Fund of Funds: Venture capital can save small businesses from COVID-19

This year has been a painful one for small businesses. The coronavirus pandemic has kept economies closed, customers at home, and spending to a minimum. Economists predict that COVID-19 will cause the greatest recession the world has seen in nearly a century.

In this context, small businesses, long considered the backbone of thriving economies, have struggled. Traditional challenges, particularly funding, have been exacerbated by the pandemic.

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These obstacles need solutions for economies to return to growth and businesses to get back on their feet.

In OECD countries, small and medium enterprises (SMEs) generally account for about 95 percent of companies, 60-70 percent of employment and a little more than half of gross domestic product. SMEs are also powerful emerging-economy engines, given their ability to generate jobs, value and innovation.

Here in Saudi Arabia, the discovery of oil – which roughly coincided with the Kingdom’s founding – led to decades of big-government employment and large private business. Saudi Arabia’s Public Investment Fund (PIF), one of the world’s largest sovereign wealth funds and the main driver of the Kingdom’s economic diversification efforts, launched Jada to unlock the SME sector.

The goal: position this 4 billion riyal instrument owned by PIF to ensure financial stability and support so these enterprises can help boost Saudi Arabia’s GDP from the current 28 percent to 35 percent in 10 years.

A Saudi man walks at the Tadawul Saudi Stock Exchange, in Riyadh, Saudi Arabia. (File photo: AP)

A Saudi man walks at the Tadawul Saudi Stock Exchange, in Riyadh, Saudi Arabia. (File photo: AP)

Beyond the money

Normally funding is seen as the biggest obstacle to SME success; after all, startups are risky – and risk capital is somewhat scarce – particularly amid a global pandemic. But from our perspective, what’s often missing is the right ecosystem.

SMEs tend to be great at tapping into what consumers want, but they need much more: help with the strategy, operations and financial structuring to become commercially sustainable. Any institution can provide financing – but not everyone offers the active engagement that can make or break a startup: incubators and accelerators that can provide the tools from office space and IT support to compressed knowledge, and take SMEs to maturity in a matter of months.

That’s where Jada comes in.

Under the fund of funds (FOF) structure, Jada invests in funds that invest in multiple Saudi private-sector SMEs, or Saudi-focused SMEs headquartered outside the Kingdom. In fact, a large part of PIF’s focus is enabling and supporting the private sector. To that end, in a little more than four years, PIF has created and launched more than 30 new companies and 10 sectors in Saudi Arabia.

Jada aims to empower a range of sectors (such as education, technology, entertainment and pharmaceuticals) through this domino effect; thus our name, “widespread rain” in Arabic. Jada also takes the ecosystem a step further with our Emerging Managers Program that develops first-time fund managers through mentoring and networking.

By catalyzing startups, Jada is expected to deliver strong national returns, with investments adding some 2,600 jobs and 4 million riyals to GDP by year-end, and growing exponentially to 58,000 jobs and 8.6 billion riyals to GDP by 2027. SMEs are already bolstering new sectors like e-commerce and fintech; they’re also disrupting traditional industries, such as agriculture, logistics and healthcare.

Additionally, SME growth will spur manufacturing and services, helping establish Saudi Arabia as a hub connecting markets in Africa, Europe and Asia, and strengthening local supply chains.

A woman shops for laundry detergent at a supermarket in Saudi Arabia's capital Riyadh on October 18, 2020.  (AFP)

A woman shops for laundry detergent at a supermarket in Saudi Arabia's capital Riyadh on October 18, 2020. (AFP)

Read more: Venture capital survived coronavirus – it may yet save the world

Fund of funds rising

The visibility of FOFs is rising, notably in emerging markets like Eastern Europe, India, Korea and Latin America where investments are made for significant social or environmental impact, accompanied by financial return.

As to Saudi Arabia, we’re looking to grow technology startups to create highly skilled, high-paying jobs. Human capital is one of the most important resources that Jada can empower here; with more than 58 percent of the population under age 30, capacity building is urgent. So is gender inclusion, with Saudi women representing a demographic that is highly educated yet underrepresented in the private-sector workforce.

After benchmarking similar companies in the European, East Asian and Southeast Asian markets, Jada hit upon our mechanism for choosing funds. Ultimately, fund management is a people business, so matching the right investment manager to the right investment strategy is crucial.

So far, Jada has closed on nine funds, with another seven underway.

Saudi women work at a dates packaging factory in Al-Ahsa, Saudi Arabia. (Reuters)

Saudi women work at a dates packaging factory in Al-Ahsa, Saudi Arabia. (Reuters)

Optimism reigns supreme

The pandemic’s human toll is incalculable, and its financial cost to business around the world will run into trillions.

But if there is a silver lining to this tragedy, it is the optimism of creative people eager to move their ideas from the lab, the field or even the kitchen table, to the marketplace.

It’s the new clarity on resilience and being digitally enabled in a world that can change on a dime.

It’s the tools and people who can create a thriving ecosystem thanks to reduced risk and volatility through diversified investment, strong ROI potential and the guidance of the right investment manager.

And it’s the fact that SMEs are proven to provide resilience during economic downturns.

Saudi Arabia’s entrepreneurial sector is growing fast – and its venture capital community is also growing, attracting more money, more advisers and more entrepreneurs, with Jada, the Saudi Venture Capital Company and other stakeholders supporting this growth. The FOF structure enabled here by PIF, combining equity capital and bespoke strategic support to grow and scale companies, could be the silver bullet enabling SMEs to survive and thrive post-COVID for a prosperous future.

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Adel Alateeq is CEO of Jada Fund of Funds, a PIF-owned company. He has more than 25 years’ experience in managing private equity, venture capital, real estate and public financial markets. He is based in Riyadh.

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Last Update: Tuesday, 27 October 2020 KSA 17:04 - GMT 14:04
Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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