An Israeli-Saudi ‘Silicon Wadi’ will benefit both countries
Like every crisis, COVID-19 brings great opportunity. Unexploited potential persists for Israeli tech companies to enter new markets in the six Gulf Cooperation Council (GCC) countries, implement state of the art technologies, and encourage the development of local tech initiatives in the region. I forecast a future that entails the creation of a joint high-tech ecosystem among GCC countries, known as the “Silicon Wadi.” Now, more than ever, it is in the best interest of Israel and the GCC to increase business cooperation.
While experts are still trying to predict the ongoing effects of COVID-19, it appears that the high-tech industry in Israel may take a negative hit from a decrease in the inflow of investments from the US, the European Union, and China. International investments play a crucial role for companies, especially those trying to get back on track in our current climate. Considering the less-than-favorable situation of the US market and US pressure to prevent Chinese influence in the region, searching for alternatives in other markets makes sense for Israeli high-tech companies, while the GCC is looking for high-quality investment opportunities.
The Goods
The Israeli high-tech industry has much to offer several different fields: cybersecurity, agritech, fintech, digital health, water-tech, food-tech IOT, and cloud related technologies.
The year before the COVID-19 crisis undoubtedly set a new threshold for world market growth. Israel recorded a year with the largest number of exits – 138 in total, of which 122 were mergers and acquisitions and the rest were Initial Public Offerings, or IPOs. Total transactions in Israel for 2019 amounted to $21.7 billion.
An even more encouraging figure was the growth of those companies prior to sale, which is indicative of business growth alongside technological growth. It was also a great year for investors in Israeli high-tech companies. Some of them made three times the amount of their initial investments.
A quick glance at the source of money flowing into Israel’s high-tech scene in 2019 shows that 80 percent came from the US. The remaining 20 percent was split between Germany, Canada, and China. Not even a single percent of the funds was invested directly from the GCC countries. Moreover, almost no top-tier Israeli high-tech company is doing any significant business with any of the GCC countries – even though they are the most convenient choices in terms of physical proximity, market size, and growth potential.
The Market
For the city of Riyadh, 2019 was also a good year. Saudi Arabia’s Vision 2030 economic reform plan is starting to become a reality. The region is changing, and new opportunities, new trends, and hyper development are sweeping Saudi Arabia and Dubai.
The reforms aim to strengthen the Saudi Arabian economy by diversifying the Kingdom’s business portfolio to include industries other than oil and gas. To do so, and to be able to receive the necessary support, the Kingdom must reorganize and revalue many aspects of day-to-day life.
This trend can create mega-scale opportunities in the region. One example is the NEOM vision, a $500 billion plan to build “the city of the future” within Saudi Arabia that will act as a living hub for entrepreneurship and innovation. The city will be built from the ground up with innovative thinking and a combination of breakthrough technologies in the fields of environment and sustainability, energy, water, transportation, culture and more. This city will be sustainable and operated independently, apart from a governmental framework, with its own tax and labour laws and autonomous judicial system.
The Challenge
One potential reason for the lack of investment in Israel by Arab countries and the lack of Israeli high-tech penetration to the GCC is the barrier of the Arab-Israeli conflict. But this may be too simple of an explanation. During the last 20 years, Israel and the GCC countries have been conducting unofficial business together – and not just security-related business, but projects involving irrigation, infrastructure, plastic and water planning. Now, geopolitical changes in the Middle East, mainly through warming of the Gulf States’ relations with Israel, are creating a bridge for new business ties to emerge.
Another explanation for limited GCC investment in Israel is the “capital preservation” concept that characterizes the investments made by the Arab world. Apart from Saudi Arabia’s investments in SoftBank Vision Fund, Saudi Arabia placed third after the UAE ($426 million) and Egypt ($95 million) with respect to total funds raised in the Arab world in 2019. Next in line are Jordan ($41 million), Lebanon ($29 million), Kuwait ($21 million), Bahrain ($6 million), and Oman ($6 million). Investments in venture capital are relatively minor compared to the GDP of the countries in this region.