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Saudi Aramco: Company General Use
Osamah AlamriExecutive Director of Strategy, Saudi Venture Capital Company
Saudi Aramco: Company General Use
Saudi Aramco Innovation Week
“Digital Venturing. Vast Opportunities”
The Role of Venture Capital in Backing Innovation-Driven Startups
Osamah Alamri
18 December 2019
Saudi Aramco: Company General Use
Agenda
3
Why Venture Capital (VC)
Innovation Ecosystems
VC investments in Saudi Arabia and MENA
Appendix
2
1
3
4
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1. Innovation Ecosystems
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Innovation is the outcome of linking research, human capital and financial capital to create economic value
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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
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2. Why Venture Capital
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The Unique Value Creation of Venture Capital
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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
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How the Venture Capital Industry Works
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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
$ $ $
$$
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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
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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
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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
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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
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VC Fund Portfolio Companies' Success Rate
14Source: TechCrunch
35%
Return 1-2X
Return > 3X
5%
Return < 1X
50% 10%
Return 2-3X
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3. VC investments in Saudi Arabia and MENA
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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.
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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)
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2
12
4
3
15
1
11
7
8
6
14
10
20
5
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Corporate VCsVC backed Deal Flow Creation Programs: Accelerator Startup Studios
Startup Funding Gaps in Saudi Arabia
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Stages
IDEA EXIT
Seed A B C DPre-Seed
Investors Angels VCs
Accelerators, Startup Studios
Gaps Angels Later Stage VCs
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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
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VC investments in Saudi Arabia – H1 2019
20Source: MAGNiTT Saudi Arabia and MENA Reports 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
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VC investments in MENA – H1 2019
21Source: MAGNiTT Saudi Arabia and MENA Reports 2019
• Saudi Arabia is the 3rd in MENA by total Funding, and the 4th by number of deals
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Thank You
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Appendix
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Saudi Aramco: Company General Use
A1. SVC Investment Strategy
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Strategy Brief
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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
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Derived key lessons from 11 best-practice global benchmarks
Gaps Assessment and Working Models
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KFoF
Angel Matching
Interviewed angel investors, VCs and entrepreneurs
Engaged 120+ KSA market stakeholders
Analyzed 6 global funds databases
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Key Lessons Learned and Guiding Principles
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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
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Deployment Strategies
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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
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A Development-focused Approach Moving Gradually to a Balanced Approach
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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
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Five Main KPIs to Track Performance
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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
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Robust Evaluation and Selection Criteria
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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
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Target Priority SME Sectors
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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
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A2. SVC Investment Portfolio and Impact
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Approved SAR 1,025MInvestment in Funds (SAR 974M) and Co-Investment in Startups (SAR 51M)
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Seed Later StageEarly StagePre-Seed
Seed Later StageEarly StagePre-SeedInvestment in Funds
16 Funds
13 Startups
Co-Investment in Startups
17 Startups
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Impact on Startups
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Direct (Co-Investment in startups)
Indirect(Investment in funds)
30Startups
* Derayah & Impact 46 invested in the deal
*
*
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Impact on VC Ecosystem in 2019
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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
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A3. Job Creation & Economic Impact
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Takeaways
Investments made by SVC and partners from 2018 to 2023 will create ~13-14 k stable jobs by EOY 2028
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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
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Direct job creation through SVC activities (yearly, 2018-2022)
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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
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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
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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