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The Intersection of Technology & Investments in KSA, and the Kingdom’s Digital Future

banking 4.0, open banking, digital banking
Unravelling Banking 4.0
March 22, 2024

“Saudi Arabia is the largest, the fastest and the greatest technology success story of the 21st century, and yet, this story is just the beginning,” stated Saudi Minister of Communications and Information Technology, Abdullah Alswaha proudly at LEAP 2024.

Saudi Arabia is aggressively advancing towards becoming not just a dominant international economic force but a leader in the global tech arena; LEAP 2024 gave the world a candescent glimpse of that. From witnessing an array of technological progressions, new investment funds, and startup investments at LEAP24, Saudi Arabia has reinforced its position as a central hub for technology, innovation, entrepreneurship and investments.

Saudi Arabia’s Tech Revolution: Shaping the Future

Saudi tech ecosystem is witnessing a remarkable transformation, positioning the country as a leading hub for technological innovation and investments in the region. It is the country’s ambitious economic diversification plans, as part of its National Transformation Programme, that are driving the imperative for industries to transform digitally as technology becomes an underlying enabler for long-term viability of businesses.

A massive commitment to support tech innovation through various initiatives, including regulatory reforms, investment incentives, and the establishment of tech-focused economic zones such as NEOM and the King Abdullah Financial District, are encouraging tech startups and multinational corporations across the region and globally to become a part of the Saudi economic engine.

Saudi Booming Technology Sector: Expanding Horizons

Driven by the forward-looking strategy outlined by Vision 2030, KSA has been able to successfully sail ahead and continue its economic transformation despite the headwinds of global economic uncertainty in 2023. The unprecedented growth and remarkable milestones achieved by its technology sector is one glaring example of that.

Where the Saudi digital economy grew at a rate of 10.3% to reach a value of US$123 billion in 2023, its tech workforce expanded from 200,000 to 350,000 working professionals in the past year.

Another example that underscores Saudi Arabia’s leading role in shaping the future of digital innovation and AI investment, is the 33% growth rate of venture capital investments in the country with the Saudi digital market nearing US$50 Billion in size despite a global downturn. This represents 40% of the regional market share and accounts for more than 52% in venture capital financing.

With Amazon Web Services now venturing into Saudi Arabia and planning to set up an infrastructure region by 2026 with the objective of supporting developers, startups, entrepreneurs, and enterprises, the Kingdom has become the sole nation in the entire MENA region to host all key hyper-scalers including IBM, Microsoft, Dell Technologies and Apple.

Investments in companies operating in the realm of generative AI and cloud infrastructure are at an all-time high. Significant investments in the regional cloud infrastructure in the preceding year and the recent announcement of the world’s largest industrial LLM (Large Language Model), METABRAIN by Saudi Aramco, indicate the scale and speed of Saudi tech sector’s progression.

Formation of Aramco Digital to take the lead on AI development and drive digital transformation; the company’s collaboration with IBM in cybersecurity among other areas; introduction of Saudi Accelerated Innovation Lab (SAIL) to incubate digital R&D, build new digital solutions, create new ventures, and invest in new technologies; all point at the seriousness with which Saudi organisations and government are running in the race of implementing advanced technologies at a national scale.

Adding to the above, amidst the rapid global technological evolution, the Kingdom of Saudi Arabia is taking significant strategic steps towards adopting and regulating Blockchain technology. This move will play a pivotal role in fast-tracking Saudi Arabia’s journey towards digital transformation, sustainable economic development, and opening new investment horizons.

Saudi Arabia: A Regional Hub for Artificial Intelligence by 2030

As a part of the ambitious blueprint outlined in Vision 2030, Saudi Arabia plans to establish an investment fund worth US$40 Billion dedicated to investing in AI startups and the related technology necessary to power the Artificial Intelligence revolution such as semiconductor chips and data centres.

The strategy is aimed at attracting foreign investments worth US$ 21.33 Billion in the field of AI, establishing 400 AI startups, creating 25,000 new jobs and transforming the Kingdom into a regional centre for artificial intelligence by 2030 with a critical focus on healthcare, energy, transportation and manufacturing sectors.

