Corporate venturing in Saudi Arabia
In the past few years, Saudi Arabia has witnessed an interesting trend in the venture capital industry: major corporations have set up corporate venturing arms for their own strategic and financial objectives and to tap into the high growth potential in the region.
The foci of these venture funds are in telecommunications and information technology (e.g. STC Ventures backed by Saudi Telecom Company ), media and entertainment (e.g. MBC Ventures backed by MBC Group), and publishing and advertising (e.g. Numu Ventures backed by Saudi Research and Marketing Group).
The Saudi government itself launched “Taqnia Ventures” a fund sponsored by the Saudi Company for Technological Development and Investment (Taqnia) focusing on the transfer of energy, biomedical and ICT technologies to Saudi Arabia.
Corporate venturing is a unique from venture capital where the main objective is to advance both strategic and financial objectives rather than merely financial objectives as seen in VC funds. CV investments are considered strategic when they are made mainly to increase the sales and profits of the corporation’s own businesses.
From the corporation’s perspective, decision makers have generally three options to form their CV unit: (1) an external fund, where an outsourced fund manager is appointed to manage the fund (this model was adopted by Saudi Telecom where they appointed Iris Capital Management); (2) an internal department/division established under either the strategy and development group or the finance group (this model is adopted by MBC Ventures and Numu Ventures); and (3) a fully owned subsidiary of the corporation (as adopted by SABIC Ventures and Saudi Aramco Energy Ventures).
Each option has a significant impact on the management and performance of the CV unit. This can be clearly witnessed during critical milestones of the CV unit investment process: investment, follow-on investment, investment management, and divestment decisions. The more flexibility that the teams managing the fund have in making these critical decisions, the more quickly you will see the unit achieve its objectives. The external fund management model has complete autonomy in decision-making, while the internal division has the opposite. Globally, the best performing CVs are externally managed.
The average size of the investment management team at Saudi CVs is between three and four professionals. And almost all of them are based outside Saudi Arabia. The investment policy and investment objectives are almost identical – all CV units have the objective to invest in start-ups that will have synergies with the sponsoring company.
When analyzing all of these corporate activities in the Saudi venture capital industry and how they are structured, I believe what is happening is very healthy and that we are on the right track. But also I believe that we are still at the early stages of building a comprehensive eco-system for VC investing and there is plenty of improvement needed, especially in matters related to the legal and regulatory framework in the kingdom and also the need for privately sponsored incubators and start-up accelerators to develop strong commercially driven start-ups that corporate ventures to sponsor.
One alternative option for Saudi corporations operating in specific sectors is to have them combine forces by utilizing their multiple infrastructures and capabilities; this can be done through creating a multi-corporate venture fund. They can rally behind a world class venture capitalist with proven track record. For example, in the ICT and media sector, sponsor corporations can setup a Multi-Corporate ICT and Media Venture Fund rather than each corporation setting up its own CV unit. This way, these corporations will increase the success of the fund and also ensure a wider group of corporations providing significant synergies to portfolio companies.
In this option, the fund manager will help portfolio companies get access to a wide range of corporate infrastructure such as distribution channels, marketing and advertisement, co-branding, payment solutions, financial guarantees, call center, technical support, customer database, market research, and communication solutions at the sponsor corporations.
In 2010, Facebook, Amazon, Zynga and other major technology companies including Comcast and Liberty Media established the sFund, a USD 250 million fund. The fund is managed by Silicon Valley venture capital firm Kleiner Perkins Caulfield & Byers (KPCB). It will supply financing, advice and contacts. While anchor investors such as Facebook provide the start-ups access to its platform teams, beta APIs, and new programs, Amazon provides a year’s access to Amazon Web Services. It’s worth mentioning also that the sFund doesn’t invest in direct competitors to Facebook, Amazon or Zynga.
Adopting the multi-corporate strategy in Saudi Arabia by corporations operating in similar industries will have a positive impact on the venture capital industry and also ensure quicker success of start-ups in the region.
Aiman Al-Atiqi is a partner with Iris Capital MENA, Saudi Telecom Company ‘s venture fund manager. Previously, he worked as an associate director for Jadwa Investment, a Riyadh-based investment bank and private equity firm, as part of the private equity team.