Saudi Arabia's future: From Kingdom of Oil to Start-up Hub & Fintech Center?

International investments in high-tech and fintech startups worldwide are booming. Main focus of investors (PE or institutional) is however still largely centered on the historical boomtowns in the US, Europe and Asia. India, Israel and Russia are a very good second league. The world however seems to be changing. The amount of startups in the MENA region (including Israel) is growing at an exponential rate, but still dwarfed by US and European figures. Still, after a start-up goldrush in Israel, followed by the usual Arab suspects, such as Dubai, Cairo and Tunis, others are getting up to challenge these leads.

Bahrain, a very underestimated and undervalued high-tech/fintech base, is crawling back to where it was just before the Arab Spring and a Shi’a uprising pushed it back. Based on its financial center background, just behind Dubai when looking at the overall interest of investors, bank and institutional investors, it now is trying to carve out its own leading position in the high-tech/fintech league of nations. No interest at all is still given to the ongoing dramatic, and very promising, societal, economic and financial changes in Saudi Arabia. The existing views of an overwhelming majority of investors, operators and financial institutions on the Kingdom are still based on the historical fact that Saudi’s position in the world is based on its enormous oil wealth and reserves. Until 2015 this picture was without any doubt the right one to put in your mind, if not interested in oil and gas, forget Saudi Arabia. Non-oil related economic sectors were struggling to get from infancy to puberty, while the parents (government) and its family (Saudi entrepreneurs) where not at all interested in streamlining developments into a strategy to change the Kingdom. This has changed, due to a change in guard (Salman family line) and the introduction of a new disruptive, challenging but feasible, economic strategy, presented in Saudi Crown Prince Mohammed Bin Salman’s Vision 2030. The impact of this vision or futuristic Saudi Arabia is slowly but indisputably taking shape. After being focused on the oil-gas-energy relationship, the Kingdom is now entering in full force the 21st Century, targeting aggressive goals in high-tech, fintech, energy diversification, liberalization of the economy and private investments and foreign ownership.

The latter economic-societal drive is for a large part being channeled via the newly formed Saudi sovereign wealth fund Public Investment Fund (PIF), which already has shown its own views on where Saudi Arabia should be heading the coming decades. The massive PIF, which could be the recipient of the Aramco IPO and the other 100 planned IPOs of state-owned entities, is the financial and strategic motor of a new Saudi Arabia, to build on an immense list of Saudi-based companies and startups. The PIF has become very active in local and international tech startup investing. As was presented in Vision 2030, the PIF, slated to become the world’s largest sovereign wealth funds, will be one of the leading global investors in technology. Main focus of the international media, when analyzing the Saudi PIF approach, has been centered on the PIF’s partnership with Japan’s SoftBank Group in order to create a $100B tech investment fund (October 2016).

However, the PIF investment schemes are not the only ones coming from Saudi Arabia. At present, based on third-party analysis, there is already a global network of 25 Saudi Arabian investors, all based in the Kingdom.

The above mentioned graph does not include Saudi investors or investment companies with a HQ elsewhere. In the graph, investments are denoted by green lines, acquisitions by orange lines.

As is shown by the graph, Saudi PI investments are increasingly divers. When looking at the Kingdom’s most famous entity Aramco, the latter has been heavily investing already beyond oil. As indicated in the graph, Saudi Aramco Energy Ventures (SAEV), which is the official venture arm of Saudi Aramco, has become the second most active Saudi investor, with a total of 20 investments that have taken place between January 2012 and January 2017. At the same time, SAEV already is involved and active in deals in industries beyond oil, such as those involving Siluria Technologies, MAANA, and Wearable Intelligence. Siluria Technologies is a producer of natural gas-related and clean energy-related technologies, while MAANA and Wearable Intelligence are focused in the big data analytics, and wearable technology spaces, respectively.

A growing amount of investors are taking stakes in the so-called clean energy space. As stated in reports, of the 24 deals pertaining to companies in the energy, oil, and drilling space, at least 12 deals relate directly to clean or alternative energy companies. The National Petrochemical Industrial Co. also participated in financing to the company Siluria Technologies, while the Riyadh Valley Company has participated in rounds of financing to 3 clean-energy related companies: a $12.5 million Series C round in Q2’16 to Sol Voltaics, a solar efficiency energy capture and storage company; a $14 million Series B round in Q3’15 to GLM, a Japanese electric car company; and, a $36.6 million Series D round in Q2’15 to BeamReach Solar, a solar commercialization company.

