How can Saudi startups attract VC funding?

How can Saudi startups attract VC funding?

The COVID-19 pandemic has impacted all businesses across the globe, including those operating in Saudi Arabia. The repercussions of the pandemic have resulted in new trends in the venture capital scene, and Saudi investors’ have shifted their strategies.

Many of the changes brought about during and post-pandemic are here to stay and continue to transform all aspects of society, with greater reliance on online channels. This includes, but is not limited to a decrease in business travel as meetings are being carried out online, and a drop in office rentals, as working remotely is now more widely accepted. The educational sector is expected to continue to rely heavily on online platforms due to school closures, with children receiving online tutoring and consuming electronic content. Shopping for non-essential and essential goods will shift towards online platforms, as retailers enhance their platforms and services.

One challenge that both companies and individuals need to account for, is the introduction of VAT in early 2018 at 5%, and the subsequent increase of taxes on goods and services to 15% in July 2020. As we have already seen, this has dampened spending on non-essential items.

With this in mind, whilst the winners that emerged from the pandemic have already surfaced, post-crisis, other sectors are expected to thrive, and capture funding

We foresee that online training and educational resources, as well as content creators have a huge market across all age groups that they still have not tapped into. The opportunity is to create Arabized content – from music to books and learning material – is a key area which remains underserved by local entrepreneurs. Take Kitab Sawti, which was acquired by Swedish firm Storytel and Anghami, the music streaming company which is diversifying its content to create Arabic podcasts. Online media consumption is on the rise in the Middle East, and consumers are becoming more open to using digital products and digital payment solutions.

Secondly, as people spent more time indoors, home maintenance apps have increased their market share, and due to the low barriers to entry in this sector, more entrants are expected. However, companies will need to innovate and enhance their customer service offerings to stand out from the crowd.

Fintech is still an untapped sector, and we foresee increased activity in this sphere, with more peer to peer lending and alternative SME lending solutions.

Lastly, another global trend coming to the region, which is shared kitchen space or cloud kitchens, will allow for restaurants, delivery companies and chefs to cut costs. This sector is still generally untapped, with a few ventures in the UAE, with a few ventures receiving funding. This opportunity will grow as companies find ways to minimize costs, and delivery services pick up.

However, despite the recorded spike in growth in these sectors, the pooling of investments during the crisis, as well as the forecasted growth in these industries, entrepreneurs need to continue to innovate and grow, in order to maintain levels when markets return to ‘normal’. Entrepreneurs should look at scalability and expand to new markets, continue to reduce costs, localize supply chains, optimize their customer service offerings and remain ahead of the competition, if they want to survive.

How can Saudi Arabia accelerate the entrepreneurial sphere?

In Saudi Arabia, policy makers have been quick to act, given the challenges brought on by COVID-19. The national vision should remain on diversifying the economy away from a reliance on commodities. One provision that should be taken is to create incentives for entrepreneurs to tap into more productive sectors. In addition regulatory frameworks need to be more streamlined, easing and upgrading regulations, to support high-growth tech companies to transform and contribute towards the economy. These measures should include moving a big portion of activities online, such as litigations, and offering more services from the government online.

A nationwide upskilling and reskilling program is needed, to ensure that the Saudi workforce remains relevant and equipped for a technologically dominated and AI focused future. Startups have an opportunity to tap into here.

Final thoughts

As they say, knowledge is power and the more information businesses have at hand, the better. Knowledge always prevails. In addition, being solution-oriented to overcome the challenges brought about by the pandemic has become more relevant, as investors have become very cautious. Previously, entrepreneurs either relied on investors giving them money easily due to a grand allocation of funds, or depended on the market being so big with the aim of capturing a wide market share. This has become more relative. Even companies that boomed during the COVID-19 pandemic need to continue to innovate, localize supply chains and cut down on costs, to remain relevant. Entrepreneurs need to also enhance their systems, and show more resilience during hard times, to survive.

Stay tuned for more updates, or read the full report in Arabic, on Harvard Business Review Arabia here.

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