The impact of the economic crisis and shifting market dynamics, on Saudi investors’ strategies
Without a doubt, the COVID-19 pandemic has impacted all businesses across the globe, including those operating in Saudi Arabia. With repercussions ranging from dampened economies, to bleak forecasted GDP growth, as well as forced closures and remote work, companies shifted their strategies and focused on survival mode.
Trends began to emerge in the entrepreneurial sphere, in the midst of the crisis and the months that ensued. Trends have shown that proven components for success to survive the repercussions of a crisis include adaptability and agility. Many startups and scaleups, with innovative and adaptable business models responded to the changing market dynamics and were able to thrive, despite the adverse circumstances. In parallel, investors shifted their mindsets based on emerging trends, and continued to look for great investment deals. Despite the numerous challenges, Saudi Arabia ranked third across the MENA region, based on the number of deals closed, and the country captured 15% of total funding in the region (Magnitt).
The winning sectors that closed deals and secured funding despite the challenging climate included ecommerce, delivery services, edtech and healthtech, which were predominantly under-invested in before the crisis.
What are Saudi investors looking for? How have VC funds changed their strategies?
The ongoing economic crisis as a result of the COVID-19 pandemic, has shifted investors’ strategies, and resulted in delays in investment decisions being taken. In addition, many Venture Capital (VC) funds began reviewing and scrutinizing their portfolios, and intensified work with the companies they have already invested in to push them to strategize, grow market share and problem-solve.
In parallel, many investors were still keen to fund ventures that are agile, showcased innovative features, and that have shown greater adaptability to the crisis. Investors also became more heavily focused on due diligence, before making a deal, which delayed closings. In other words, it’s a buyer’s market.
Investors began eyeing high growth industries with less exposure to risk associated with the pandemic, such as e-commerce, delivery services, healthtech and edtech.
As a result of the pandemic, investment strategies became more focused on the following key elements:
- Instead of allocating funds for new investments, investors have been utilizing their existing funds to support their current portfolio of companies through bridge rounds and follow up rounds.
- They are reorganizing the pipeline to focus on opportunities that have proven to be more COVID-19 resilient and agile.
- The due diligence processes have changed and every number is being challenged by investors.
The importance of due diligence for funds
As investors became more vigilant, due diligence grew in importance and became more critical to the investment process than ever before. Investors began spending more time and effort, as well as resources on due diligence, as per the below findings:
- Funds are now scrutinizing the projections of companies, especially in the post COVID-19 period
- Older valuations no longer apply, and companies will be more carefully looked into now
- Any costs that surfaced post COVID-19, due to social distancing (which emerged due to lower capacity or disrupted supply chains) will also need to be accounted for, which will affect the bottom line.
On a fund level, diversified funds with different types of assets and sectors in their portfolio were less impacted, due to lower exposure to risk. Funds with portfolio that included essential sectors, or non-elastic demand sectors, such as food and healthcare, were less impacted
Stay tuned for more updates, or read the full report in Arabic, on Harvard Business Review Arabia here.