The rapidly changing investment landscape in the Gulf Cooperation Council (GCC) countries is drawing much attention to the region. In Saudi Arabia, the economic diversification project is led by the Public Investment Fund (PIF), a sovereign wealth fund. PIF aims to stimulate the non-oil private sector through both foreign and domestic investment as well as by fuelling the local start-up ecosystem with new funding bodies, venture capital and angel investor networks. PIF has sought to generate more funds for these initiatives by borrowing, taking 5% of Saudi Aramco public and selling their full stake in the Saudi Basic Industries Corporation (SABIC). While PIF is not Saudi Arabia’s only sovereign wealth fund, it is the one tasked with growing into one of the largest in the world.
But despite the unprecedented levels of capital and funding available for new businesses, along with new business infrastructure to harness innovation and support entrepreneurs, a fear of failure combined with unclear and rapidly changing regulations are viewed as major barriers to innovation.
Funding and SME support
A key motivation for the expansion of venture capital in Saudi Arabia stems from the plan to stimulate small and medium enterprise (SME) growth. With 67% of the population aged between 15-34 and a youth unemployment rate around 27%, PIF believes that SMEs play an essential role in economic growth and job creation, as well as a key role in diversifying into non-oil sectors. The Vision 2030 strategy for PIF has helped stimulate the development of a venture capital (VC) and private equity (PE) ecosystem, based on the idea that such support will enable the growth of the country’s lagging SME sector and ensure the long-term success of these enterprises.
As a result, the VC and PE sectors have quickly become crowded, with the establishment of several funds to support SMEs – many with overlapping goals and strategies. The two most prominent funds are the Saudi Fund of Funds (Jada) and the Saudi Venture Capital Company (SVC). Jada was created to ‘promote the development of a thriving PE and VC system’ through financing SMEs, while SVC is a government VC fund set up to stimulate venture investments in funds and to co-invest with angel groups.
A third contender in this space is the Saudi Arabian Investment Company (Sanabil). Established in 2008, when oil prices were over $100/barrel, this sovereign wealth fund was initially tasked with investing budget surpluses abroad. However, it has recently partnered with 500 Startups, an active early-stage venture fund and seed accelerator based in California, to seed approximately 100 Saudi start-ups.
While running all these SME stimulus programmes could be viewed as a doubling down strategy by the Saudi government, it also appears to be a duplication of efforts.
The regulatory framework
With the influx of capital available to SMEs, there are also efforts to support the regulatory framework to ensure the strategy is successful, such as the creation of the General Authority for Small and Medium Enterprises, Monshaat, in 2016. However, while Monshaat may be more open to new thinking, older government bodies are often staffed with civil servants who are reluctant to change their ways and do not always provide a smooth ride for small, newly established companies – or large and established ones for that matter.
While not the intention of the process, the recent wave of crackdowns on businesses by the National Anti-corruption Commission (Nazaha) highlights the lengths many businesses are willing to go to in order to circumvent the seemingly arbitrary and insurmountable obstacles put in place by gatekeepers in various government bodies.
While there have been major reforms in some government ministries and regulatory bodies – especially those related to Zakat and tax, customs and visas – not all benefit the investor. Many also remain untouched by reform and suffer from institutional inertia, making them less likely to enact Vision 2030 policies.
Sociocultural barriers to risk
The Vision 2030 strategy documents note that 53% of the Saudi workforce are employed by SMEs, contributing 21% to GDP. However, questions about appetite for risk, innovation and creativity remain. The 2019 Global Entrepreneurship Monitor (GEM) survey, a publication sponsored by Mohammed bin Salman’s Misk Foundation, explores questions of entrepreneurship in depth. While the report is optimistic about mindset readiness among Saudis, its definition of entrepreneurship appears synonymous with simply starting a new business, rather than the more nuanced meanings related to filling a market gap with new innovation in order to attract investment. In fact, Saudi respondents said the main reasons for starting a business had to do with job scarcity (72.4%) or the low salaries of available jobs (63.1%). Moreover, the report indicates that 93% of total entrepreneurial activity did not introduce any innovation into the market, and 88.6% were not offering a new product or service.
While access to finance is considered a major obstacle to starting a new business globally, only 7.6% of Saudi GEM respondents cited finance as the main obstacle to starting a business. Instead, the biggest obstacle is the fear of failure and the social sanctions that may be at stake – unsurprising given that 39.5% of respondents cited government tax policies and bureaucracy as the primary reason for business failure. In addition to new funding and support available for SMEs, informal financial help from family and friends has always played a key role in starting a business, meaning that failure would put a strain on family and social networks.
Given the lack of innovation among new businesses, they should not all benefit from the overabundance of capital available through all these new channels. Instead, this capital should be directed towards creating an education and social system that encourages creative and innovative thinking to help Saudi Arabia achieve its vision for the future.