Don’t be surprised that the launch of the world’s largest technology fund has gone completely under the radar. After all, amidst a $350 billion defense deal- what is a measly $93 billion- even if this (comparatively) paltry sum includes backers such as Apple and Qualcomm.
In June last year, I wrote about how Saudi Arabia had launched the world’s largest venture capital fund by investing $3 billion in ride-hailing startup Uber. Back then, the Public Investment Fund (PIF) had announced its plan to launch a $2 trillion mega-fund- enough to ‘create the largest fund on earth‘- and transition Saudi Arabia into the post-oil era. Or as I like to call it, transform from “the Kingdom of Black Gold to the Kingdom of Tech“.
And Kingdom of Tech it will be.
Over the weekend, when the world was focused on Trump’s inaugural visit to the Kingdom, Saudi Arabia announced with little fanfare it had secured $93 billion of the $100 billion target, for the Vision Fund- officially making it the world’s largest tech investment fund, as well as the world’s largest private equity fund.
The Vision Fund– aptly named in reference to the Vision 2030- is backed by The PIF and Japanese telecommunication giant SoftBank Group- who transformed a $20 million stake in e-commerce unicorn Alibaba into a $70 billion stake. Other investments includes the acquisition of Sprint Corp, as well as hundreds of stakes in startups- including Asian Uber competitor- Grab- in which it led a $750 million Series F, and Uber-killer Didi Chuxing. In total, SoftBank contributed $28 billion in the Vision Fund’s capitalization, alongside the PIF who invested $45 billion.
It is the other (albeit smaller) backers of the Vision Fund that underlines it’s potential, and a concrete shift in the Kingdom’s investment, technology and economic diversification policy. On-board include Apple- who committed $1 billion to the Fund- as well as it’s arch-nemesis-turned-co-funder Qualcomm, whom in partnership with Foxxconn and Sharp collectively invested $4 billion. The remaining $15 billion was capitalized by Abu Dhabi’s very-own sovereign wealth fund- Mubadala- the investment masterminds behind renewable energy cluster Masdar as well as investors in Virgin Galactic.
As of yet, few details have been released on the Vision Fund- although we can already speculate in terms of its investment targets and preferences.
Given the size of the fund, and the current portfolio of it’s investors- it is likely to acquire minority and majority equity stakes in deals that run the hundreds of millions of dollars in technology firms- both established or startup unicorns that can generate not only long-term investment opportunities, but access to key technologies and market potential.
The fund’s most likely investment targets (if Soft`Bank and the PIFs previous investments are anything to go by) will most certainly focus on proven, value-added technology fields such as computing, software, hardware, consumer-facing technologies, financial technologies and artificial intelligence. Don’t be surprised however to find that the portfolio will include more future-oriented technologies such as VR/ AR, robotics, biotech and IoT- as these technologies shift from outliers to consolidation and mass market- and have clear long-term value for all Vision Fund investors and their primary industries.
Recently, the span shifted to 10 and 30 years ahead. I’m now seriously thinking about how to make sure that SoftBank group can grow for the next 300 years.
– Masoyoshi Son, CEO Softbank
On the other hand, if you are expecting a technology fund that will invest in breakthrough technologies and early-stage disruptive companies- this is highly unlikely- or at least, not directly.
Most likely, the Vision Fund will set aside some capital to invest as an LP in reputable and well-established venture capital firms spanning Asia, India the GCC, and the USA. After all, the PIF is a shareholder in STC Ventures- who in turn is managed by Iris Capital, who has stakes in Careem. However, from my experience in having worked with Saudi technology funds and programs- I also wouldn’t be surprised if substantial endowments won’t be earmarked for renowned university technology research programs and tech spin-off funds- with already established technology partners such as MIT and KAUST- that will focus on longer horizon technologies with significant industrial value to the Kingdom and it’s partners.
This doesn’t mean that the Vision Fund won’t be investing in startups per say. On the contrary, we can expect some big ticket unicorn startups (that haven’t IPOed yet) to be on its hit-list. Back in March of this year, SoftBank invested $300M in coworking slash office-leasing unicorn WeWork. It is already anticipated that a massive follow-on funding round of $2.7 billion will be raised through Vision Fund- potentially raising the startups valuation to over $18 billion- and clearly following in the footsteps of the PIF’s previous $3 billion investment in Uber. The Vision Fund won’t be seeking minority stakes either in these startup unicorns- placing it in a prone position to hit the jackpot when (and if) these startups go public- and recoup the high-ticket value of their initial investment. But most importantly- with equity stakes ranging from 20-40%- this will place the Fund in a position to influence the strategy of the founders- and influence not only the future direction and growth of the companies- but their technological focus.
It is the long-term strategic elements of the Vision Fund that make it unique- rather than it’s $93 billion size.
