Silicon Valley VCs tour Middle East in hunt for funding

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

Prime know-how VCs equivalent to Andreessen Horowitz, Tiger International and IVP have jetted groups of executives to Saudi Arabia, the United Arab Emirates and Qatar in latest weeks, in accordance with folks with information of the journeys.

These visits come after their conventional North American and European backers take care of 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 financial system away from oil with investments into scorching tech sectors equivalent to synthetic intelligence.

That has additionally meant that some VCs have quietly reversed earlier choices to refuse conferences with, or money from, Saudi Arabia over issues about its human rights document 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 Jap money.

A bunch of Silicon Valley executives obtained a private invite from the workplace of Yasir al-Rumayyan, the governor of PIF, the $620bn Saudi sovereign wealth fund, to be his visitor finally month’s Formulation 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 particular person, 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 corporations, 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 corporations weren’t revealed.

Horowitz, whose San Francisco-based agency raised simply over $14bn final yr, specifically has develop 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 information. Now the oil-rich Gulf, which loved a petrodollar windfall final yr, is buzzing with US start-up buyers, 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 massive 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 atmosphere 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 firms within the Gulf. “We predict it can develop into an more and more vital space of the world over the following decade. It reminds us of going to China in 2003.”

Tiger International 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 accustomed to the matter. A staff from IVP, one in all Silicon Valley’s oldest enterprise corporations, led by associate Somesh Sprint, went on a tour of the area, in accordance with one particular person 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 throughout the coronavirus pandemic. Marquee funds that when prized exclusivity, equivalent to Sequoia Capital and Andreessen Horowitz, have raised funds of as a lot as $5bn and generally as massive as $9bn. That shift has been intensified by massive entrants to the market, equivalent to Japan’s SoftBank and Tiger International, which have deployed tens of billions of {dollars} into start-ups.

“These guys have constructed their fashions on high-volume, high-velocity buyers — 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 equivalent to Saudi Arabia is the “Faustian cut price these corporations 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 regularly 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 massive direct investments in US tech firms, 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, plenty of high-profile western companies, together with many tech buyers, stopped publicly working with the nation.

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

VCs are sitting on a document $300bn of “dry powder” — cash raised that has not but been deployed. However many are struggling to seek out profitable investments in start-ups and will likely be unable to boost 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.

Consequently, many have been lured again to the Gulf, which “is essentially 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 actually take a number one position within the improvement of know-how over the following 20 years,” Ajami mentioned. Mubadala has invested in or alongside plenty of huge Silicon Valley corporations, 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 know-how.

For some buyers, there stays a difficult 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 they’d 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 corporations. “For those who’re actually good at what you do, go to Norway [to raise money].”

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

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