Saudi Venture Capital Company (SVC) Update Presentation 2... · Metrics. 1. The 5 KPIs are applied...

Saudi Aramco: Company General Use

Osamah AlamriExecutive Director of Strategy, Saudi Venture Capital Company


Saudi Aramco Innovation Week

“Digital Venturing. Vast Opportunities”

The Role of Venture Capital in Backing Innovation-Driven Startups

Osamah Alamri

18 December 2019


Agenda

3

Why Venture Capital (VC)

Innovation Ecosystems

VC investments in Saudi Arabia and MENA

Appendix

2

1

3

4

Saudi Aramco: Company General Use4

1. Innovation Ecosystems


Innovation is the outcome of linking research, human capital and financial capital to create economic value

5


Macro-Economic Impact of Innovation and Technology Ecosystems

6Source: UA Tech Park Website; Science Center Website; Hsinchu Science Park Annual Report 2012; Booz and Company Analysis

Examples from around the world


2. Why Venture Capital


The Unique Value Creation of Venture Capital

8

The venture-capital industry is perceived across

US and some European

countries as an engine of

economic growth due to the

following reasons

VC is an important part of

the innovation ecosystem and

has helped some of the world’s

most successful companies to grow such as

Apple, Google, Microsoft, etc.

National Economic Growth

Private Sector Simulation

Create more job opportunities across

different sectors

VC investments boost innovation has wider spill-

over effects given a boost to GDP

Stimulate the private sector by encouraging private investors to invest in Startups

01

02


How the Venture Capital Industry Works

9

VC Players

The venture capital industry has five main players:

Accelerators

Entrepreneurs

Private Investors

Investment bankers

Venture capitalists and government VCs

01

02

03

04

05

Ideas

Mentorship and development

Entrepreneurs Venture Capitalists or Government VCs Investment Bankers

IPOs, M&As, etc.

Accelerators and incubators Private Investors Public Markets and

Corporations

$ $ $

$$


VC has Played a Role in the Creation of the World’s Most Valuable Companies

10Source: Invest Europe and National Account

World’s four most valuable companies are ICT-companies with VC-backing early on. While VC funds invest in only around 0.2% of new U.S. Businesses, 43% of U.S> public listed companies founded between 1979 and 2013 were VC-cabked.1

The World’s most valuable companies, measures by market cap in October 2018

01

02

03

04

05

06

07

08

09

10

Apple, est. 1976 (US)

Amazon.com, est. 1994 (US)

Microsoft, est. 1975 (US)

Alphabet/Google, est. 1998 (US)

Berkshire Hathaway, est. 1839 (US)

Facebook, est. 2004 (US)

Alibaba Group, est. 1999 (CN)

Tencent, est. 1998 (CN)

JPMorgan Chase, est. 2000 (US)

Johnson & Johns on, est. 1886 (US)

ICT

ICT

ICT

ICT

ICT

ICT

ICT

VC backed

VC backed

VC backed

VC backed

VC backed


Venture Capital Plays a Vital Role in a Startup’s Growth

11Source: Invest Europe and National Account

Company Development

Investment Stages

Idea / Startup

Seed / Angel

Development

Early Stage VC

Growth

Late Stage VC

Maturity

Exit

Concept, business planning

Product development

Operational rollout

Growth Expansion

Time

Cash flow

High risk asset class in equity financing

Crucial to the diversificationof the economy and to job creation


Key Features of Venture Capital

12Source: EduPristine

Illiquid asset class

High risk

Long term horizon

Equity participation

Returns through capital gains upon exit

Investment in innovative startups

with high growth potential

Participate in management

https://www.edupristine.com/blog/venture-capital


Phases of a VC Fund

13Source: EduPristine

Formation

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16+

Fund term (years)

Investment

Harvesting

Extension

https://www.edupristine.com/blog/venture-capital


VC Fund Portfolio Companies' Success Rate

14Source: TechCrunch

35%

Return 1-2X

Return > 3X

5%

Return < 1X

50% 10%

Return 2-3X

https://techcrunch.com/2017/06/01/the-meeting-that-showed-me-the-truth-about-vcs/


3. VC investments in Saudi Arabia and MENA

15


Saudi PE/VC market underdeveloped compared with other thriving economies

16Source: Preqin Buyout Deals Analyst and Venture Deals Analyst

Comparison of Annual PE/VC investment value2011- 2015 average as % of total GDP 2015

UKSinga-pore

14.2

54.5

74.7

South Korea

98.599.9

Egypt KSALeb-anon

RussiaBrazilMalay-sia

42.3

Ger-many

France ChinaNether-lands

5.5

USA

14.13.8

TurkeyJapan

39.3

UAEIndia

23.6 21.826.4

103.5

14.69.6 5.87.8

GCC countryDeveloped countries Emerging country

Note: Only includes transactions where a deal value was reported - often unreported in emerging countries and some VC transactions. Transactions announced over the 2011 - 2015 period.


