Venture capital (VC) is a form of private equity that funds startups and early-stage emerging companies with little to no operating history but significant potential for growth. It can be provided at different stages of their evolution, although it often involves early and seed round funding. Investments are usually made by venture capital firms and may take the form of debt or equity. The venture capital industry in Saudi Arabia has grown significantly in recent years thanks to the country’s commitment to economic reform and financial infrastructure development. With a growing economy and a large pool of untapped investment opportunities, the prospects for direct investment in Saudi Arabia are very attractive.
The purpose of this article is to provide an in-depth analysis of the venture capital situation in Saudi Arabia in 2023. The article will examine growth factors, sectors for investment, and problems faced by venture capital firms in the country. Moreover, it will also provide strategies for success in the Saudi Arabian venture capital industry and provide insights and guidance for investors looking to take advantage of opportunities in the region.
The Venture Capital Landscape in Saudi Arabia
Overview of Venture Capital in the country:
Venture capital in Saudi Arabia has come a long way over the past decade, and the industry has undergone significant growth and development, which has led Saudi Arabia to aggregate $987M in funding from 144 deals, recording a 72% increase compared to the year 2021 with a success percentage of 97% of closing deals. This is all due to expanding investment opportunities, a favorable regulatory environment, and the presence of well-established venture capital firms that have fueled the industry\’s growth.
The Kingdom registered three mega deals, $170 million Series C by Foodics, $100 million Series B by
FinTech Tamara, and $100 million Series C by TruKKer, totaling $987 million over 144 agreements, close to the $1 billion mark.
The market is expected to continue to grow in the coming years under the influence of several factors, including economic reforms, an improving business environment, and a growing middle class.
Drivers of Venture Capital Growth in Saudi Arabia in 2023
Economic Reforms: The Saudi government has implemented a series of economic reforms aimed at diversifying the economy, reducing its dependence on oil, and creating new sources of growth. These reforms have had a significant impact on the venture capital industry, creating new investment opportunities and improving the overall business environment.
Improving Business Environment: In recent years, the business environment in Saudi Arabia has improved significantly and the government has taken steps to simplify the process of doing business, increase transparency and reduce red tape. This has made it easier for venture capital firms to invest in the country, boosting their confidence and accelerating the growth of the industry.
Growing Middle Class: The growing middle class in Saudi Arabia presents significant opportunities for venture capital firms as this group increasingly seeks new investment opportunities to increase their wealth. After all, the middle class is a growing segment of the population and is expected to continue to drive demand for venture capital investment in the country.
Access to Capital: The development of financial infrastructure in Saudi Arabia, including the stock exchange, has increased access to capital for venture capital firms. This has enabled them to make larger investments, expand their presence in the region, and take advantage of a growing number of investment opportunities.
Sectors for Investment in Saudi Arabia in 2023
Technology: Saudi Arabia’s tech sector is poised for significant growth in the coming years thanks to the country’s commitment to digital transformation and the development of its technology infrastructure. After that, venture capital firms looking to invest in the technology sector can take advantage of the growing demand for digital solutions in areas such as e-commerce, financial technology, and cybersecurity.
Healthcare: Saudi Arabia’s healthcare sector is also expected to see significant growth in 2023, driven by the country’s growing population and growing demand for quality healthcare services. Venture capital firms can invest in healthcare providers, pharmaceutical companies, and medical technology start-ups, tapping into the sector’s huge growth potential.
Tourism: The tourism sector in Saudi Arabia is expected to grow rapidly in the coming years, thanks to the country’s efforts to attract more visitors and promote its rich cultural heritage. Moreover, venture capital firms can invest in tourism-related businesses such as hotels, travel agencies, and tour operators to capitalize on the growing demand for tourism services in the country.
2022 – Saudi Arabia Industry Comparison | By Funding
Similar to its sister MENA markets, FinTech increased capital by 167% in 2022, moving up two ranks to become the most funded industry in Saudi Arabia. With $239 million raised, FinTech overtook EdTech and E-commerce, the top two industries in 2021, to take the top spot in 2022.
The $170M Series C financing of F&B firm Foodics helped it stay in the top three.
2022 – Saudi Arabia Industry Comparison | By Deals
By agreements done over 2022, FinTech took the top spot, accounting for 19% of all transactions seen in Saudi Arabia.
