Silicon Valley VCs tour Middle East in hunt for funding

Silicon Valley traders are touring the Center East, looking for to construct long-term ties with sovereign wealth funds through the worst funding crunch for enterprise capital companies in virtually a decade.

High expertise VCs reminiscent of Andreessen Horowitz, Tiger World and IVP have jetted groups of executives to Saudi Arabia, the United Arab Emirates and Qatar in current weeks, in accordance with folks with information of the journeys.

These visits come after their conventional North American and European backers cope with an financial downturn that has pressured them to rein in non-public investments.

VCs are, in flip, being inspired to come back to the area, as Gulf officers and younger royals search to diversify their economic system away from oil with investments into sizzling tech sectors reminiscent of synthetic intelligence.

That has additionally meant that some VCs have quietly reversed earlier choices to refuse conferences with, or money from, Saudi Arabia over considerations about its human rights file following the 2018 homicide of journalist Jamal Khashoggi.

“We got here to San Francisco in search of them in 2017. Now . . . everyone seems to be coming to [us],” mentioned Ibrahim Ajami, head of ventures at Mubadala Capital, a $6bn arm of Abu Dhabi’s $284bn sovereign wealth fund. “The tech correction has humbled the trade.”

The Monetary Occasions interviewed greater than a dozen Silicon Valley VCs who management tens of billions of {dollars} between them, in addition to a string of advisers and bankers. They describe a brand new love affair between US enterprise funds and Center Japanese money.

A gaggle of Silicon Valley executives acquired a private invite from the workplace of Yasir al-Rumayyan, the governor of PIF, the $620bn Saudi sovereign wealth fund, to be his visitor ultimately month’s Components One Saudi Arabian Grand Prix in Jeddah, in accordance with an individual with information of the calls.

Among the many attendees, in accordance with the individual, was Andreessen Horowitz co-founder Ben Horowitz — the veteran financier’s second journey to Saudi Arabia in lower than six months. Andreessen Horowitz declined to remark.

PIF’s enterprise arm Sanabil just lately disclosed its partnerships with almost 40 US enterprise companies, together with Andreessen Horowitz, Coatue Administration, David Sacks’ Craft Ventures, Perception Companions and 9Yards Capital, the place former UK chancellor George Osborne is a managing associate. The sums invested within the companies weren’t revealed.

Horowitz, whose San Francisco-based agency raised simply over $14bn final yr, specifically has turn into a vocal supporter of Saudi curiosity in tech innovation.

In October, he spoke on the “Davos within the desert” convention in Riyadh and had lunch with Princess Reema bint Bandar al-Saud, the Saudi ambassador to the US. At a convention organised by PIF final month in Miami, he praised the dominion as a “start-up nation” and likened its crown prince, Mohammed bin Salman, to an organization founder.

A yr in the past, Horowitz’s journeys to Saudi Arabia would have been an anomaly amongst VCs flush with money and eager to keep away from the ethical predicament of coping with states with poor human rights data. Now the oil-rich Gulf, which loved a petrodollar windfall final yr, is buzzing with US start-up traders, in accordance with a number of individuals who have visited there this yr.

“The 4 Seasons in Riyadh is mainly Palo Alto,” mentioned a associate at one giant Silicon Valley enterprise fund.

That willingness to do enterprise within the area has led to some criticism. Founders Fund associate Keith Rabois, who mentioned in 2018 that Silicon Valley had been hypocritical for accepting Saudi cash, mentioned, “I don’t change my values and ideas as a result of a funding setting is troublesome.”

However Lead Edge founder Mitchell Inexperienced, who made enterprise investments in Alibaba and Uber, mentioned he had spent the previous few weeks “constructing long-term relationships” with folks and corporations within the Gulf. “We expect it’ll turn into an more and more vital space of the world over the subsequent decade. It reminds us of going to China in 2003.”

Tiger World associate Scott Shleifer additionally spoke on the Riyadh convention in October, and the agency has been pursuing funding from the dominion as a part of its newest $6bn fundraising, in accordance with folks aware of the matter. A group from IVP, one in every of Silicon Valley’s oldest enterprise companies, led by associate Somesh Sprint, went on a tour of the area, in accordance with one individual with information of the journey. IVP declined to remark.

US enterprise capital has exploded in measurement lately, partially fuelled by a growth in tech valuations through the coronavirus pandemic. Marquee funds that after prized exclusivity, reminiscent of Sequoia Capital and Andreessen Horowitz, have raised funds of as a lot as $5bn and generally as giant as $9bn. That shift has been intensified by giant entrants to the market, reminiscent of Japan’s SoftBank and Tiger World, which have deployed tens of billions of {dollars} into start-ups.

“These guys have constructed their fashions on high-volume, high-velocity traders — now they’re a prisoner to the capital cycle,” mentioned a associate at a enterprise fund with greater than $4bn beneath administration.

Coping with nations reminiscent of Saudi Arabia is the “Faustian discount these companies have made by scaling up”, the associate added. “They went for ubiquity and market share and gave up on shortage, and due to that they need to play the sport of promoting themselves. Enterprise capital went from being the Hermès Birkin bag of investing to Goal.”

PIF, specifically, has step by step permeated US tech by means of its investments over the previous decade. It contributed $45bn to the $100bn SoftBank Imaginative and prescient Fund in 2016. It has made giant direct investments in US tech corporations, together with a $3.5bn funding in Uber in 2016 and greater than $1bn in electric-car maker Lucid Motors in 2018. That very same yr, Elon Musk mentioned he was in talks with PIF to assist him fund a $72bn deal to take Tesla non-public, though a deal didn’t materialise.

Within the wake of the homicide of journalist Jamal Khashoggi by Saudi operatives in late 2018, various high-profile western companies, together with many tech traders, stopped publicly working with the nation.

That continued till the current financial downturn, which has meant swimming pools of capital obtainable for enterprise funds at giant western establishments have dried up. Fundraising by enterprise capital companies hit a nine-year low on the finish of 2022, in accordance with analysis agency Preqin.

VCs are sitting on a file $300bn of “dry powder” — cash raised that has not but been deployed. However many are struggling to search out profitable investments in start-ups and can be unable to lift a brand new enterprise fund.

Money that VCs put into start-ups has plunged greater than 50 per cent over the previous 12 months, in accordance with information supplier Crunchbase.

In consequence, many have been lured again to the Gulf, which “is probably the most liquid place on the planet proper now”, in accordance with the pinnacle of a $1bn enterprise fund.

“It is a distinctive alternative for funds like Mubadala to essentially take a number one function within the improvement of expertise over the subsequent 20 years,” Ajami mentioned. Mubadala has invested in or alongside various huge Silicon Valley companies, together with non-public fairness group Silver Lake and Sequoia Capital. It just lately invested in fintech group Klarna alongside Sequoia.

In the meantime, the Qatar Funding Authority mentioned in 2019 it will increase investments within the US from $30bn to $45bn, together with in expertise.

For some traders, there stays a tough ethical debate. “The US is shopping for oil from Saudi, we’re promoting them drones, the place do you draw the road?” mentioned one enterprise capitalist, who admitted that they had shifted from a stance of by no means accepting Saudi cash to being extra open to it as fundraising had dried up.

For others, notably those that management smaller funds and subsequently have nonetheless been capable of faucet up western pension and endowment funds, the problem is extra black and white.

“I’ve been within the Valley for 20 years and I’m more and more upset with the way in which we behave,” mentioned one senior banker who handles offers for enterprise companies. “If you happen to’re actually good at what you do, go to Norway [to raise money].”

Further reporting by Ivan Levingston, Will Louch, Arash Massoudi and Antoine Gara

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