All Eyes on MENA

There was a 40% decline in gaming venture capital funding from 2021 to 2022 (CB Insights). Activity in the public markets and M&A followed a similar slowdown. While we will be digging into the trends within the Q4 gaming industry in next week’s newsletter, there is one region, and one investment group in particular, that has accelerated investment momentum in gaming: the Kingdom of Saudi Arabia (KSA). 

This week, we are analyzing KSA’s innovation strategy and ambitions within gaming. In light of this, does Saudi Arabia have potential as a hub for development and creation in gaming?

Vision 2030: A Plan for the Future

In 2016, Crown Prince Mohammad bin Salman announced Vision 2030, a national socio-political and economic reform to reduce Saudi Arabia’s reliance on crude oil by diversifying its economy and developing public services. The vision is built around three primary (and extremely open-ended) themes: a vibrant society, a thriving economy, and an ambitious nation (Saudi Embassy). Saudi Arabia has set up a Public Investment Fund (PIF) to make this a reality. 

Understanding Other Tech Ecosystems in MENA

Other MENA countries have also seen rapid socio-economic reform. Two in particular have established themselves as strong hubs of innovation over the last 10 years: Israel and the United Arab Emirates (UAE). Their startup environments are a key indicator of this progress. Israel and the UAE had a combined ~$10b of venture funding in 2022 (relatively, venture funding in the US was ~$170b and Europe was ~$65b) (CB Insights).

When looking at each of their individual histories in innovation, Israel is a regional powerhouse in the startup ecosystem and has 4 primary strengths:

• Focus on Research and Development (R&D): Israel invests ~4.1% of its GDP in R&D and is ranked 2nd globally in R&D expenditure per capita (Deloitte). This is defined as total expenditure (current and capital) on R&D carried out by all resident companies, research institutes, university and government laboratories, etc., in a country. It includes R&D funded from abroad, but excludes domestic funds for R&D performed outside the domestic economy (Organisation for Economic Co-Operation and Development).
• Educated, skilled workforce: Israel has one of the highest percentages of engineers and scientists per capita, plus one of the highest ratios of university degrees and academic publications per capita (UIEC). Israel also has a mandatory military service which means that all citizens receive technical training at a young age.
• Government support: Government backed Incubators in Israel offer funding of up to 85% of early-stage project costs for 2 years. Across all 25 incubators, over 45% of participating companies raised additional capital from other investors (Deloitte). There are other support programs available such as the Israel Innovation Authority’s R&D Fund and their joint R&D binational funds with foreign countries offer up to 50% of the R&D program cost. Legislatively, The Investment Law enables foreign companies to benefit from a reduced company tax rate and investment grants (Deloitte). 
• Strong venture presence: Outside of government funding, Israel has a strong domestic venture capital presence with over 300 local funds (CB Insights).

UAE has more recently begun to establish itself as an innovation-friendly environment through two primary strengths:

• Friendly visa system: In 2018, the UAE allowed 100% foreign ownership of companies based in the UAE (an incentive previously only applicable for companies operating in designated “free zones”). The new system also granted residency visas for up to 10 years for "specialists in medical, scientific, research and technical fields, as well as for scientists and innovators" and 5 year residency visas for students studying in the UAE (up to 10 for “exceptional” students). The following year, the UAE offered 5 year residency visas to entrepreneurs that had a former business that is worth at least $136k USD or has the approval of an accredited business incubator in the country (Entrepreneur).
• Government support: In 2016, the UAE created a “CEO of Innovation” role for every government agency. The UAE government has also put together many initiatives and programmes aimed at supporting startups, particularly tech entrepreneurs. For example the Khalifa Fund (allocated ~$360m USD and offered 900 startup development programs since it was established in 2007) and the Dubai Future Foundation ($270m USD fund) have also been established to drive the Dubai government’s agenda in supporting entrepreneurs (HKTDC Research).

Gaming and Esports in Saudi Arabia

Gaming is part of PIF’s 2021-2025 strategy to drive innovation in strategic sectors including entertainment, leisure, and sports. Other areas that have been highlighted publically are golf (LIV Golf Investments), theme parks (Six Flags Qiddiya), and film. PIF has also made minority investments in entertainment conglomerates such as Amazon, Google, Microsoft, and Disney. 

In January 2022, PIF launched the Savvy Gaming Group (SGG), which is the investment and operational entity focused on gaming and esports. The goal of SGG is to build gaming and esports organizations and position them for a worldwide audience (Axios). Through this initiative, the government hopes to create 39,000 jobs, establish 250 game developers, release 30 games, and build a strong domestic talent pool that will raise the sector’s contribution to the Kingdom’s economy to $13.3 billion by 2030 (Arab News). 

