Saudi venture capital funds to tap into FinTech, e-commerce, health segments in 2021

Venture capital (VC) activity grew significantly in Saudi Arabia in recent years, with start-ups recording a 55% year-on-year (YoY) jump in funding in 2020, according to a recent report by MAGNiTT.

In the wake of COVID-19, a few sectors in the Kingdom emerged as frontrunners for VC funding as the pandemic rapidly accelerated the adoption of technology and fuelled the rising entrepreneurship ecosystems.

“Start-ups in Saudi Arabia saw an increased influx of capital towards industries that witnessed a surge in demand during the pandemic, like financial technology (FinTech) and e-commerce,” Philip Bahoshy, CEO of MAGNiTT, told Argaam.

Fund of Funds Co. (Jada), a part of the Public Investment Fund (PIF), invested SAR 1 billion till date in 14 private equity and VC funds in Saudi Arabia. CEO Adel Al Ateeq pointed out that with more VC funds and angel investor groups entering the market, the Kingdom is seeing a dramatic increase in the quality and quantity in the deal flow of start-ups.

“Driving this shift are the sectors, which are able to leverage on upscaling through emerging fourth industrial revolution technologies by design, including those in FinTech, education, healthcare, gaming, logistics and e-commerce,” Al Ateeq said.

He further asserted that the start-ups in the above-mentioned sectors saw a spectacular 2020 because of the years of accelerated development that were condensed into one calendar year. “We expect to see much of the same in 2021,” the CEO noted.

Read: Jada invests SAR 1 bln in 14 private equity, venture capital funds: CEO

Wassim Basrawi, managing director (MD) of Wa'ed, the entrepreneurship arm of Saudi Aramco, expects greater funding in businesses that contribute to Saudi Arabia’s digital transformation, regardless of the business sector.

“We expect to see continued strong interest in 2021 in the health tech, Fintech, and e-commerce sectors. COVID-19 has not affected as many start-ups in these sectors because they typically offer remote solutions that minimize or eliminate physical contact. We expect this to outlast the virus,” Basrawi said.

The Dhahran-based venture tripled the amount of money it loaned to Saudi-based start-ups in 2020 and injected more money into new businesses through VC investments in order to support local entrepreneurs.

COVID-19 challenges

Across the Middle East and Africa (MENA) region, investor appetite shifted towards larger investments in later-stage start-ups, as well as industries that saw increased demand as a result of COVID-19 and social distancing measures.

Hala Ventures founding managing partner, Ali Abussaud, said that VCs have become more selective than before in terms of team experience, business model, and start-ups’ cash-flow.

“Business models that were proven weak during the pandemic will not be a target market for VCs anymore. Most start-ups that failed to survive the pandemic will not be able to raise funds easily with an exception for strong founder/s who were able to pivot into a new business model and make a positive turnaround,” he added.

Read: Saudi Aramco’s Wa’ed triples loans to local start-ups in 2020

The pandemic affected a shift in mindset, as the market saw and experienced the importance of digital competencies and realized how integral digitalization is for businesses in the Kingdom to diversify the economy, Al Ateeq highlighted.

“At Jada, we are mindful of sustaining growth, especially for the small and medium enterprises (SMEs) who will form the backbone of the economy in the years ahead. In a post-pandemic world, planning for long-term, sustained growth, above major short-term spikes, will be key to mitigating potential market volatility,” he added.

Future outlook

Despite COVID-19, 2020 was a record year for the total number of VC funds and angel investor groups investing in Saudi-based start-ups. Basrawi remains bullish on the Saudi VC market in 2021, Wa’ed is much more driven now to invest in start-ups with proven impact through disruptive business models or social benefits.

“We now consider ‘business resilience’ to be an important criterion for investing in new start-ups. The pandemic has shown us that we live in an age of heightened risk. We must target businesses that are innately flexible and can handle whatever life throws at them,” the MD noted.

Abussaud applauded the Saudi government’s various initiatives to support the SMEs and confirmed that entrepreneurship is on the rise in the Kingdom. “We are yet to witness more start-ups launching and establishing operating branches in Saudi Arabia in 2021,” he concluded.

Write to Paromita Dey at paromita.d@argaam.com