State efforts signal encouragement for private initiatives in Saudi Arabia

Given the size and breadth of the Saudi Arabian economy it is at first glance surprising that the government continues to play the leading role in supporting local start-ups and entrepreneurs. Where other countries in MENA, such as Egypt and Jordan, have seen the private sector address the segment through angel and seed investment operations, initiatives of this kind have only recently emerged in the Kingdom.

This is partly a result of Saudi Arabia’s economic strengths in other areas: the easy returns arising from the region’s largest stock market and a real estate sector where demand consistently outstrips supply are frequently adduced as the principal constraints on more creative private sector investment. However, recent years have seen a number of interesting developments in the start-up and entrepreneurial arena, and the private sector is starting to show a greater interest in the potential returns within the segment.

The Beginnings

The genesis of angel investment in Saudi Arabia can be traced back to a little more than half a decade ago, when a group of young, Riyadhbased entrepreneurs began to meet informally in private residences to discuss investment options. With cash to invest but faced with limited options, they recognised that start-ups were not being sufficiently addressed by the financial community: conventional lending was unavailable to most due to their lack of financial track records, while government-backed lending programmes were inappropriate in that the short tenors, often of just two or three years, were not sufficient to see a start-up through its initial growth phase.

As a response to these challenges the group of investors decided to deploy their capital in areas historically underserved by banks and official initiatives, and to that end began to invite start-ups and early stage firms to pitch to them. The development of this group, which for some time had neither a name nor a corporate structure, directly addressed the significant funding gap that had for years left the Kingdom’s start-ups and entrepreneurs facing a financial cul-de-sac.

Formalisation

By 2011, this informal group of investors had coalesced into Oqal, an organisation which currently has four branches across the Kingdom and is headed by CEO Fares Al Rashed. Despite its rapid evolution the original ethos of Oqal – a combination of the Arabic words for “mind” and “money” – remains largely the same: through its regular meetings, investors are connected with young entrepreneurs with ideas and projects, with viable opportunities receiving enough funding for them to implement their business plans and later persuade banks to extend credit to them. By 2015, Oqal had assessed more than 1000 opportunities, of which over 120 were chosen as qualifying enterprises and around 20 were invested in. These include domestic and regional success stories, like online food portal HungerStation, health care management and consultancy firm First Practise, and Careem, a regional rival to Uber that established its first operation in the UAE and has since set its sights on Qatar, Saudi Arabia, Bahrain, Kuwait, Egypt, Morocco and Jordan.

Following Oqal’s success, regional seed investors and accelerator programmes have started to establish a presence in the Kingdom. Launched in 2013, Flat6Labs is a Jeddah-based accelerator programme and a descendant of the first Flat6Labs programme launched in Cairo four years ago. The initiative provides seed funding, strategic mentorship, workspaces, business training and direct support through a network of partner entities, mentors and investors in three locations in the MENA region. As of early 2014 it had already run through nine investment cycles that have aided more than 160 entrepreneurs. Its Saudi operation is the first privately owned accelerator in the Kingdom, and follows what has become a standard model for operations of this type: two months before the start of a new investment cycle an internal management team reviews submissions and selects around 100 to attend an interview in which the viability of the proposition is assessed. Five weeks before the cycle starts around 20 applicants are chosen from this pool to attend a five-day boot camp, during which time they are helped with finalising their concept, establishing a business model and preparing their pitch to investors. Each team is then expected to present to a selection committee made up of partners, industry experts, entrepreneurs, mentors and investors, which makes the final decision regarding who will be accepted into the cycle.

Cycles last a total of three months, during which time teams develop their business models, build prototypes and acquire customers. They also receive seed funding of SR50,000-80,000 ($13,325-21,320) in exchange for a 15% to 20% stake in the company, along with strategic mentorship, office space and a range of services from Flat6Labs partners. The end of the cycle is marked by a “Demo Day”, at which time the start-ups are given the opportunity to pitch to an invited audience of accredited venture capitalists, angel investors, entrepreneurs, mentors, partners and the media. After this time teams no longer have access to the Flat6Labs workspace, but are still granted access to the programme’s mentor network and workshops. The development model employed by Flat6Labs has established a useful template for similar private sector seed funding and accelerator programmes in the Kingdom. Central to its potential is the fact that it offers significant incentives to all participants: the programme founders are able to gain a minor stake in promising start-ups that have the potential to gain in value; start-ups are able to secure funding for the difficult early development stages and take advantage of the programme’s infrastructure and collective expertise; and investors approach the accelerated firms knowing that the programme has done much of their due diligence for them.

New Synthesis

The close of 2014 saw another regional accelerator enter the arena: Oasis500, the seed investment company that began life as a vehicle for IT entrepreneurship in Jordan. Famously named after its ambition to fund 500 start-ups in five years, the company deploys a model similar to that of Flat6labs, which includes entrepreneurship training, mentorship guidance, business incubation, and additional follow-up investment and funding if required. However, in entering the Saudi market it has opted to leverage the progress made by the government programmes in start-ups and entrepreneurships by partnering with Badir – under its Technology Incubator Programme – launched by King Abdulaziz City for Science and Technology in 2007. According to the deal, Badir is sharing its list of incubated companies with the Jordanian outfit, from which potential investment opportunities are chosen. The Badir-Oasis500 programme offers a training boot camp to successful applicants, which includes sessions in IT marketing, setting up a pitch deck for investors, dealing with business setbacks and the process of taking a start-up from an early stage company to a growth stage company. In funding terms, the initiative offers an average initial investment of SR116,000 ($30,900), of which SR53,000 ($14,100) is in cash and SR63,000 ($16,800) is in services, in return for which Oasis500 takes a 10-20% share of the business. This arrangement, according to Badir-Oasis500, gives the start-up sufficient resources to sustain it for a three-month period, during which time it can prepare a prototype that will allow it to secure further funding. Participants in the programme will also benefit for a raft of ancillary perks, such as legal services, marketing, public relations services and connections to angel investors.

Looking Ahead

The synthesis of government and private effort that the Badir-Oasis 500 initiative represents is an important advance in the Kingdom’s nascent seed investment arena. Thanks to the central role that the government has played in early stage investment, its infrastructure has become a useful resource for private sector entities seeking to establish themselves in the domestic market. However, the success of Flat6Labs has demonstrated that stand-alone private initiatives can flourish in the Kingdom, with the Saudi market now proving itself capable of generating its own start-ups rather than simply a market for established regional start-ups to attempt to sell into. Khalid Al Saleh, CEO of Riyadh Valley Company, told OBG, “There is a lot of local talent and potential, but young entrepreneurs need mentoring and guidance.”

The government, working through various ministries and agencies, has been attempting to cultivate an entrepreneurial environment for more than a decade. While its own initiatives remain central to this ambition, the private sector organisations that are starting to appear will also play a key role in its achievement.