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- Analysis of Historical Trends and the Evolution of Early-Stage Venture Capital Funding in Saudi Arabia: Flat6Labs Q2 2024 Report
Analysis of Historical Trends and the Evolution of Early-Stage Venture Capital Funding in Saudi Arabia: Flat6Labs Q2 2024 Report Riyadh, KSA
Flat6Labs’ early-stage venture capital investment report for H1 2024 provides detailed insights into Saudi Arabia’s investment performance, highlighting key opportunities and trends shaping the future of startup investments.
Analysis of Venture Capital in Saudi Arabia
Although the pace of funding rounds has slowed since 2021, the first half of 2024 saw a 28% increase in the total number of rounds compared to the same period in 2023. This growth was mainly driven by a 50% increase in pre-seed rounds and a 130% increase in Series A rounds.
However, growth-stage rounds (post-Series A through Series B, C, etc..) saw a decline of 67%; despite the drop in growth stage announcements during H1, we remain cautiously optimistic as these rounds are usually backhanded in the year’s second half. Notably, 2023 saw a peak in venture capital funding, driven by growth-stage rounds such as Series C for Nana and Floward, and Series D for Tabby.
Investor activity also rebounded, with a 24% rise in H1 2024 compared to the same period in 2023. This increase was driven by more participation in Series A, pre-seed, and seed rounds. Despite this, investor activity remains below the three-year average, suggesting a potential improvement in investor confidence in early-stage opportunities and a focus on more sustainable business models.
Nevertheless, venture capital investments in Saudi Arabia remain relatively small compared to the overall economy, accounting for only 0.04% of the market capitalization of listed companies (or 0.1% excluding Aramco). This is also less than 0.1% of the Kingdom’s GDP, significantly lower than the global average of around 0.5%. This indicates vast potential for growth in the future.
Sectoral and Investment Trends – Diversity in Venture Capital
Interestingly, the tech sector has outperformed the overall market for listed companies, driven by government initiatives and the goal to achieve “Vision 2030,” which has provided a supportive environment for development and innovation. Saudi Arabia’s tech sector has demonstrated exceptional growth, delivering 34% returns over the past five years. Despite this strong performance, the tech sector accounts for only 0.85% of total market capitalization, indicating substantial potential for digital growth and future technological transformations, making it an attractive option for investors looking to capitalize on this momentum.
The venture capital market in Saudi Arabia has also become increasingly diverse. FinTech and e-commerce no longer dominate the economic landscape. The report highlights a recovery in the SMB SaaS sector, with notable funding deals such as the pre-IPO Series C round for Salla, which attracted $130 million. Sectors like EdTech, transportation, and logistics are also seeing growing interest.
This diversification reflects the maturity of the startup ecosystem in Saudi Arabia, the evolution of market needs and the emergence of new opportunities which offer investors a broader spectrum of investment options, with notable changes in participation compared to 2023.
Valuations
Venture capital funding has seen notable growth driven by growth-stage activity during 2023, while early-stage funding peaked in 2021. The average round sizes have continued to increase since 2019, indicating an ongoing rise in valuations.
Likewise, the valuations of listed companies have seen significant growth over the same period, with the average sales multiple (weighted by market capitalization for all listed companies) reaching 10.3x sales excluding Aramco multiples). The market’s sales multiple has grown at a compound annual rate of 20% over the past five years, reflecting optimistic expectations for future returns.
Data indicates that early-stage investment round sizes (from pre-seed to Series A) have grown at a rate similar to the increase in listed companies’ sales multiples, while growth-stage rounds have accelerated faster.
We estimate that the average valuations are currently around $4 million for pre-seed rounds, $10 million for seed rounds, $60 million for Series A rounds, and exceed $800 million for post-Series A growth rounds.
Funding Trends in Different Stages
The report highlights a notable contrast in funding trends between early-stage and growth-stage rounds. While early-stage funding (from pre-seed to Series A) peaked in 2021, subsequent years saw a decline. However, growth-stage funding rebounded strongly in 2023, reflecting investors’ interest in companies demonstrating significant growth and maturity.
Evolution of Venture Capital Funds and SMEs in Saudi Arabia – 2024 Market Outlook
The parallel stock market (Nomu) in Saudi Arabia showed strong growth in 2023, with 34 IPOs, accounting for 83% of all listings in the market. This significant growth reflects increasing confidence in small and medium-sized enterprises (SMEs), providing new investment opportunities for investors, while also supporting the growth of the Saudi economy and enhancing its status as an attractive investment destination.
Forecasts indicate that the Saudi market will continue its robust growth in 2024, driven by ongoing efforts and initiatives to diversify the economy away from oil dependency, in line with Vision 2030. Non-oil sectors such as logistics, EdTech, and tourism are expected to see notable growth, fueled by structural reforms as well as local and regional investments.
In parallel with these developments, the Saudi financial market ‘Tadawul’ is expected to experience stability and sustainable growth in 2024. This growth will be driven by increased IPO activity and supportive government policies, creating a favorable investment environment for both local and international investors.
Flat6Labs in Saudi Arabia
In February 2023, Flat6Labs announced the launch of “Startup Seed Fund” in Saudi Arabia. The Startup Seed Fund LP (“the fund”) was established to provide investors with capital gains through investments in early-stage startups in Saudi Arabia, following a highly diversified and structured investment strategy.
The fund’s target size is SAR 105 million ($28 million) to acquire selective equity stakes in early-stage startups operating in technology and innovation sectors within the Kingdom of Saudi Arabia.
Riyadh Seed Program
Flat6Labs primarily invests in Saudi startups through its Seed Program in Riyadh by scouting for innovative startups across the Kingdom. These startups undergo a thorough evaluation process before the selection of 10 startups per cycle, with each cycle lasting four months.
The fund exclusively invests in tech startups in Saudi Arabia and is managed by Flat6Labs. Through the Riyadh Seed Program, we invested in 30 startups during 2023 and 2024 out of more than 60 startups planned over the next two years. The investment amounts range between $200,000 and $400,000 in exchange for up to a 10% equity stake in the startup.
As the most active investor in Saudi Arabia in 2023 and one of the leading venture capital firms in the MENA region, Flat6Labs highlights promising opportunities within this thriving ecosystem. The company emphasizes its leadership role in supporting and empowering Saudi entrepreneurs and its expertise in guiding investors toward growth prospects in the Kingdom.
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