Liquidity crunch leads investors such as Andreessen Horowitz to sovereign wealth funds in Saudi Arabia, Qatar and UAE
Silicon Valley investors are touring the Middle East, seeking to build long-term ties with sovereign wealth funds during the worst funding crunch for venture capital firms in almost a decade.
Top technology VCs such as Andreessen Horowitz, Tiger Global and IVP have jetted teams of executives to Saudi Arabia, the United Arab Emirates and Qatar in recent weeks, according to people with knowledge of the trips.
These visits come after their traditional North American and European backers contend with an economic downturn that has forced them to rein in private investments.
VCs are, in turn, being encouraged to come to the region, as Gulf officials and young royals seek to diversify their economy away from oil with investments into hot tech sectors such as artificial intelligence.
That has also meant that some VCs have quietly reversed earlier decisions to refuse meetings with, or cash from, Saudi Arabia over concerns about its human rights record following the 2018 murder of journalist Jamal Khashoggi.
“We came to San Francisco looking for them in 2017. Now . . . everyone is coming to [us],” said 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 industry.”
The Financial Times interviewed more than a dozen Silicon Valley VCs who control tens of billions of dollars between them, as well as a string of advisers and bankers. They describe a new love affair between US venture funds and Middle Eastern cash.
A group of Silicon Valley executives received a personal invite from the office of Yasir al-Rumayyan, the governor of PIF, the $620bn Saudi sovereign wealth fund, to be his guest at last month’s Formula One Saudi Arabian Grand Prix in Jeddah, according to a person with knowledge of the calls.
Among the attendees, according to the person, was Andreessen Horowitz co-founder Ben Horowitz — the veteran financier’s second trip to Saudi Arabia in less than six months. Andreessen Horowitz declined to comment.
PIF’s venture arm Sanabil recently disclosed its partnerships with nearly 40 US venture firms, including Andreessen Horowitz, Coatue Management, David Sacks’ Craft Ventures, Insight Partners and 9Yards Capital, where former UK chancellor George Osborne is a managing partner. The sums invested in the firms were not revealed.
Horowitz, whose San Francisco-based firm raised just over $14bn last year, in particular has become a vocal supporter of Saudi interest in tech innovation.
In October, he spoke at the “Davos in the desert” conference in Riyadh and had lunch with Princess Reema bint Bandar al-Saud, the Saudi ambassador to the US. At a conference organised by PIF last month in Miami, he praised the kingdom as a “start-up country” and likened its crown prince, Mohammed bin Salman, to a company founder.
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A year ago, Horowitz’s trips to Saudi Arabia would have been an anomaly among VCs flush with cash and keen to avoid the moral predicament of dealing with states with poor human rights records. Now the oil-rich Gulf, which enjoyed a petrodollar windfall last year, is buzzing with US start-up investors, according to several people who have visited there this year.
“The Four Seasons in Riyadh is basically Palo Alto,” said a partner at one large Silicon Valley venture fund.
That willingness to do business in the region has led to some criticism. Founders Fund partner Keith Rabois, who said in 2018 that Silicon Valley had been hypocritical for accepting Saudi money, said, “I don’t change my values and principles because a funding environment is difficult.”
But Lead Edge founder Mitchell Green, who made venture investments in Alibaba and Uber, said he had spent the past few weeks “building long-term relationships” with people and companies in the Gulf. “We think it will become an increasingly important area of the world over the next decade. It reminds us of going to China in 2003.”
Tiger Global partner Scott Shleifer also spoke at the Riyadh conference in October, and the firm has been pursuing investment from the kingdom as part of its latest $6bn fundraising, according to people familiar with the matter. A team from IVP, one of Silicon Valley’s oldest venture firms, led by partner Somesh Dash, went on a tour of the region, according to one person with knowledge of the trip. IVP declined to comment.
US venture capital has exploded in size in recent years, in part fuelled by a boom in tech valuations during the coronavirus pandemic. Marquee funds that once prized exclusivity, such as Sequoia Capital and Andreessen Horowitz, have raised funds of as much as $5bn and sometimes as large as $9bn. That shift has been intensified by large entrants to the market, such as Japan’s SoftBank and Tiger Global, which have deployed tens of billions of dollars into start-ups.
“These guys have built their models on high-volume, high-velocity investors — now they are a prisoner to the capital cycle,” said a partner at a venture fund with more than $4bn under management.
Dealing with nations such as Saudi Arabia is the “Faustian bargain these firms have made by scaling up”, the partner added. “They went for ubiquity and market share and gave up on scarcity, and because of that they have to play the game of selling themselves. Venture capital went from being the Hermès Birkin bag of investing to Target.”
PIF, in particular, has gradually permeated US tech through its investments over the past decade. It contributed $45bn to the $100bn SoftBank Vision Fund in 2016. It has made large direct investments in US tech companies, including a $3.5bn investment in Uber in 2016 and more than $1bn in electric-car maker Lucid Motors in 2018. That same year, Elon Musk said he was in talks with PIF to help him fund a $72bn deal to take Tesla private, although a deal did not materialise.
In the wake of the murder of journalist Jamal Khashoggi by Saudi operatives in late 2018, a number of high-profile western businesses, including many tech investors, stopped publicly working with the country.
That continued until the recent economic downturn, which has meant pools of capital available for venture funds at large western institutions have dried up. Fundraising by venture capital firms hit a nine-year low at the end of 2022, according to research firm Preqin.
VCs are sitting on a record $300bn of “dry powder” — money raised that has not yet been deployed. But many are struggling to find lucrative investments in start-ups and will be unable to raise a new venture fund.
Cash that VCs put into start-ups has plunged more than 50 per cent over the past 12 months, according to data provider Crunchbase.
As a result, many have been lured back to the Gulf, which “is the most liquid place on the planet right now”, according to the head of a $1bn venture fund.
“This is a unique opportunity for funds like Mubadala to really take a leading role in the development of technology over the next 20 years,” Ajami said. Mubadala has invested in or alongside a number of big Silicon Valley firms, including private equity group Silver Lake and Sequoia Capital. It recently invested in fintech group Klarna alongside Sequoia.
Meanwhile, the Qatar Investment Authority said in 2019 it would raise investments in the US from $30bn to $45bn, including in technology.
For some investors, there remains a tricky moral debate. “The US is buying oil from Saudi, we’re selling them drones, where do you draw the line?” said one venture capitalist, who admitted they had shifted from a stance of never accepting Saudi money to being more open to it as fundraising had dried up.
For others, particularly those who control smaller funds and therefore have still been able to tap up western pension and endowment funds, the issue is more black and white.
“I’ve been in the Valley for 20 years and I’m increasingly disappointed with the way we behave,” said one senior banker who handles deals for venture firms. “If you’re really good at what you do, go to Norway [to raise money].”
Additional reporting by Ivan Levingston, Will Louch, Arash Massoudi and Antoine Gara
