In line with its economic diversification plans, Saudi Arabia has been busy creating a start-up friendly ecosystem and entrepreneurs are noticing and reacting, according to Ibrahim Siddiki, partner at law-firm Bracewell LLP.
In the first half of 2021, the size of funding in Saudi start-ups was at $168 million, equivalent to 94 percent of the entire money that was spent in 2020, placing the kingdom in second place in the region’s venture capital market, said Siddiki, quoting the latest Venture Capital Investment Report by MAGNiTT.
“Over the last three years, the Saudi venture capital (VC) and start-up scene has really kicked off with a boom. There are a lot of entities in Saudi Arabia nowadays that are looking to deploy funding into start-ups,” said Siddiki, giving the example of Saudi Telecom Company’s STV fund, a $500m technology investment fund which took part in 12 funding rounds over the past nine months, representing almost 30 percent of all of the funding that was deployed into Saudi start-ups.
One of the main reasons for this start-up boom is the kingdom’s recent reforms and initiatives towards a more business-friendly environment.
“Every year, the Saudi government is making it easier and easier to establish businesses, to run businesses, and generally making the ecosystem for the Saudi start-ups an easier place to operate,” said Siddiki.
“Prior to this period, there were bureaucratic hurdles. What’s helped now are the developments in the regulation landscape with the Saudi Arabian Investment Authority issuing more licenses than ever before. SMEs are setting up businesses in Saudi Arabia because the country is promoting entrepreneurship, but also because they are being helped by foreign investors coming in and setting up businesses – the whole ecosystem is changing,” he continued.
Both private and government managed VCs and funds see the opportunity in a thriving start-up ecosystem, said Siddiki.
Ibrahim Siddiki, partner at law-firm Bracewell LLP.
“The appetite is from both the private and public VCs. Obviously the government wants to stimulate the start-up market, but the private investors are also banking on start-ups, because they see an opportunity for capital growth of their money. They know that these start-ups are based in Saudi Arabia, the economy has 30 million people and they’ve seen what the likes of, for example, Careem has done, so they also want to back them,” explained.
What’s holding the start-up ecosystem from growing even further is that company-set-up regulations in Saudi Arabia still don’t allow for the allocation of different classes of shares, essentially making any investor a shareholder in the company, with rights to participate in decision making.
“Until now, in Saudi Arabia, there is no set-up for different classes of shares. As an investor who wants to invest in a Saudi company, I would actually own a stake of the company and become a shareholder. When you invest in Europe or the UAE, you get issued shares with different classes such as non-voting shares so you are not actually involved in the company decisions or direction,” explained Siddiki.
“Start-ups will definitely benefit from changes to the regulation, which should include allowing for different classes of shares. If that happened, it would be a complete game changer,” he added.
Another factor which would support-growth is promoting entrepreneurship among Saudis under the age of 30, who constitute close to 70 percent of the kingdom’s population. “You can’t have a start-up unless you have someone behind it who has the entrepreneurial spirit,” said Siddiki.
SMEs are setting up businesses in Saudi Arabia because the country is promoting entrepreneurship.
“This will happen with time, once entrepreneurs start seeing a few of these start-ups go through the cycle and succeed, you will see others coming into the market,” he continued.
Siddiki added: “The opportunity is now because a lot of sectors have opened up. For example, five years ago, the tourism sector was not available, but today it can host a variety of start-ups. Fintech is the same thing, in that it did not exist five years ago, but 25 percent of the funding in the first half of this year has been in fintech. If you combine all these things, the future is definitely bright. It’s just a matter of time.”
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