From OPEC to Tech
How will Persian Gulf nations sustain their speed of innovation?
While a sporting event in Qatar captures the world’s attention, something that could have much greater long-term impact is taking shape behind the scenes. The World Cup makes a fine showpiece. But for technology investors, the real show is happening across the Persian Gulf region. Countries such as Qatar, Saudi Arabia, and the United Arab Emirates are ramping up efforts to become global tech innovation and finance hubs.
I represented our Singapore-based VC firm in late October at the Saudis’ 6th annual Future Investment Initiative (FII) conference (it was my 5th visit to Riyadh). This meeting is known as “Davos in the desert,” and rightly so. It seemed the entire investment world had gathered in Riyadh: executives of major banks, venture funds, and private equity funds, along with speakers like Ray Dalio of Bridgewater, who paid a rare in-person visit. Following my attendance at FII, I also co-hosted investors and founders at the F1 Etihad Abu Dhabi Grand Prix, attended the World Cup in Qatar with our limited partners from the region, and was a guest at the Wadi Ashar Dialogue in Saudi Arabia.
In addition to hosting high-profile forums, the Gulf states have launched waves of programs to foster tech-based activity in various forms. Some key new areas of interest are emerging. And key questions are arising, as to whether the Gulf region can maintain the momentum that’s been built. We’ll look at both after considering what triggered the whole phenomenon.
Two Driving Factors + Three Sectors to Watch
The main reasons for the tech-and-finance push are twofold: existing wealth, and a desire to diversify away from the “resource curse,” which often stalls development in places that over-rely on exporting natural resources. Thanks to petroleum revenues, nations and sheikdoms that once lacked decent roads now compete to build the tallest skyscrapers. These revenues also have raised living standards for many (though not all.) But oil and gas income can fluctuate greatly depending on market prices, and the global movement to renewable energy may be good for the climate but not the best long-term sign for oil producers. Heads of the Gulf states want to be leaders, not followers, and thus the drive to invest today’s money in tomorrow’s promising trends.
Few independent, Western-style venture funds have been formed as yet. Most tech investing is led by sovereign wealth funds and family offices, often through spinoff funds targeted to growth ventures. Initially, this investing was aimed outside the Gulf region, and much of it still is, as shown recently when Saudi and Qatari investors took part in Elon Musk’s purchase of Twitter.
Now, though, there is a new focus on breeding tech industries at home and attracting foreign investment. Government-backed initiatives play a strong role here. They range from the Saudi Green Initiative (SGI) to interlinked webs of agencies and programs in the Emirates. On my visits to the Gulf region I am seeing three tech sectors draw particular interest: fintech, renewables, and a surprising one, alternative proteins.
Fintech (financial technology) is the most active sector at present, notably within the United Arab Emirates. Fintech makes sense because it’s the low-hanging fruit. Demand is growing for advanced mobile services, and Dubai and Abu Dhabi already are financial hubs, so their governments and nstitutions are helping to build technology that can bolt onto the industry. Support systems include the Fintech Hive startup accelerator in Dubai, plus sandboxes like Abu Dhabi’s ADGM RegLab, where firms can test new fintech concepts in a controlled environment. Also, the UAE national government is working to attract crypto and digital assets. Its latest Virtual Assets Market Report touts the country’s “light-touch” approach to regulation, which it claims is a sensible middle ground between banning crypto and throwing the doors wide open.
Fintech entrepreneurs are designing services to work across the MENA (Middle East — North Africa) corridor and some could have much wider markets. About one-fourth of the world’s people are Muslims, many of whom observe Sharia precepts on financial affairs. Multiple startups now offer Sharia-compliant fintech in Southeast Asia, where our firm invests. At least one is pursuing a foothold in the Gulf region while outward growth from the Gulf looks equally promising.
Renewable energy is a longer-term investment play. Persian Gulf countries get plenty of sunshine, and Saudi Arabia, for one, has ambitious plans to expand production of both solar and wind energy. Renewables at present generate only about 0.3% of the kingdom’s electricity but could eventually even bring in export revenue: Outside the Gulf region, a project is under way to pipe solar from the Sahara to Scotland via HVDC (high-voltage direct current) cables. The Gulf states can get an export boost simply by moving to renewables domestically, as this would free up more oil and gas for sale.
Governments in the region want to be progressive leaders in going green. The Saudi Green Initiative is an omnibus plan for coping with climate change. Elements include planting 600 million trees for CO2 capture and preventing erosion of the kingdom’s coastline.
Alternative proteins and food technology make up an intriguing sector. Plant-based proteins such as soy products are a niche market compared to the preference for meats, poultry and fish in most countries. But the niche is growing fast. A Bloomberg Intelligence report projected the global market for plant proteins to reach $162 by 2030, more than 5X the 2020 value. One potential new feedstock source is the date palm tree, cultivated in the Gulf region since ancient times. The Oman Investment Authority has partnered with a U.S. firm to use Oman’s surplus date harvest in a process that combines the fruit with mushroom protein.
Tech-industry ecosystems are forming rapidly in the Gulf and there are some early success stories. Although no decacorns have emerged yet, two Dubai startups became major acquisitions. Uber bought the ride share firm Careem for over $3 billion and now operates in 12 countries as a subsidiary, while the online marketplace Souq was acquired and absorbed by Amazon.
The challenge for the Gulf states is to build on this early momentum. Several factors threaten to put a damper on sustained growth. In the sectors I’ve mentioned, there is growing global competition to develop scalable new technologies and/or business models. Global competition for capital is likely to increase, too, as China and Hong Kong come free of Covid lockdowns.
Furthermore, competition within the Gulf region could be a factor. Saudi Arabia, Qatar, Dubai, and Abu Dhabi compete on many fronts, and lately, it can seem that they’re all racing to become the definitive hub of tech and finance. A key determinant in the years ahead may be the extent to which they can collaborate, partner and retain talent. None have huge domestic markets, but together they would be formidable.
At present, our venture firm’s interest in the Gulf region rides primarily on exploring it as a growth market for our Southeast Asian portfolio companies. Could this evolve to a deeper and more direct interest? It’s not out of the question. The world is increasingly connected, and the Persian Gulf area looks increasingly like a good place to make connections.