KSA exhibiting unleveraged SME potential compared to the world's largest economies

17Source: World Bank, MSME Country Indicators (2014); World Trade Organization (2014); OECD - Financing SMEs and Entrepreneurs, 2015; EU SME Statistical Database 2015.

Note: 15 largest economies excluding Russia, due to lack of data

29%32%

33%37%

38%40%

46%49%50%

52%52%

54%58%

60%61%

21%

0 10 20 30 40 50 60

+25%

(%)

China

Japan

Germany

UK

France

India

Italy

Brazil

Canada

Korea

Australia

Spain

Mexico

KSA

USA

SME contribution to GDP (%) in largest economies and KSAGDP

ranking

Ave. (excl KSA)

9

2

12

4

3

15

1

11

7

8

6

14

10

20

5


Corporate VCsVC backed Deal Flow Creation Programs: Accelerator Startup Studios

Startup Funding Gaps in Saudi Arabia

18

Stages

IDEA EXIT

Seed A B C DPre-Seed

Investors Angels VCs

Accelerators, Startup Studios

Gaps Angels Later Stage VCs


VC investments in Saudi Arabia – H1 2019

19Source: MAGNiTT Saudi Arabia and MENA Reports 2019

• $40M invested in Saudi-based startups

• Total funding increased by 82%

• Number of deals increased by 44%

• 26 deals took place in Saudi Arabia

• 30 institutions invested in Saudi-based startups


VC investments in Saudi Arabia – H1 2019


• Increase in the number of investments in top Industries, and minimal decrease in the Delivery & Transportation

• Value investing by total funding has increase by 5 %- 20% in each industry


VC investments in MENA – H1 2019


• Saudi Arabia is the 3rd in MENA by total Funding, and the 4th by number of deals


Thank You


Appendix

23


A1. SVC Investment Strategy

24


Strategy Brief

25

Startups and SMEs financing is a core pillar of the SME strategy to achieve Vision 2030

VC equity financing in KSA is in its nascent stages

Surveyed local stakeholders and subject matter experts andexaminedinternational benchmarks

SVC will deploy a total of ~SAR 2.8B across its two investment programs:

I. Co-Investments in Startups

II. Investment in Funds


Derived key lessons from 11 best-practice global benchmarks

Gaps Assessment and Working Models

26

KFoF

Angel Matching

Interviewed angel investors, VCs and entrepreneurs

Engaged 120+ KSA market stakeholders

Analyzed 6 global funds databases

Presenter

Presentation Notes

Our findings were informed by credible references and insights, including: Review of local economic context and aspirations, as developed in the Vision 2030 and NTP Engaging with stakeholders through interviews with different ministries and entities, in addition to more than 40 structured interviews Learning from the experiences of more than 15 countries with strong fiscal practices and/or high reliance on reserves and resources Benchmarking exercise included interviews of 3 previous Ministries from leading MoFs in addition to reports of leading international organizations


Key Lessons Learned and Guiding Principles

27

Government funds balance economic impact and financial success

To prioritize their national mandate, most funds focus on local investments

A sector agnostic, gap-oriented approach is preferable to develop the overall ecosystem

Funds aim for a minority stake in startups as per VC best-practice

It is key to attract strong and professional managers through the right incentive systems

Direct investors are active, while indirect investors rely on co-investors for activism


Deployment Strategies

28

Investment in FundsGP/LP Structure

Co-Investment in StartupsDirect Investment

MandateCatalyze private investments at early stages of the VC ecosystem and develop private VCs

Direct co-investment along with angel investors, venture capitalists in Startups

StagesSeed, Early and Later stages Seed, Early, and Later Stages

MethodIndirect investments through partner’s funds

Up to 1:1 matching with private sector co-investor

Ticket sizeUp to 65% of fund sizeSeed: SAR 100K – 1M Early: SAR 1M – 10M+

Favorable economics (e.g. profit sharing) may be offered to partners


A Development-focused Approach Moving Gradually to a Balanced Approach

29

Description

Rationale

Intrusive model in which government clearly prioritizes economic development

Financial sustainability maintained without real focus on returns

Government is one of the key ecosystem players

Saudi ecosystem is nascent, forcing government to heavily stimulate it across stages and sectors

Government makes concessions to pull in private sector participation

Bears the necessary cost of development of the overall VC infrastructure

Advanced model in which economic mandate is achieved by equally focusing on financial excellence

Private sector-lead ecosystem with less intrusive public sector

Deal flow and fund availability are sustainable

Avoids crowding-out of private sector VC market is developed and

government does not need to make additional financial concessions

SME contribution to GDP

Availability of private investor

funding

Elimination of the supply or demand

gap in equity financing

Gradual move to balanced approach

Initial Stage Development-focused approach

Final Stage Balanced approach


Five Main KPIs to Track Performance

30

V

Metrics1

The 5 KPIs are applied at the SVC level and at the program level

Operational metrics

Financial metrics

Economic metrics

Finalstage

Tracked but not a KPI in the first 5 years

Initialstage

Number of jobs created

% capital deployed/ committed

# of companies backed

Total value to paid-in (TVPI):

