What if not Dubai? Startup landing in Saudi Arabia

How suitable is Saudi Arabia, with more than 90% of its territory occupied by deserts and the share of the oil sector in GDP approaching 50%, as a country for creating or relocating a startup? Founder of venture consulting Blank and author of startup review Kirill Sosnin talks about the kingdom's entrepreneurial ecosystem.

A few years ago, Saudi Arabia was not considered outside the context of oil production, but in 2021 the world was presented with a new government strategy, Vision 2030. Vision 2030 — it is a reform system led by Crown Prince Mohammed bin Salman.

The main goal of the reforms is to reduce the country's dependence on oil revenues. For this purpose, it is planned to create investment funds, increase the share of the private sector in GDP from 40% to 65% and increase the export of non-commodity goods.

The reforms are also aimed at attracting foreign direct investment (FDI) in the country's priority sectors such as healthcare, ICT, tourism, development and renewable energy.

Liberalization of legislation

Creation of special economic zones with simplified taxation and gradual liberalization of law — one of the key incentives for investors to invest in the kingdom's economy.

Until 2018, full ownership of an LLC, the most popular form of business organization among startups, was prohibited for foreigners. Now, having registered a MISA license from the KSA Ministry of Investment, an expat can conduct business without a Saudi partner.

In January 2024, Saudi Arabia expanded long-term visa programs: you can obtain residency by investing approximately 4 million Saudi riyals (a little more than $1 million) in real estate.

The reform turned out to be a win-win for both sides: investors are relieved of some of the bureaucratic delays regarding localization in the country, and developers are expanding their portfolios with premium class properties in large cities like Riyadh, Jeddah and Dammam.

In addition, several months ago it was announced that a bill would be prepared to allow foreigners to own all types of housing, including commercial, residential and agricultural real estate.

The development of a regulatory framework regarding the protection of intellectual property rights is under special government control in Saudi Arabia. In 2018, a single body, SAIP, was created responsible for all issues related to IP regulation, and in 2022, the National Intellectual Property Strategy (NIPST) was adopted, under which Saudi Arabia plans to join the Madrid Agreement Concerning the International Registration of Marks and the Hague Agreement on international registration of industrial designs.

The country is also a member of the Cooperation Council for the Arab States of the Gulf. In other words, you can apply to register, for example, a patent in several jurisdictions in addition to the kingdom: in the UAE, Kuwait, Bahrain, Qatar and Oman.

Fundraising in Saudi Arabia

If Dubai is called the “Arab miracle”, then Riyadh also has a right to this title. Saudi Arabia — the only country in MENA to show an increase in venture capital investment in 2023, while this figure for its neighbors in the Gulf fell by an average of 10-30%, and globally the decline reaches up to 40%.

Four years ago, the volume of venture deals in Saudi Arabia was $45 million, and in 2023 it exceeded the $2.5 billion mark, which allowed the UAE to be relegated to the background for the first time in the history of the region.

In comparison with the UAE, it is noteworthy that local Saudi funds are becoming the main source of capital for startups; their share of capital is almost half of the total. The second place is occupied by funds with American roots, and then — neighbors of the kingdom in the region.

Family offices in Saudi Arabia — as powerful a force as funds or accelerators, and actively diversify their assets. With the caveat that they are less likely to become participants in venture deals and prefer less risky investments.

Last year was also remembered by the Saudi Arabian venture market for a record number of mega-deals in fintech and eCom worth more than $100 million. The two largest of them ensured BNPL services Tamara and Tabby the status of unicorns, the third big check went to an express grocery delivery service to your home Nana Direct.

Fintech has always had prospects in the region, given the almost one hundred percent penetration of the Internet and significant amounts of funding through state venture funds like Saudi Venture Capital Company and Jada Fund of funds.

However, its potential was revealed thanks to experimental legal regimes, the so-called “regulatory sandboxes”, the best practices of which were legitimized at a general level.

The development of the venture industry in Saudi Arabia may become an important example for other countries with similar economic conditions, demonstrating how strategic investments in innovation and entrepreneurship can transform a national economy and enhance its global competitiveness.

Opening a startup: mainland vs free zone

Experimental legal regimes will continue to be tested in special economic zones, of which four more have opened since spring 2023:

• King Abdullah Economic City in Jeddah specializing in industrial development;
• Jazan, which, due to its proximity to the port, specializes in export-import operations;
• Ras al-Khair, another port and SEZ for the incorporation of companies with a focus on shipbuilding and oil production;
• Cloud Computing SEZ at KACST with a focus on ICT and banking.

Unlike incorporating a company on the mainland, “landing” in one of the SEZs it provides many benefits, including a 5% corporate income tax for 5 years instead of the standard 20%, tax-free repatriation of profits, a simplified regime for obtaining a visa for employees for 5 years and much more.

Despite all the privileges and benefits, relocating to Saudi Arabia and registering a company — still an expensive proposition for a young foreign startup.

As for duties and contributions, the most significant of them — payment for a business license from the Ministry of Investment of Saudi Arabia (MISA), the cost of which starts from 12 thousand Saudi riyals or approximately $3,200.

In addition, to obtain it, you must provide a business plan and confirmation of the company’s financial solvency: the requirement for a minimum authorized capital for an LLC was abolished several years ago, but it is recommended to reserve at least 25 thousand in accounts for a company in the service sector. local currency, which is equal to $6,600.

For a long time, registration fees were higher and the kingdom remained a difficult environment for doing business. However, in recent years, startups have begun to explore the local market, and I think we will soon be able to list many success stories of technology founders in the Saudi market.

Conclusions

For a startup considering Saudi Arabia as a landing spot, it is important to understand the key aspects of the local business climate and use them to your advantage.

Firstly, an entrepreneur should pay attention to the opportunities provided by special economic zones. These zones offer significant benefits, simplified taxation and other benefits, such as a simplified process for obtaining visas and licenses. This can significantly reduce entry barriers and operating costs, which is especially important for new and growing businesses.

Experimental legal regimes can allow startups to test new ideas and technologies without fully complying with normal regulatory requirements, reducing risk and speeding up time to market.

Secondly, a startup needs to build interaction with local funds and accelerators. In Saudi Arabia, the number of venture capital and government funds is growing exponentially, which increases access to capital. The easiest way to develop a network and get closer to investments — this is to go through one of the many acceleration programs (Techstars Accelerator, Falak Business Hub, TAQADAM, etc.).

In conclusion, success will require not only an understanding of local legal frameworks, but also a willingness to adapt to a rapidly changing economic and cultural landscape. For its part, strategic initiatives to attract investment and develop infrastructure make the kingdom one of the most promising markets for innovative companies in the world.