Venture Capital Investments in Saudi Arabia

: The Views of Venture Capitalists and Entrepreneurs

Abstract

The academic literature has demonstrated a growing fascination with Venture Capital (VC) investment in recent years. The debate has centred on how venture capitalists (VCs) make investment decisions and the information they rely on when taking an equity stake in an investee company. In addition, little is known about how much investors monitor start-ups after the decision to invest has been taken. The VC scene in the US or European context is understood better than that of developing countries such as those in the Middle East including Saudi Arabia. Although some differences among VC investors in developed countries have been identified, the reasons behind such differences have not been fully understood. Previous studies have looked at the role of different factors in determining entrepreneurs’ eligibility to get funded. These factors include education, prior experience, social capital, firm size, sector, and gender differences. The research in this thesis builds upon prior investigations by conducting an in-depth investigation into how VCs value an investment opportunity; the study seeks to highlight the role of different factors on the VCs’ decisions; financial as well as non- financial factors are considered. A model combining agency theory as well as signalling theory has been developed in the current thesis to investigate the relationship between the signals emitted and received by VCs as well as entrepreneurs. The unique cultural and legal environments in the Kingdom of Saudi Arabia, the growing VC sector in the country, and the increasing importance attached to start-ups under the Saudi Government’s Vision 2030 programme make the current investigation timely. Ascertaining the perceptions of VC investors as well as the views of entrepreneurs in such a context provides a deeper understanding of the determinants of VC investment in a novel setting. The primary data in this study were gathered using semi-structured interviews and a case study approach; 21 VC participants and 17 entrepreneurs were interviewed for this thesis. A single case study in a Saudi-based start-up was conducted to triangulate the findings. The thesis explores issues related to both the pre-investment stage as well as the post-investment stage VC activity. The findings show some support for the VC model initially proposed in this thesis, which was informed by prior US and European research. However, several differences emerge given the unique cultural settings within the Saudi location of the research. The results suggest that a great deal of emphasis was placed on historical and projected financial information by Saudi VCs when assessing potential investee firms; this finding differs slightly from the international evidence from developed countries. Saudi VCs seem to be influenced to a greater extent by their American counterparts in terms of their usage of investment appraisal techniques. The results suggest that the experience of the VC investor had a substantial impact on the valuation process employed when deciding whether or not to take a stake in an investee firm. In addition, signals such as personal chemistry, connections, and peer validation played a significant role in the VC investment process in Saudi Arabia. The cultural background of the Kingdom was associated with a less pronounced VC-entrepreneur agency problem. The results provide an in- depth understanding of the VC investors’ mindset relative to the existing studies in the literature.

Date of Award	2024
Original language	English
Awarding Institution	University of Dundee
Sponsors	Kingdom of Saudi Arabia & Jazan University
Supervisor	David Power (Supervisor) & Renzo Cordina (Supervisor)