IRR


Robust Evaluation and Selection Criteria

31

Team and track record

Investment strategy

Source Funding

Commercial terms

Investment partners are subject to continuous monitoring to assess the team in place, the performance of the fund and the processes implemented

Operating model

Evaluation Criteria

Co-Investment in Startups

Investment in Funds


Target Priority SME Sectors

32

Priority sectors for SMEs

Electricity, gas, steam & air conditioning supply

Information and communication

Arts, entertainment and recreation

Manufacturing

Healthcare

Education

Accommodation & food services sector

Administrative and support service activities

Transport & storage

Real estate activities

Agriculture

National SME Strategy


A2. SVC Investment Portfolio and Impact

33


Approved SAR 1,025MInvestment in Funds (SAR 974M) and Co-Investment in Startups (SAR 51M)

34

Seed Later StageEarly StagePre-Seed

Seed Later StageEarly StagePre-SeedInvestment in Funds

16 Funds

13 Startups

Co-Investment in Startups

17 Startups


Impact on Startups

35

Direct (Co-Investment in startups)

Indirect(Investment in funds)

30Startups

* Derayah & Impact 46 invested in the deal

*

*


Impact on VC Ecosystem in 2019

36

Co-invested in the largest funding rounds in 2019

Encouraged establishing new Venture Capital firms

Motivated local APs to establish VC Funds

Attracted regional startups to move their HQ to Saudi Arabia

Motivated regional VC’s to invest in Saudi Arabia

Encouraged angel investors to invest in startups

Created and diversified funding options for entrepreneurs

Stimulated co-investment in industrial projects


A3. Job Creation & Economic Impact


Takeaways

Investments made by SVC and partners from 2018 to 2023 will create ~13-14 k stable jobs by EOY 2028

38

Source: Expert interviews, Pitchbook, CB insights

▪ Number of jobs created by SVC fluctuates in short-term due to ongoing investments and startup failure rates

▪ The number of jobs creates will stabilize in the long-term to around ~13-14 k jobs by 2028

▪ Number of jobs calculated are induced by only the first two rounds of SVC investments, i.e., investments made between 2018 and 2023

▪ If additional investments are made after 2023 (i.e., a third funding cycle or private sector investments in later rounds), the number of jobs will be higher 1.5-2.0

5.2-5.7

8.3-8.

7.8-8.2

16-17

By EOY 2022

11-12

5.8-6.3

3-4

By EOY 2019

1.5-2.0

By EOY 2028By EOY 2025

6.8-7.2

13-14

6.2-6.7

Saudi jobsNon-Saudi jobs

Cumulative number of jobs created


Direct job creation through SVC activities (yearly, 2018-2022)

39

ESTIMATES

Source: Expert interviews, Pitchbook, CB insights

1600-1700

6800-6900

1500-1600

By EOY 2021

7200-7300

By EOY 2020

3200-3300

5400-5500

By EOY 2019

5100-5200

500-600

3400-3500

By EOY 2018

400-500

By EOY 2022

1. Started with number of investee companies at each stage and in each year based on investment plan

2. Estimated stage at which each company would find itself during each subsequent year based on international benchmarks and success rates (e.g., we invested in a seed company in 2018, there is x% chance it goes to series A in 2019, then y% chance it goes to series A/B in 2020, etc.)

3. Based on 1 and 2 above, drew a yearly “heatmap” of all investee companies - i.e., what is the number and stage of all companies invested in so far (not only in the specific year – e.g., when looking at 2022 heatmap, we look at where all investments done from 2018-2022 stand today)

4. Estimated an average number of employees for each stage of growth

5. Combined 3 and 4 to know the cumulative number of jobs created by the end of each year

6. Applied high-level regulatory Nitaqat rates across sectors of interest to estimate Saudi vs. non-Saudi jobs split

Saudi jobs Non-Saudi jobs

Cumulative number of jobs directly created, roundedMethodology


Investments made by SVC and co-investors from 2018 to 2023 will directly add a total value of SAR 3.3 – 3.9B to the Saudi GDP

40

Source: Expert interviews, Saudi GTAP and National Statistics, Pitchbook, CB insights, Vision 2030

ESTIMATES

Methodology Contribution to GDP, SAR Billions Takeaways

▪ SVC investments made in 2018 to 2023 will have a direct GDP multiplier effect of 0.75 – 0.85 x

▪ This number is in line with observed GDP multipliers in emerging countries

▪ Measured GDP impact is the conservative direct value-add created by SVC and its partners -overall contribution would be even higher through enabling private sector investments for later stage investments in successful startups

2018-2019

3.3-3.9

2022-2023

1.3-1.5

1.2-1.4

0.8-1.0

2020-2021 Total 2018-2023

1) Calculated yearly investment made by SVC and private sector co-investors

2) Estimated split of investments at a high-level and across sectors based on Vision 2030 projections

3) Applied GDP multiplier for each sector based on GTAP estimates

4) Deduced value-add created in the economy by SVC and related private sector investments

Saudi Venture Capital Company (SVC) Update Presentation 2... · Metrics. 1. The 5 KPIs are applied...

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