Poised to become a leading regional hub of AI in the coming years, the country is taking concrete steps to achieve these goals that include the:

  • Establishment of Smart Cities with intelligent solutions to improve urban services, enhance sustainability, and create an innovative urban environment.
  • Setting up Regional AI Center in Riyadh to attract global companies and provide a supportive environment for startups and innovation.
  • Launching financing and support programs for AI startups such as grants, loans, incubation, and acceleration programs.
  • Development of a regulatory environment that is supportive of AI and encourages investment in the field and protects users' rights.

The Public Investment Fund's targeting of AI startups denotes the importance of having a well-thought-out strategy for entering the Saudi market.

What is worthy of mentioning here is the fact that advanced technologies, particularly generative AI, will significantly enhance KYC (Know Your Customer), KYB (Know Your Business), AML (Anti-Money Laundering) and Fraud Prevention processes for financial institutions.

Entrepreneurship and The Burgeoning Investment Landscape

Saudi Arabia gaining the leading position in the region’s VC ecosystem in 2023 for the first time in its history and surpassing the US$1 Billion mark for the second consecutive year despite the decline in both regional and global VC markets, is a testimony of the Arabian peninsula's fierce economic development.

Evidenced by the introduction of numerous initiatives contributing to the unmatched evolution of KSA’s startup ecosystem and Saudi Arabia capturing the highest share of total VC funding in MENA in year 2023, affirms the attractiveness of the Saudi market.

Saudi Arabia's extraordinary strides in the digital economy and entrepreneurship over 2023 can be well gauged by the following key highlights of the past year:

  • Saudi Arabia increased its rank to 2nd most transacted country in the MENA region.
  • The Kingdom accounted for 26% of the total deals across MENA region with funding rising by 33% YoY tipping over US$1.38 Billion.
  • MEGA deals (US$100Million+) stood at an all-time high of US$879 Million. The fintech industry accounted for two of the four MEGA rounds and three of the top five deals closed in Saudi Arabia.
  • As a consequence of MEGA deals, the average deal size in the country rose to US$12.8 Million.
  • FinTech led as the industry of choice for investors. 51% of the country’s total capital deployed was in the fintech sector, amassing US$704 Million across 30 deals punctuated by Tabby and Tamara’s MEGA rounds. E-commerce/retail vertical landed second in deals.
  • 114 unique investors funded Saudi-based startups in 2023; Hala, Shorooq Investors, Venture Souq, Waed Ventures, SVC, STV,  Wamda Capital, Al-Jazeera Capital, Global Ventures, Vision Venture and 500, being some of the most prominent VCs.
  • Exit activity in the Kingdom remained relatively stable with 9 Mergers & Acquisitions taking place. Saudi Arabia accounted for 21% of MENA’s M&A transactions in 2023, ranking second after the UAE.

In addition to this, recently in March, a number of investment funds were launched by VC giants operating in the region namely, SVC, Oasis, Merak Capital, Takamol Holding Ventures, Plug and Play Middle East, Unifonic and Impact46. The funds, collectively valued at US$ 888 Million, are poised to support the local tech startup and venture capital sector in various verticals such as AI, digital payments, and e-sports/e-gaming.

Moreover, Saudi Venture Capital & Private Equity Association launched three programs to further develop the Venture Capital and Private Equity ecosystem in Saudi Arabia, targeting fund managers (General Partners) and fund investors (Limited Partners).

Where VC firms were found prioritising initiating new funds and programs, the Ministry of Information Technology, among a number of other supporting initiatives, launched “Tech Founders” training program aimed at developing the skills of founders of tech startups.

The Rise of Fintech: Revolutionising Saudi Finance Sector for a New Era

In the midst of a proliferating number of tech startups and outstanding fundraising, development of Saudi Arabia’s fintech industry was exceptional, driven by the Financial Sector Development Program (FSDP).

Since the inception of Fintech Saudi in 2018, there has been an impressive 20.7x times growth in the number of fintechs. As of now, the Kingdom is host to 207 fintech companies and the goal is to increase this number to 525 by 2030.

Attributed to the regulatory support, increased digital adoption and Saudi Arabia’s commitment to fostering a digital economy, fintech funding in Saudi Arabia exhibited a dynamic growth pattern beginning with US$ 20 million in 2020 soaring to US$ 791 Million in 2023. Below is a quick snapshot of it.

Venture Capital in KSA 2023

Among all deals, investments in Tabby ($700M from J.P. Morgan) and Tamara (US$150M from Goldman Sachs) are of significance as both startups not only secured MEGA deals but also represent the lightning adoption of Open Banking within the financial technology sector as both offer Buy Now Pay Later (BNPL) services.

