|19 December, 2018

Saudi poised for tech entrepreneurship growth despite funding shortfall - report

Venture capital sector is still insufficiently represented in the kingdom, according to Wamda Capital partner

Image used for illustrative purpose. Elevated view of modern city center, Riyadh, Saudi Arabia

Image used for illustrative purpose. Elevated view of modern city center, Riyadh, Saudi Arabia

Getty Images

As Saudi Arabia witnesses an increase in the number of technology start-ups, the entrepreneurship ecosystem offers the potential to boost the kingdom’s economy, despite financing obstacles encountered by small and medium enterprises (SMEs), according to a recent industry report.

The report, published by Wamda and commissioned by Google earlier this month, states that Saudi Arabia is an attractive market for start-ups and corporations alike, although the number of venture capital firms is currently insufficient to meet the equity financing needs of tech start-ups.

“With Saudi Arabia’s ample resources and inherent market dynamics, the burgeoning tech entrepreneurship ecosystem is poised to become a regional powerhouse,” Walid Faza, partner and investment principal at Wamda Capital, told Zawya by email.

“The Saudi market is the largest in the GCC in terms of population and consumer spend. Saudis are avid social media users - they are regarded as the key target market for digital content providers and online advertisers in the region,” he added.

According to a YouTube report in February this year, Saudi Arabia ranks among the highest countries in the world in terms of the amount of hours spent watching YouTube per capita.

Wamda’s Faza also notes that 95 percent of Saudis consume entertainment from neighbouring Arab states, and only 40 percent of the content viewed is generated in Saudi Arabia.

And while online sales in Saudi Arabia were estimated at $8.7 billion in 2017, this figure is projected to grow to nearer $13.9 billion by 2021, according to data from research firm Fitch Solutions (formerly BMI).

“Saudi Arabia’s young population, increasing broadband and smartphone penetration rates, and the government’s growing focus on e-commerce are key factors that are driving this shift toward online buying in the country,” a report by the Saudi Communications and Information Technology Commission (CITC) said. 

The authority also noted that the typical shopper in Saudi Arabia spends an average of 4,000 riyals per annum online, driven by favourable internet offers, home delivery convenience and a greater range of products.

Wamda's report, however, notes that there’s very little angel funding available, as high net-worth individuals aren’t really investing, and the big family-owned firms are just beginning to get acquainted with tech entrepreneurship. It also says bank funding to SMEs “is one of the lowest in the region”.

A report published this month by consultancy Strategy& and Endeavor — an entrepreneur mentorship provider based in New York - echoed similar views on the Saudi entrepreneurship scene, noting that the lack of funding options in Saudi Arabia hinders the growth of SMEs in the kingdom, especially as it has an underdeveloped private equity and venture capital market when compared to other countries in the region. The report also noted that banks remain cautious of lending to businesses with potential to build significant scale.

Furthermore, Wamda’s report highlights a barrier in Saudi Arabia’s state education system, noting that “it does not encourage critical and innovative thinking… and the value of hard work and academic accomplishment, necessary for entrepreneurial success, are not yet emphasised in schools and universities”.

However, it states that there have been notable schemes designed to grant access to world-class higher education for Saudis, with the kingdom offering one of the most generous overseas scholarship schemes since 2005. It also highlights that Saudi Arabia has the fourth-largest scholarship student body studying abroad, after China, India, and South Korea.

“There has been a surge of initiatives and organisations that have recently started to support tech entrepreneurs across Saudi Arabia. From education to mentorship, networking events, enabling new channels through e-commerce and m-commerce, to new corporate funds and venture capital funding,” Wamda’s Faza told Zawya. “Many more support organizations will be required to support the entrepreneurship culture across the country,” he added.

Currently, only 5 percent of tech start-ups in Saudi Arabia are founded by women, compared to 25 percent in the Levant region, according to Wamda’s report.

“Saudi Arabia must continue to remove obstacles that hinder the setup, funding and scaling requirements for start-ups, everything from company registration to labour laws, and continue to support entrepreneurs throughout their growth and development. They should focus more on early critical and creative thinking to empower women to start companies, overcome the fear of failure and to continue fostering a culture that supports innovation,” Faza said.

Saudi Arabia is the largest economy in the MENA region, with a gross domestic product (GDP) of $646 billion, but SMEs are only responsible for about 20 percent of this (compared to 60 percent in the UAE, according to a report published in October by Allied Investment Partners).

Yet there is an overwhelming sense of optimism from entrepreneurs and stakeholders within the entrepreneurship ecosystem in Saudi Arabia, from government initiatives and regulators to educational institutions and investors, according to Faza.

“There is incredible potential for growth and there is strong political commitment to develop a solid science, technology and innovation base that will spur new entrants into the private sector in the Saudi economy,” Faza said.

Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF) which holds more than $250 billion in assets, recently announced plans to invest $45 billion in the technology fund led by SoftBank Group.

Faza said there have been a range of initiatives and organisations that have been launched recently to support tech entrepreneurs in Saudi Arabia, covering everything from education to mentorship, networking and, crucially, funding.

Some of the efforts already established in Saudi Arabia that will help the ecosystem, according to Faza, have been the creation of the National Science, Technology and Innovation Plan; regulatory reforms such as the new entrepreneurial visa and the establishment of the SME support body Monshaat; an increase in the number of incubators, accelerators and co-working spaces; and an improvement in linkages with international start-up groups.

He added that some regulatory roadblocks remain, though, stating that commercial codes and digital policies should be harmonised and meet global best practices; approval procedures between different government bodies should be synchronised; and new decrees and policies aimed at building momentum in the ecosystem should be expedited quickly.

He also said more effort should be made to streamline public support programmes, but said efforts were already under way in this space through the creation of Monshaat, and a new platform allowing start-ups to access all required government services known as Miras.

(Reporting by Nada Al Rifai; Editing by Michael Fahy)

(nada.rifai@refinitiv.com)

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