Another upcoming and very active entity, the KAUST (King Abdullah University for Science and Technology) Innovation Fund, has participated in two rounds of financing totaling $1.2 million to NOMADD Desert Solar Solutions, which offers an automated solar panel cleaning robotic device.

Still not really on the frontpage of international news and media, Saudi Arabia has become very active in the so-called ride-sharing sectors. Of the 70 deals related to tech between January 2012 and January 2017, 16 deals have been directly connected to companies in the mobility industry. Saudi investors have shown a particular affinity for ride-sharing companies. Both the Saudi Telecom Company and the Al-Tayyar Travel Group participated in a $350 million Series D round of financing in Q4’16 to Careem Networks, a newly minted ride-sharing unicorn, and competitor to Uber in the Middle East and North Africa (MENA) region. The Public Investment Fund of Saudi Arabia financed a $3.5B private equity round to Uber in Q2’16, one of the largest investments ever in a privately held startup. Additionally, the Kingdom Holding Company participated in a Series F and other transactions to Lyft, in deals totaling more than $497M.

Taking ride-sharing a level higher, the Saudi Royal Family has participated in multiple financing rounds, totaling $155 million in aggregate to the unicorn JetSmarter, a worldwide mobile marketplace for private jets.

For most Saudi investors, however, going local is the theme of the day. Based on the intrinsic demands as presented in Saudi Vision 2030, Saudi investors are focusing efforts on local tech investments in the MENA region. Mobily Ventures, the venture arm of Etihad Etisalat (dba Mobily), invested in 4 MENA-based companies between 2014 and 2015, including United Arab Emirates-based mobile delivery app Fetchr, and Saudi Arabia-based online food ordering platform Hellofood. All 30 deals in which seed investor Flat6Labs Jeddah participated, pertain to companies based in Saudi Arabia. Flat6Labs Jeddah has been the most active investor between 2012 –2017.

When digging further into the overall startup, PE or investment strategies in the Kingdom related to High Tech or Fintech, the situation is still blurry and challenging. Analysts agree that e-commerce, media, healthcare, cleantech, and edtech are already offering larger opportunities for startups. At present, these startups are being supported by a growing support environment, made up of funds, co-working spaces, incubators, and accelerators. These have nearly tripled in the Kingdom from 13 to 36 between 2011 and 2015. Wamda Research Lab (WRL) stated that these entities include funding organizations (30%), events (17%), business support (15%), incubators and accelerators (14%), university/technology parks (12%), and co-working/fab labs (12%). Main startup cities in the Kingdom, as WRL indicated, are at present Riyadh (54%), Jeddah (29%), Eastern province (10%) and Makkah (8%). While Riyadh and Jeddah are focusing on entrepreneurship support networks, Makkah and the Eastern province are more focused on creating specialized centers within universities to support entrepreneurship. The WRL report indicates that most entrepreneurship support programs, including Kafalah, Riyadh Taqnia Capital, SMEA, STC Ventures and Wa’ed, are run by the government or big corporations.

Overall, the main driver of the current startup boom is still government spending. Saudi Arabia is currently targeting investments of $109 billion on solar energy infrastructure to increase its share from renewables to one-third. The latter has already led to a business environment that offers startups multiple opportunities, including smart home energy management, industrial internet (to monitor and analyze energy consumption data), and water desalination.

Still, challenges are there, as regulations and bureaucracy are still part of the problem. The latter factors however will be tackled by the government, local organizations and others, as they will need to be removed to open up opportunities.

Another major challenge, even in the Kingdom with a lot of high value persons or companies, financing is still an issue. Latest reports show that most funds in Saudi Arabia offer between $0.1 million and $2 million in the seed stage for around 10% to 20% equity stake but not much is available for growth needs. One example of this approach is Saudi Aramco Energy Ventures (SAEV), which offers $5-10 million over two to three rounds of financing, leads the pack in terms of the funding size.

