Specialized SME private equity and venture capital investments in Saudi Arabia are gaining momentum. A few incubators have announced sponsorship of some technology startups but none of the early and late stage ventures have yet been announced as successfully completed transactions. 

The Saudi market is the largest GCC economy with a very large number of SMEs, a majority of which are focused on retail and services. There are no clear statistics for technology ventures.

Recent research estimates that SMEs comprise more than 90% of established companies, but if small shops and company branches are excluded, the picture looks different for professionals working for specialized SME PE and VC funds. The statistics show there are 374,178 micro SMEs, 91,352 small companies, 6,373 medium companies, and 1,820 large companies. If micro SMEs and large companies are excluded, SMEs in Saudi Arabia worth consideration by investors total 97,725, or 20.63% of all companies.

If we narrow our focus on the technology ventures market, we will find that the fundamentals show great potential. For any startup in this sector, the ICT indicators must show high penetration levels with strong growth potential, which is the case with Saudi Arabia, as it has the largest mobile market in the region. Active subscriptions stand at 54.3 million, fixed broadband subscribers at 2.6 million (36% penetration rate), mobile broadband subscribers at 11.9 million (41.4% penetration rate), and internet users at 14.9 million (49.1% penetration rate). Also, the kingdom has the highest proportion of mobile phone users in the world (180 mobile phones for every 100 residents).

Another important indicator for the development of the Saudi VC sector is the social network usage, where recent statistics for 2011 from CITC showed that it has doubled since 2010. The number of users on Twitter and Facebook now is very large across all age and social groups. The estimated number of users of Facebook is 4.8 million, or 16.8% of the population and 35.3% of internet users. Saudi stands at the 30^th position globally in terms of the number of users of social sites, and is ranked second in the Arab world after Egypt.

Also, 37% of the social media users in Saudi are between the ages of 25 and 34 years while 68% are male users. These figures clearly show that the market and population has a well-developed e-readiness and e-awareness that would enable the adoption of internet-based services.

If we look into some of the internet-based service businesses, we will realize that there is great potential for this sector. For example, the Saudi retail sector is estimated at USD 76 billion (of which B2C e-commerce accounts for only 0.7%). The Saudi tourism sector is estimated at USD 5.8 billion with off-line local firms capturing only 7%, or USD 0.4 billion. The remaining 93% is captured by international online travel agencies and direct airline service providers.

Out of 100-plus ventures and technology startups I have been interacting with lately, very early stage (seed) ventures are the dominant ones in the Saudi VC landscape, where seed represent 62%, early stage 33%, and late stage 5%. These technology ventures specialize in different services: content (22%), e-commerce (20%), social networking (16%), mobile services and apps (14%), online directories and classified ads (7%), and others (21%).

A common thing among late stage ventures is a strong management team with good experience. The success of a venture relies on the quality of the management team as it is the most important criteria for selecting a VC target in Saudi.

In order for the technology VC sector to develop, policy makers and government initiatives should design their funding programs toward Saudi professionals with excellent work experience and solid academic qualifications in order for these high calibers to build bigger and much more successful ventures which in return will solve the unemployment issue the Saudi government is currently focusing on. What is currently in place is the opposite as a proof of unemployment is a prerequisite for government sponsored SME funding programs to be awarded and this is resulting in sponsoring poor traditional startups (e.g. retail, manufacturing) which are in return heavily dependent on foreign labor and do not solve the unemployment problem or develop an innovation culture in Saudi Arabia.

Aiman Al-Atiqi is a partner with Iris Capital MENA, Saudi Telecom Company’s venture fund manager. Previously, he worked as an associate director for Jadwa Investment, a Riyadh-based investment bank and private equity firm as part of the private equity team.

Reference: http://stcventures.com/technology-startups-and-saudi-venture-capital-landscape/