As a result of the Saudi Central Bank and Capital Market Authority’s initiatives to advance financial technology, 28 investments were made in FinTech firms in 2022.
Both Enterprise Software and EdTech have seen tremendous growth, with EdTech seeing twice as many deals in 2022 as it did in 2021.
2022 – MENA Country Comparison | By Funding
Saudi Arabia maintained its ranking as the Middle East and North Africa’s second-most-funded region with 31% of all the money used in the MENA. Also, it was the third-most active market in the MENA accounting for 23% of all transactions.
2022 – Saudi Arabia VC Funding | By Stage
84% of the 144 deals that Saudi Arabia closed in 2022 were in the early-stage (Pre-SEED to Pre-Series A).
Similar to its comparable MENA countries Egypt (88%), the UAE (79%) and Saudi Arabia (84%), early-stage agreements secured the majority of deals in Saudi Arabia.
Series B experienced a 3PP gain driven by rounds reported by companies including Foodics and Tamara, while Series A deals’ share fell to 8%.
Challenges in the Venture Capital Industry in Saudi Arabia in 2023
Regulatory Environment: Despite the progress made in recent years, the regulatory framework for direct investment in Saudi Arabia can still be challenging. The rules are complex and can change frequently, making it difficult for venture capital firms to navigate the regulatory environment.
Lack of Deal Flow: Finding suitable investment opportunities can also be a challenge for venture capital firms in Saudi Arabia as the flow of transactions in the market is limited. Moreover, this can limit the ability of venture capital firms to grow their portfolios and make it difficult for their investors to make a profit.
Competition: Competition in venture capital in Saudi Arabia is high, with more firms entering the market looking to take advantage of investment opportunities. This can make it harder for venture capital firms to get the best deals and could increase the pressure to achieve high returns.
Strategies for Success in the Venture Capital Industry in Saudi Arabia in 2023
Building Strong Relationships with Local Partners: Building strong relationships with local partners such as family offices and local investors can be the key to success in venture capital investment in Saudi Arabia. These relationships can provide venture capital firms with valuable insights into the local market, helping them identify investment opportunities and navigate the regulatory framework.
Understanding the Regulatory Environment: After all, the framework for venture capital in Saudi Arabia is critical to success in the industry. venture capital investment firms should look for professional advisors with extensive experience in the region and be up to date with the latest regulations to ensure compliance.
Identifying Niche Sectors for Investment: Identifying niche sectors for investment, such as technology and healthcare, could be a successful strategy for venture capital firms in Saudi Arabia. By focusing on areas with high growth potential, venture capital firms can generate high returns for their investors and create a competitive advantage in the marketplace.
Staying Ahead of Competitors: Staying ahead of the competition by constantly monitoring the market, keeping abreast of the latest investment trends, and actively seeking out new investment opportunities can be the key to success in the Saudi Arabian venture capital industry. Venture capital firms that are flexible, innovative, and proactive will be well-positioned to succeed in this dynamic and competitive market.
According to reports number of exists recorded doubled by Saudi Arabia in 2022 compared to the year before. Saudi Arabia maintained its third-place position in terms of M&A activity with 10 closures, accounting for 14% of all MENA exits. Jahez reported two acquisitions, while many cross-border banking transactions UAE-based businesses purchasing startups in the KSA were also reported. Venture capital in Saudi Arabia is expected to continue to grow in 2023, driven by several factors including economic reforms, an improving business environment, and a growing middle class. With a large pool of untapped investment opportunities, the prospects for direct investment in Saudi Arabia are very attractive.
Moreover, the prospects for venture capital investment in Saudi Arabia are very positive and the industry is expected to continue to grow and develop in the coming years. With a favorable regulatory environment, a growing economy, and growing demand for digital solutions in key sectors, venture capital firms have the potential to generate significant returns for their investors. To succeed in the venture capital industry in Saudi Arabia, venture capital firms must focus on building strong relationships with local partners, understanding the regulatory framework, identifying niche sectors for investment, and staying ahead of the competition. Above all, the venture capital investment industry in Saudi Arabia continues to grow and develop, it will provide investors with numerous opportunities to capitalize on the country’s strong economic growth and its growing middle class.