A possible solution or support for startups and high-tech/fintech companies in the next months and years could come from the influx of private equity companies. As Husam Kutaifan, head investment banking at Emirates Investment Bank (EIB), stated that due to the implementation of Saudi’s Vision 2030 and the National Transformation Plan (NTP) the attractiveness of entering the Saudi market has increased substantially. Main focus will be, in addition to the high net value opportunities in the proposed IPOs, sectors such as high-tech and fintech. Value is also seen in projects related to health care, education and food. Kutaifan is especially optimistic about technology opportunities, where throughout the whole Middle East valuations have continued to rise. The interest for scarce assets, especially in e-commerce, is still increasing, leaving more room for new comers to take part. Prime examples are the deal by US e-commerce giant Amazon to pay $580 million for the region’s Souq.com, after an auction drove the price up. Then, Mohamed Alabbar’s online retail platform Noon bought a controlling stake in rival Namshi in a deal that valued it at around $300 million. The coming years, technology investments and startups will be making headlines. Kutaifan thinks there is still potential appetite for the sector, especially in Saudi Arabia. “The big funds are still going after them. We hear the Public Investment Fund of Saudi Arabia has earmarked billions to invest in Saudi-focused tech sectors. A lot of these are still in the startup, high-growth phase. There has been lots of talk about fintech (financial technology), but so far we have not seen something of real size in the region. Most of the big action has been in the e-commerce sectors,” he said.

A major support for current and future investment projects in Saudi Arabia is also expected to come from the upgrade to the international market status of the Kingdom. If Saudi Arabia is fully included into the MSCI Emerging Market Index, liquidity in the market will increase and international and local interest in new companies and startups, with a focus on technology, will be there.

When looking at Fintech, the picture is very rosy. Fintech innovation is currently seen as a driver for a Islamic Finance. The Dubai Islamic Economy Development Centre (DIEDC) already is supporting fully fintech innovation. The latter is partly based on reports, such as from Accenture, that worldwide around $18.9 billion is being invested in emerging financial technology companies, an increase of $2.3 billion in comparison to 2016. As a growing amount of analysts agrees, the latter makes fintech the engine of the future global economy and a key element in ensuring its sustainability. Supported by the WB drive to have every adult around 2020 having a bank account, the market will increase substantially.

The same is being shown by the State of Fintech report by Wamda Research Lab and Payfort. The latter reports that the number of startups in financial technology in the MENA region reached 105 in 2015, compared to only 46 in 2013, and is expected to climb to 250 by 2020. Until now the most successful country is the UAE, showing a four-year compound annual growth rate (CAGR) of almost 60 per cent. Home to half of the fintech companies that operate in the region, the country provides a well-structured, sophisticated legislative environment in addition to initiatives accelerating the development of the national economy. However, Saudi Arabia is the upcoming startup hub, supported by the government’s drive to diversify the economy and looking to monetize and invest its IPO revenues and oil wealth internally. For all GCC countries, the combination of Fintech and Islamic Finance is of great interest. Combining safe investment and social responsibility with innovation and effective utilization of available tools, Islamic finance can adopt any contemporary financial instruments and put them to good use. Crucial to the growth of the Islamic economy, the competitiveness of Islamic financial institutions will significantly grow from their cooperation with the fintech sector. Riyadh has understood this, looking at the example of Dubai and partly Bahrain.

According to the KPMG Pulse of Fintech report, the growth potential for Fintech in the Middle East is still enormous. Until now, global fintech investments has been focused on US and Europe, followed by Asia. MENA, according to KPMG only has received around 1% of global fintech funding. However, the region is currently experiencing the most explosive growth, according to research conducted by Boston Consulting Group.

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In addition to these deals, TPay, MENA’s first and largest Direct Carrier Billing platform, acquired its competitor and the second largest Direct Carrier Billing service provider in Egypt, DCBEgypt, earlier this month for an undisclosed amount. Founded in 2014, TPay is among the first Fintech companies in the region to revolutionize digital payments and has processed over 2.6 billion transactions since being launched. With the acquisition of DCBEgypt, TPay will be able to offer clients a greater regional experience.

For Saudi Arabia, and its neighbors, investments in fintech startups, especially at the seed level or during early rounds of capital-raising is crucial and highly valuable. The approach currently taken by Saudi Arabia to heavily support and fund fintech in the country is a prime asset. Not only the Saudi government however should be assisting, institutional investors and family businesses should also be addressed (and educated) to lend support and resources to regional fintech startups. Even that Saudi Arabia for its part has declared that fintech will be an integral part of its Vision 2030 plan, more work needs to be done. The latter will also need to include attracting international startups to come to the Kingdom, address local challenges and opportunities, while accessing the financial markets in the country at the same time.

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