Breaking Down the Gaming Budget

Upon launch, SGG announced a $1.05b acquisition of ESL and FACEIT to form the ESL FACEIT Group. In September, SGG announced they have a budget of $37.8b to invest with the goal of making the country a hub for gaming. The group intends to split the funds up across four key areas (Esports Insider): 

• $13.3b: Acquire “a leading game publisher to become a strategic development partner.”
• $18.6b: Minority stake investments in ‘key companies’ that support Savvy’s game development agenda. To date, these have included EA, Activision Blizzard, Take-Two, Nintendo, and The Embracer Group (Axios).
• $5.32b: To invest in mature industry partners in order to add value and expertise to Savvy’s gaming and esports portfolio. Last week, The Wall Street Journal reported that Saudi Arabia had taken a majority share of leading AR company Magic Leap in a $450m deal. PIF led Magic Leap’s Series D-III in 2018 at a $4.5b valuation. The most recent public valuation for Magic Leap was $2b in Oct-2021 when they raised $500m from undisclosed investors.
• $0.53b: “Diversified investments in industry disruptors’ to grow early-stage games and esports companies”

‍The KSA Gaming Population

CEO Brian Ward has said that SGG received the largest startup capital allocation ever provided by the PIF (Axios). The PIF is one of the largest sovereign wealth funds in the world, with ~$600b in assets. This means that gaming and esports will make up ~6% of their assets (Sovereign Wealth Fund Institute). This is a large amount, given that KSA’s population is only ~35m people and the MENA gaming market in 2021 was $1.76b (estimated to reach $3.14b in 2025) (Business Wire).

However, when taking a closer look at the gaming population of KSA, there are a few regional strengths that can serve as domestic tailwinds for their early gaming market growth:

• A young population: 40% of the population is under the age of 25 (The World Factbook)

• Gender diversity: Gamers in KSA are not just young males. In a consumer insights survey, Newzoo found that approximately 42% of gamers in Saudi Arabia are female (Newzoo).
• High gamer density: 89% of the Saudi population identify as gamers, the highest per capita globally (Fast Company Middle East). Today, the MENA region’s domestic market is the fastest growing in the world, touting over 377m estimated players – this is almost as many gamers as all of Europe combined (386m) and much more than America (210m) (Pocket Gamer Connects)
• Valuable domestic wallets: 32% of Saudi gamers are average spenders ($0-25 per month) on mobile games, compared to Western Europe’s 18%, and 12% are considered big spenders (>$25 per month), compared to Western Europe’s 4% (Intenta Digital). In 2019, Pocket Gamer estimated that the average revenue per paying user (ARPPU) for mobile gamers in Saudi Arabia was $270. For context, China that same year had an ARPPU of $32 (Pocket Gamer).

Savvy Gaming Group: Too Focused on Late-Stage

Despite the significant capital being invested in gaming and esports, there are four reasons why we believe Saudi Arabia will struggle to become a gaming hub.

• No foundation to foster domestic talent: Israel has built a strong startup ecosystem through a highly educated population, strong government funding, and legislative support. There is not an explicit portion of Savvy’s budget that incentivizes young people to become developers or to retain that talent in KSA. Brazil is a country that struggles with the latter - it has a very talented game development workforce, but companies in the region must compete with the budgets of studios based in North America or Europe. 
• Low focus on cultivating early companies: < 2% of the SGG budget will be set aside for early-stage gaming and esports companies. This strategy prioritizes maturity in foreign companies that, for the most part, do not have an existing presence in MENA. Instead, they are exerting their influence on foreign corporations. These investments are not aligned with the outcome of positioning KSA as a global hub.
• Low existing venture presence: Saudi Arabia has ~⅓ of the number of venture capital funds of Israel, despite having >3x the population (Tracxn). Even if domestic entrepreneurs can get from 0 → 1, they will struggle to compete for venture funding and must look internationally.
• Attracting international talent: Saudi Arabia will struggle to attract foreign talent and investment. Both Israel and the UAE built either strong binational entrepreneurship programs or very friendly visa systems to attract foreign entrepreneurs and employees. On the other hand, KSA has a terrible record on human rights, which include suppression of its citizens and the press, gender discrimination, and support for the war in Yemen. SGG has already received many questions from the companies it has acquired around the safety of their employees, specifically calling out concerns around women and LGBTQ+ rights in the Kingdom (Axios). KSA is not well positioned to compete for foreign talent as employees and potential candidates across industries increasingly expect the organizations they support or work for to take transparency, accountability, diversity, and inclusion seriously.

Takeaway: While MENA is a valuable and rapidly growing market in gaming (that we are excited to continue to invest in), SGG will struggle to fulfill its goal of establishing Saudi Arabia as a hub for innovation and gaming. Their prioritization of late-stage foreign companies and lack of focus on cultivating a gaming ecosystem from the ground up is short sighted. Socio-political and religious barriers will prevent KSA from attracting international talent and the region will struggle to build sustainable domestic momentum in gaming. 

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