Saudi’s Uber-deal: An attempt at the world’s largest venture capital fund?

Only two weeks after announcing a $3.5 billion investment in the ride sharing company Uber, Deputy Crown Prince Mohammad Bin Salman was on the road looking for new opportunities.

Partnership agreements have already been signed with Cisco Systems and Microsoft, and there is considerable speculation on whether additional investment deals are in the pipeline. It seems that the investment into Uber is merely the high-profile start of a global Saudi investment spree.

“The investment in Uber was made to give publicity for the fund itself and for Saudi Arabia,” said Mohammed al-Suwayed, the head of capital and money markets at Riyadh-based asset management firm Adeem Capital. “From now on many investors and entrepreneurs will start approaching the PIF for investments. However, I don't think the PIF will decide to invest in high-risk investments other than Uber.”

The $3.5 billion investment into Uber is the single largest investment into a private company ever. Although the deal was announced the first week of June, the negotiations between the PIF and Uber had only begun several months before in March. The investment sees the PIF own about 5% of Uber and the PIFs managing director, Yasir al-Rumayyan, will join the Uber board.

The investment into Uber is important because it shows that Saudi Arabia is already implementing part of its long term goals. In Saudi Arabia’s Vision 2030, the government announced: “In technology, we will increase our investments in, and lead, the digital economy.”

Keen investor

But the investment is perhaps more important because of the signal it send to the rest of the world - that Saudi Arabia is keen to make investments into technology startups that pose a much larger risk than what it has invested in so far.

Until recently the PIF had invested in stable companies such as Saudi Basic Industries Corp and Saudi Telecom Company. In the past year it expanded to invest $1.1 billion in South Korea’s Posco Engineering and a $10 billion investment into various Russian projects via the Russian Direct Investment Fund.

But with the investment into Uber the PIF has entered a whole new playing field. Technology startups are more profitable but also more risky than what the PIF has traditionally invested in.

Even if, as al-Suwayed believes, Uber is the most risky investment the PIF makes, it can still take on considerable more risk than it has in the past. This is not only interesting to those analysing Saudi Arabia, but also to thousands of entrepreneurs in the West who seek funding for their own startups, including many at the Global Entrepreneurship Summit.

Tatjana de Kerros, the founder of the entrepreneur website The Startup illusion, expressed what was on the mind of many when she wrote, “by investing in Uber, the PIF has just confirmed it is building the world’s largest venture capital fund.”

Whether that is true remains to be seen, but the money is certainly there. Currently only 5% of the PIF investments are foreign, but Saudi Arabia has announced its intention to increase that figure to 50% by 2020.

If it succeeds at this and the PIF also grows to its target of $2 trillion, the massive investment into Uber will represent less than a single percent of the foreign investments that will be made by the PIF in the coming years. Now that it has opened its deep pockets to firms outside of its traditional scope, the 45-year old PIF is rapidly attracting the attention of Western entrepreneurs.

This is especially significant as many analysts believe that funding for startups has recently become more difficult, partly due to an overvaluation of startups in the past few years.

As many startups in the West face mounting obstacles to traditional funding, Sovereign Wealth Funds like the PIF are an ideal alternative. Because of low oil prices and low interest rates, the potential high reward of tech startups is worth the risk for the Sovereign Wealth Funds. These funds control over $7.3 trillion in assets globally, and the Saudi PIF is expected to soon be the largest of them.

The Uber deal has made headlines for being the largest single investment into a private company ever. All the signs indicate that this investment is only the start of something much larger. If this is the case it could be transformative not only for the Saudi economy, but the entire landscape of startup funding - something the young entrepreneurs in Stanford will want to know everything about.