It is without doubt that the Vision Fund is a critical element of the Saudi Vision 2030- despite press releases having focused more on the role of SoftBank. This is in part due to the backlash Uber received when it sealed it’s latest round with the PIF- raising eyebrows across the US startup and investment community that it accepted funding from Saudi Arabia.
I, on the other hand (and as some of you are well aware),- have always been a significant proponent of Saudi Arabian economic diversification- and whilst there are risks associated with investing public money into what is by nature risky investment vehicles – there is no doubt about the potential benefits this can reap for the now Kingdom of Tech.
1. Access to unicorn and high-profile investments. Not that it couldn’t access them before- but as I previously highlighted- Uber suffered a massive backlash in accepting funding from the PIF. However, with the Vision Fund being spearheaded by SoftBank CEO rather than the PIF (despite it being a majority shareholder)- and having the likes of Apple, Sharp and Oracle founder on it’s investment committee- this will certainly have a positive impact in having access to, and sealing the deal with unicorns and other large technology companies, whom may otherwise have feared a PR backlash. SoftBank’s reputation and quality is undeniable- and it’s extensive experience in picking winners will be of significant added-value to the fund’s deal-flow.
2. It will pivot its relationship and economic influence with Asia. Few people are aware that in terms of innovation, Saudi Arabia doesn’t benchmark itself against the USA or even Europe- but aims by 2025 to be the leading innovation-driven economy in Asia. Nearly one third of the world’s private unicorns are based in Asia- 52 in total, with 37 in China and 8 in India. The relationship with SoftBank will enable Saudi Arabia to access a highly vibrant and growing tech ecosystem to invest in- and in the long run will expand economic opportunities and influence in the region that will go beyond just the technology sector.
3. A new strategy for technology-transfer and localization. The Vision Fund is set to become a cornerstone of Saudi economic diversification- and its transformation into an innovation-driven economy. So far, whilst the Kingdom has attracted a number of foreign companies to its technology and industrial clusters (General Electric, Boeing, IBM to name but a few)- the true spillover effect of the presence of these giants remains to be questioned. Those who have truly benefited are the companies themselves- having access to lucrative contracts and an open door to Middle East’s largest market. In exchange, they have contributed to R&D, technology, localization and entrepreneurship acceleration- whom in effect, have been at times little more than CSR activities and whose true economic value-added could be discounted. I have yet to see significant value-chain localization- and true innovation spillovers that have changed the structure of the Kingdom’s technology ecosystem. It is in no uncertain terms that Vision Fund will change this trend. By having stakes in large technology companies and startup unicorns- Vision Fund will have a seat on the table. And this seat may result in its portfolio companies expanding their presence in the Kingdom- partaking more actively in R&D and product development domestically, and working with local firms and startups. In exchange- they’ll still receive access to the region’s largest market- but they will be reporting to majority shareholders- not procurement officers.
4. Breakthrough technologies versus unicorns. With a follow-on WeWork deal in the pipeline- Vision Fund may well position itself to becoming one the the premier unicorn-investors globally. However, this is a fine-balance to tread between investment return and economic return. A future large IPO exit could bolster the coffers of the PIF- and create new sources of non-oil revenue. In contrast, their economic and innovative impact on Saudi Arabia would be minimal in real-terms. On the other hand, investing in portfolio technology companies that are building breakthrough technologies may very well enable the creation of new industrial capabilities in fields as varied as healthcare, renewable energy, defense and space- which in turn strengthen the ecosystem for local firms and startups serving this space. The Vision Fund’s long-term strategy may well depend on the vision of Son, and a choice between fueling media-darlings or long-term growth.
5. It may not fuel the growth of local tech startups. Currently, many high-growth MENA startups (think Careem, Fetchr, Souq.com etc) are copy-cats of existing US-based startups- providing localized technologies, products and services to an under-served market. This has been possible due to the difficulty for unicorns to successful penetrate and localize its offerings to the intricacies of the Middle Eastern market. By opening it’s doors wide open to startup unicorns- Saudi Arabia puts it’s own startup ecosystem at risk. Local entrepreneurs may find that previously niche markets have saturated overnight- and may never be able to compete with the market traction of a household name. Therefore, the Kingdom will have to carefully balance it’s desire for big-ticket items, and carefully direct and manage the manner in which unicorns plan to invest and expand into the market to ensure sufficient space remains for local entrepreneurs.
It is without doubt that the potential long-term impact of Vision Fund- if coupled with a balanced and strategic approach to it’s portfolio- and clear investment objectives- could be a transformative vehicle for Saudi Arabia and it’s co-investors.
I will even go as far as saying that Saudi Arabia may become a trailblazer for other countries exploring new long-term technology investment vehicles and growing their innovative capacities. However, this strategy is not without risk.
The Vision Fund should focus on investing in those future technologies that will have mass market adoption in the next 5 to 10 years- rather than fueling a potential startup bubble, and crashing on the way. If it manages to balance its long-term strategic objectives with the economic opportunities this will create- I envision a bright future for Vision Fund and the Kingdom of Tech.