If you have ever wondered why it’s so difficult for Saudi start-ups to find funding, this infographic is about to open your eyes. Based on one of my more controversial blog posts, Why Start-Ups Don’t Get Funding in Saudi Arabia, this infographic includes extra information on some of topics covered in that earlier article, all presented in a fun visual format.
The full text of the infographic is also available on this page for those who prefer text.
Why Start-ups Don’t Get Funding in Saudi Arabia
There is a lot of money in Saudi Arabia… but most scalable start-ups still can’t get seed funding.
1. Government and non-government business initiatives are aimed at micro-businesses, not start-ups.
- 5 employees or fewer
- Needs no more than about 40,000 to 50,000 USD (~150,000 to 188,000 SAR) in seed funding
- No scalable business model
Scalable business model:
- A design for the operation of a business that allows revenues to grow significantly faster than costs
Microbusinesses are a safe bet for creating self-employed people, such as your local:
But businesses with scalable models, while riskier, can create game-changing entrepreneurs, such as:
- Mark Zuckerberg
- Richard Branson
- Steve Jobs
That’s why most efforts by government and non-government business initiatives go toward helping non-scalable small businesses: they create self-sufficient workers without stirring up the larger business world or requiring real risks from investors.
2. Banks help traditional midsize companies, leaving start-ups out.
Midsize business characteristics:
- Up to 300 employees
- Revenues between about 27 million to 133 million USD (~100 million to 500 million SAR)*
- In a traditional Saudi area of business
*This revenue-based definition varies a lot depending on who you ask and what country you are in.
Traditional Saudi areas of business:
- Real estate
- Oil and gas
- Other intensive, low-cost, manpower-based businesses
Banks see midsize companies in traditional areas as safe investments because they can meet strict loan requirements.
To receive a bank loan of about 5 million to 20 million USD (~19 million to 75 million SAR), you typically only need to do the following:
☑ Show audited financial statements from your company
☑ Provide valuable physical assets (like equipment) as collateral
☑ Agree to assign proceeds from your contracts to the bank
However, if you are launching a new start-up, you probably:
☒ Don’t have financial statements yet
☒ Don’t have valuable assets (especially if you sell virtual products)
☒ Don’t have any contracts that the bank can take a cut from yet
3. Very few groups are serving new companies that need between 50,000 and 3.9 million USD (~188,000 to 15 million SAR), like the typical start-up… and not all of them are truly helpful.
The Kafala Program
⬆ Lets you request a bank loan with the government backing you at 50%
⬇ Requires you to be in business for 3 years first
⬇ Requires financial statements
⬇ Requires proof of ongoing contracts
⬇ Requires substantial personal or business assets to back up your loan
⬇ Rate of the loan is high (12.5% with fees and expenses)
CONCLUSION: Not helpful for the average entrepreneur.
⬆ Offers an interest-free loan with small administrative fees
⬆ Offers funding as an equity partner (as a loan alternative)
⬆ Continuously evolving
⬆ Run by highly competent people
⬇ Requires time-consuming training and paperwork
CONCLUSION: Helpful for entrepreneurs who need practice before making a big investment move, as long as they have enough free time.
⬆ Links entrepreneurs with angel investors while drawing attention to entrepreneurship
⬆ 4 out of 5 companies involved in first pitching event received letter of interest
⬆ Offers a funding prize of ~66,000 USD (~250,000 SAR) to winner of the Sirb Award
⬇ Has not funded many entrepreneurs yet
CONCLUSION: Worth a try, but only time will tell if this program can scale up to the level Saudi Arabia needs.
⬆ Links entrepreneurs to angel investors (mostly tech-friendly)
⬆ Growing and meeting with more entrepreneurs on a more frequent basis
⬇ Losing strong positioning due to poser investors (involved just for prestige)
⬇ Has not funded many entrepreneurs yet
CONCLUSION: Worth a try if you pitch at a city where you know members are serious angel investors, not socialites.
3. When will this situation change?
Since most angel investing is still done by the same big, conservative old families that control the commercial wealth in Saudi Arabia, the situation will only change when one of them invests in a start-up.
93% of Saudi investors prefer not to invest outside of the real estate sector.
4. What can entrepreneurs do?
We entrepreneurs must keep busy creating the knowledge economy that will support future innovation. Each one of our small successes will encourage the creation of new entrepreneurs.
Eventually, these small successes will become big successes, bringing one of the major Saudi businessmen to offer us funding. And one is all we need to begin changing our country.