all approach to debtors, regardless of the asset class. Despite this, the launch of such a fund is the additional of a vital elements that will contribute towards developing an entrepreneurial ecosystem, synchronising with efforts by the Saudi state. One example is the inception and launch of King Abdullah University of Science & Technology (KAUST) in 2009.