Arab News, Sunday, Feb 19, 2023 | Rajab 28, 1444
Saudi Arabia’s venture capital funding nears $1 billion mark
Saudi Arabia:
Driven by Saudi Arabia’s unprecedented growth in
its startup ecosystem, the Kingdom’s venture capital funding increased by 72
percent last year compared to 2021 with investments reaching $987 million across
144 deals, according to MAGNiTT.
However, the leading startup and venture capital
data firm cautioned that, as global economic uncer- tainty and investor fatigue
rises, the venture market might be most vulnerable to taking a hit.
In an interview with Arab
News, Philip Bahoshy, founder of MAGNiTT, said he believed that venture
funding will begin to see a decrease in growth rate this year but Saudi
companies will compensate via mergers and acquisitions.
Rise in M&A activities
“We will continue to see a record number of M&A
activities,” he said. “Companies that are unable to raise funds will potentially
merge and well-funded companies, specifically in Saudi Arabia, will look for
inorganic growth by acquiring companies in other geographies.”
M&A activity is also driven by exits and initial
public offerings as Bahoshy stated Saudi companies will start to go public in
the local market more than in other Middle Eastern countries.
“Well-funded companies in Saudi Arabia that are
supported through government initiative funds are likely to become acquirers of
startups, than being acquired,” he added.
In 2022, the Middle East and North Africa region
saw 17 M&A compared to 41 in 2021 while Saudi Arabia alone witnessed 10 M&A
transactions last year compared to five the year before, a 100-percent increase.
“I anticipate a country like Saudi Arabia that has very specific government
initiatives, support for startups, and fund of funds will continue to deploy
capital and grow year on year,” Bahoshy reiterated.
Bahoshy went on to say that international
companies and corporates will also start to make acquisition moves in the region
because of low valuations.
Bahoshy added that other geographies in the MENA
region will witness a slight decline in funding activity driven by two main
reasons: the lack of liquidity and geopolitical challenges.
“When you compare 2022 to 2021, you see a slowdown
in that aggres- sive growth, driven by parallels to global economics where
increased inflation has driven to increase interest rates, a slowdown in the
public markets transpiring into lower valuations, and a slowdown of liquidity in
the private markets, not completely dissimilar to what’s been seen at a global
level,” he further explained.
Growth in Saudi venture markets
Saudi Arabia managed to grow when leading venture
markets in the region witnessed a downfall in investments in 2022 like the
UAE’s
20 percent year-on-year decrease in funding.
Bahoshy explained that the Saudi Arabia’s rise in
these tough times was mostly powered by govern- ment focus on startups and the
support provided by funds and companies which will also decide the Kingdom’s
continued growth.
“It is very much driven by how many companies will
be raising $50 million, $100 million, $150 million and being able to raise that
level of capital in this challenging economic environment that we’ll see that
growth year on year,” he added.
Industry prospects
In 2022, the financial technology sector, also
known as fintech, was the industry of choice for investors attracting almost 25
percent of the total startup investments in the Kingdom. Bahoshy expects fintech
to continue to dominate the funding space in Saudi Arabia with the launch of
financial develop- ment initiatives and the activation of open banking.
“As a standout industry in 2023, I anticipate it
will remain financial services, however, what you do tend to see is in this type
of environment, the software as a service enterprise solutions industry remains
extremely appealing for investors,” he stated.
Bahoshy added that sustain- ability, healthcare
and educa- tion will be growing sectors in the upcoming year as these sectors
are ripe for disruption and development.
Last year, edtech, short for educational
technology, saw a 2,000-percent increase in funding year-on-year while
information
technology solutions witnessed an 819-percent
increase, according to MAGNiTT’s 2022 report.
Upcoming trends
As the region opens up to the world, more
international investors are putting their cash in companies and startups that
are making the ecosystem more attractive.
Last year, international investors made almost 44
percent of all investments in the Kingdom with Emirati investors making 16
percent and US-based funds amounting to 11 percent.
Bahoshy anticipates the inter- national investor
trend to grow even further as more countries will direct their capital into
Saudi Arabia and the region.
“I expect there to be a slowdown from
international investment in our region from the US and potentially Europe,”
Bahoshy stated. “However, I predict regions like Southeast Asia, Japan, China,
now that the COVID restrictions have been removed and travel has been eased, to
direct their capital into Saudi Arabia and the region given there is a natural
affinity for our region.”
He added that as the region is rich with sovereign
wealth funds more capital will be deployed from the Middle East to global and
local entities.
Bahoshy believes that 2023 will be a tough year
for the startup ecosystem given global economic uncertainties but added that the
market will start to pick up pace by the first quarter of next year.
“Effectively for the next six to nine months, I
think that it’ll be a real slowdown in investment activity, which will continue
into the end of the year, and that the pickup will only happen in the first
quarter of 2024,” he said.
Moreover, the slowdown in investment activity is
set to hit late stage and early stage ventures but it will not have much of an
impact on series A stage startups.
“The sweet spot that we antici- pate is in the
series A or late seed stage, that’s a ticket size between $1 million and $5
million of investment because it’s not super early, where it’s risky. Companies
are likely to have shown product market fit and have had to focus on
monetization, if not positive unit economics,” Bahoshy explained.