VC in fintech KSA 2023

To further strengthen its fintech sector, SAMA (Saudi Central Bank) and Saudi Capital Market Authority collaboratively launched the “Makken Fintech” program under the umbrella of Fintech Saudi that aims to empower 150 fintech startups over a period of 3 years.

Unlocking the Future: Charting the Course for Technology and Investments by Leveraging the Vision 2030 Strategy

Saudi Arabia will constitute 70% of the relative weight for the MENA market on the MSCI Emerging Markets Index by 2024, mentions the latest report published by Goldman Sachs. Technology and investments in tech companies will play a pivotal role in facilitating Saudi Arabia to reach there.

But what does the future entail for the tech sector? How will businesses adopt technology in the next two to three years?

1. Artificial Intelligence will reign the business sector

According to KPMG Tech Report Saudi Arabia 2024, 16% of the leading Saudi organisations have witnessed gains from investment in Artificial Intelligence and automation, and 56% of Saudi technology leaders believe that AI will be a defining factor in helping them achieve their business objectives over the next three years.

2. SaaS based business models will be adopted across verticals

Increase in performance and profits owing to XaaS (Anything as a Service) model, 63% of organisations in Saudi Arabia have already adopted the XaaS model in the past 24 months, and this will only increase.

3. Cyber Security providing tech companies will flourish

Against the backdrop of successful recent digital transformation, cybersecurity stands firm as a focus area since digital transformation and the adoption of new technologies will increase exposure to cyber risks. Businesses that perform strongly on the cyber security front will gain competitive advantage.

4. ESG will take the lead as the top tech innovation priority

Since ESG principles lie at the core of Saudi Vision 2030, the Environmental, Social and Governance (ESG) agenda is expected to be the primary driver of technology innovation over the next two to three years. Given a growing emphasis on the need for businesses to advance their ESG commitments and the rising attention on sustainable/green finance for financial institutions, the organisations that will proactively adopt ESG in their business functions will stay at the forefront.

Agility, however, is crucial for businesses to stay ahead of the curve.

Way Forward: The Role of Government, Investors and Startups

Advancements in technology, increased inclination of startups towards adopting those technologies and surge in investments all go hand in hand. Undoubtedly the Saudi technology, entrepreneurship and VC ecosystems have undergone dynamic evolution in the past couple of years ascending the country to the top ranks in terms of funding size for startups.

This surge in funding has drawn a growing number of entrepreneurs to either establish new ventures or relocate their existing startups to the Kingdom.

Recognising this trend, the Saudi government is actively reforming regulations to facilitate a smoother integration of non-Saudi founders into the local business landscape. These regulatory enhancements are complemented by highly attractive incentives aimed at encouraging relocation to Saudi Arabia such as financial benefits, support services, and a more entrepreneur-friendly business environment.

Adding to this, the strenuous efforts of the Saudi Government to ensure the implementation of its larger strategy through state owned institutions, organisations and initiatives such as SAMA, Capital Market Authority, Fintech Saudi, Financial Sector Development Program, SDAIA and SVC, have contributed immensely to this hyper growth. This in turn has encouraged existing and new financial institutions to establish VC funds, and motivated regional and global funds to invest in Saudi startups.

The proactive approach by the government underscores its commitment to fostering a thriving, diverse tech ecosystem within the country.

However, the key to fostering sustained and steady growth lies in a three-dimensional effort.

Where Saudi government’s enhanced focus on minimising equity funding gap by stimulating VC investment from the private sector, and launching investment programs/products developed according to the needs of the ecosystem would aid the flourishing of the technology-startups-investment trio; on the other hand, the investment firms can play their part in solidifying VC ecosystem through their increased support for startups and SMEs in the form of funds, opening expansion opportunities in other markets and mentorship of entrepreneurs.

As far as startups are concerned, whether Saudi Arabia is the right place to start your tech business is no longer a question; whether you’ll be able to take advantage of the rising tech wave is something to ponder upon. The answer lies in devising and executing a strategy that aligns with the goals of Saudi Vision 2030, serving the overarching strategic plan for the Kingdom’s journey towards economic transformation underpinned by its three pillars - a vibrant society, a thriving economy and an ambitious nation.