If you have not heard the news yet, you must be living under a rock. Ride-hailing giant Uber has just received a $3.5bn cash injection from Saudi Arabia’s Public Investment Fund. This follow’s last month’s undisclosed amount of funding from Toyota – including a partnership to provide drivers with more affordable car purchasing and lease terms. This deal is one of the largest funding rounds by a technology company in history. No surprise here for one of the world’s most highly capitalised private companies.
The round closed at Uber’s current $62.5bn valuation, despite it being a not-so-guarded secret that the unicorn suffers from increasing losses. Uber posted staggering losses of $1.7bn in the first three quarters of 2015, against revenues of just $1.2bn. However, it has been previously disclosed that Uber had $4.1bn in cash and cash equivalent tucked away safely in the bank, to which it can now add an extra $3.5bn at least.
Be that as it may, it is not Uber we are interested in. After all, the ride-hailing app will continue to raise ludicrous sums of cash as the likelihood of it going public remains very slim. No, it is Saudi’s Public Investment Fund (PIF) you should be watching. And closely. Because ostensibly, it is launching the world’s largest venture capital firm.
Until last year, the PIF was totally under the radar. Established in 1971 to support projects of “strategic commercial significance to the economic development of the kingdom”, it acted like any other sovereign wealth fund. And despite Saudi Arabia being the world’s largest oil producer, it managed assets of significantly less value than the Abu Dhabi Investment Authority, China Safe Investment Company or even the Kuwait Investment Authority, estimated at around $180bn to $200bn.
And then came the announcement that Saudi Arabia was planning a $2 trillion megafund to ride the post-oil era – enough to create “the largest fund on Earth”, announced Saudi Arabia’s deputy crown prince, and potentially buy out Apple, Google, Microsoft and Berkshire Hathaway with plenty of cash left over, $102bn according to Bloomberg. Listing Saudi Aramco on the stock market will finance the fund.
As Saudi Arabia launched its much-lauded Vision 2030, the PIF transformed into its economic cornerstone. It is the main instrument to transform the kingdom into what McKinsey Global Institute – which formulated Vision 2030 – fondly refers to as “an innovation-driven” economy.
Because if you cannot create it, invest in it. And by investing in Uber, the PIF has just confirmed it is building the world’s largest venture capital fund.
The PIF already counts among its assets much more traditional investments, notably in Sabic and the National Commercial Bank, whose $6bn IPO in 2014 came only second to Alibaba’s in terms of size. Nearly a year ago, it invested $1.1bn in Korean engineering firm Posco, and plans to invest a further $10bn in the Russia Direct Investment Fund.
Saudi Arabia has had a long-standing relationship with South Korean firms, so this comes as no surprise, and investing in Russia signifies an economic rapprochement. But investing in a tech startup like Uber is a whole different ball game – a world away from the “extreme low-risk, sustainable returns strategy” that until the Uber deal marked the PIF’s investments, according to a Reuters source in Saudi Arabia.
Another Saudi economic commentator said “taking a private equity stake in a company that is deploying technology to disrupt an entire industry and owns no physical assets is beyond bold”.
And bold it is. As of June 1, the PIF went as far as describing itself on Crunchbase as “venture capital that does private equity investments”. So far, only 5% of its investments are foreign. By 2020, this will increase to 50%, and we can now expect many more investments in unicorns and technologies, with Saudis sitting on the board.
Why? It is opportunistic and innovation-driven. It is aligned with the kingdom’s strategy to transform into a startup and entrepreneurship Eldorado. If driverless cars are going to be a hit in five years, so be it – Saudi Arabia will invest.
Few are aware that Saudi Arabia has already been investing heavily in acquiring and commercialising international patents and technologies, and is already actively engaged with companies and institutions such as General Electric, Massachusetts Institute of Technology, Siemens and IBM. For Saudi, the challenge remains that despite these big-ticket partnerships, they are primarily R&D focused. And transforming R&D investments into economic returns can take years and is not particularly cool. On the other hand, you cannot get a hotter ticket than an investment like Uber. Even better, it sends a message of confidence to a burgeoning entrepreneurship movement that is taking shape.
But this strategy of engaging in private equity and VC is also extremely risky at a time when Saudi Arabia requires stable, and recurrent income flows. As we are well aware, even the hottest of startups are never a sure thing. Look at Theranos, which had a $9bn valuation only last year – and incidentally fits perfectly with Saudi’s growing attention to healthcare – and spectacularly crashed and burned. What about Palantir, which despite receiving investment from In-Q-Tel, the venture capital arm of the Central Intelligence Agency, and being steeped in US government contracts, is also having a truly rough time? Invest in Google and Microsoft by all means, but governments historically make truly terrible venture capitalists, and plugging your economy to an already turbulent tech bubble may not be the best strategy.
Which leads us to the next point. In building the world’s largest venture capital fund, the PIF will also have to invest heavily in attracting VC and private equity talent to Riyadh. It cannot rely solely on advisers and bankers such as JPMorgan to sniff-out potential deals. As it grows seats on the boards of various tech startups, not only will it have to work out a way to align its economic interests with those of a scaling tech firms – a challenge in itself – but it will have to think like a VC, a cultural 360-degree shift in a country where the VC industry is relatively nascent, and which has spurred no unicorns as of yet.
In fact, this strategy follows clearly in the footsteps of nearly all startup development efforts in the kingdom. Nearly all initiatives are government-backed in some shape or form, with VCs and the private sector taking a back seat. This already hinders the kingdom’s capacity to innovate, as risk aversion is already high, and this just fuels it more. On the other hand, with all the other localised versions of ride-hailing apps propping up left, right and centre, this official seal of approval will not only see a surge in imitation startups, but will be the death knell for them.
Many have reported this cash injection as great news for Uber – although not without criticism – as the company struggles to make leaps in the Middle Eastern market. What is surprising, is that the PIF did not invest in Dubai-based Careem. Of course, Careem’s valuation is just a fraction of Uber’s. However, it is one of the few startups in the Middle East to have gone on to raise $60m at an undisclosed valuation in a series C. If the PIF is going to play VC, and help transform the kingdom into an innovation-based economy, investing in a regional high-growth startup would have sent the right message to investors and entrepreneurs, and would have been more aligned with its localisation strategy.
Building the world’s largest venture capital fund will not be without its acute challenges and risks. However, it is without doubt aligned to the kingdom’s strategy of investing not only in technologies of the future, but technologies that will shape its future. From driverless cars to drones and even artificial intelligence, this is not just about oil prices, but about Saudi’s ability to transfer these technologies to develop its own “civilian and military applications”, as another source put it.
Do not expect all the PIF’s investments in tech to be as high profile as Uber. The fund will not take the risk of disclosing all its investments for fear of further affecting oil prices. However, do not be surprised to see more appointments to the boards of tech giants, as the kingdom takes a distinctive entrepreneurial approach to refuelling its economy.