February 15, 2019 | Real Clear Markets

Saudi Wealth Fund Woes Could Spell Worries for Silicon Valley

Silicon Valley is awash with Saudi money.
February 15, 2019 | Real Clear Markets

Saudi Wealth Fund Woes Could Spell Worries for Silicon Valley

Silicon Valley is awash with Saudi money.

Silicon Valley is awash with Saudi money. The Public Investment Fund, Saudi Arabia’s sovereign wealth fund, has pumped billions of dollars into U.S. startups in recent years, part of an economic diversification strategy spearheaded by Crown Prince Mohammed bin Salman. But reports of recent turmoil at the fund, coupled with the reputational fallout over the murder of Saudi journalist Jamal Khashoggi by Saudi agents, could jeopardize what’s become a comfortable funding stream for Silicon Valley.

Top western executives are leaving the PIF, according to a report from late December—sometimes leaving behind pay packages of $1 million and guaranteed bonuses. Several officials left within 18 months of beginning their tenure, while one, a former head of strategy, lasted just weeks.

Underpinning this wave of desertion is Mohammed bin Salman’s micromanagement of the investment vehicle, according to the report. Officials who have left privately concede that the young royal’s domination of the fund’s strategy was a driving factor, noting that his personal interests in headline-making venture capitals deals came at the cost of marginalizing other portfolios within the fund.

The PIF is central to Saudi Arabia’s economic reform program: it’s a key player in Vision 2030, the crown prince’s ambitious plan to wean the kingdom off hydrocarbons. A 2017 Saudi government document laying out the PIF’s contribution to Vision 2030 describes the fund as “the engine behind economic diversity” in the kingdom. In addition to increasing its assets under management, the PIF is also tasked with leading Saudi Arabia’s expansion into new sectors, such as entertainment or domestictourism, in the process creating much-needed jobs for Saudi nationals to lessen the kingdom’s 12.8% unemployment rate. Between 2018-2020, the fund seeks to boost assets under management to $400 billion from roughly $220 billion; allocate 20% of its assets in new sectors, targeting that these new sector assets will directly contribute $8 billion to Saudi GDP; and boost its share of assets in international investments from 5% to 25%.

That tall order necessitates top talent, with the PIF reported to havegrown its staff four-fold since 2016. The fund is especially reliant on poaching talent from the western financial sector. But replacing the slew of western officials it has lost is difficult, according to recruiters, given the reputational damage of the Khashoggi killing.

Disorder at the PIF could bleed into Silicon Valley, given that the kingdom is reported to have invested over $11 billion into U.S. startups since 2016. Mohammed bin Salman’s personal fondness for tech is well-documented; the young royal conducted a Silicon Valley roadshow when he visited the U.S. in April 2018, rubbing shoulders with Google’s Sergey Brin and Sundar Pichai, Virgin Group’s Richard Branson, and Apple’s Tim Cook.

The PIF directly has stakes in several major tech firms, including a 5% stake in Uber worth $3.5 billion and a roughly 5% stake in Tesla. It has also parked $400 million into Magic Leap and over $1 billion into Tesla’s rival,Lucid Motors. Indirectly, the PIF has pumped even more cash into Silicon Valley via the SoftBank Vision Fund, its joint-venture fund with Japan’s SoftBank. PIF committed $45 billion of the Vision Fund’s $93 billion, which has translated into investments in WeWork, Flipkart, Slack, Wag, and DoorDash, among others.

The crisis in the PIF’s staffing is seeing the fund intellectually outmatched in deals, the original report noted, which could imperil its future investments in Silicon Valley if the PIF continues to lose internal capacity. U.S. startups may see what they thought was a stable funding stream dry up. To be sure, Mohammed bin Salman likely still cares about tech investments, to the extent that he sees a successful PIF as central to his hold on power and to shoring up his position as Saudi Arabia’s “modernizing” crown prince—which might mean that despite the fund’s internal struggles, its Silicon Valley plans could march on at his demand.

But even if the PIF solves its problems, the seeds of concern about partnering with Saudi money have been planted in Silicon Valley in the wake of Khashoggi’s murder—a fact which could imperil PIF investments more. Venture capital firms are beginning to question the provenance of their funding, according to a report by the New York Times. Last October, one venture capitalist noted in his blog that, for the first time, a company in his firm’s portfolio had asked him asked about the source of his firm’s funding, and that he expected such requests to continue as startups and venture capitalists grapple with how much money “bad actors” have pumped in to the tech scene.

PIF investments have felt the pain of Saudi Arabia’s image crisis. Richard Branson suspended talks for a $1 billion PIF investment into Virgin Galactic over the Khashoggi scandal, while Hollywood talent agency Endeavor withdrew from a $400 million deal with the PIF. Several business leaders and media companies cancelled their appearance at last October’s Future Investment Initiative, a splashy business conference in Riyadh.

It’s still not apparent that Mohammed bin Salman appreciates how serious a hit the kingdom’s brand has taken. Thus, in early January reports emerged that the Saudis had compelled Netflix to stop internet streaming of an episode of a comedy show that was critical of the kingdom. Netflix officials said they had censored the episode of Hasan Minhaj’s Patriot Act after Saudi officials lodged a complaint and threatened to prosecute the company under Saudi cybercrime law. The episode is still available in the kingdom via YouTube, but the optics of this censorship did little to help the kingdom’s worsening image.

U.S. companies are right to be increasingly wary of taking Saudi cash. The kingdom certainly has more money to throw around, if the PIF’s 2020 targets are to be met—but any Saudi transaction will come with a side of reputational risk until Mohammed bin Salman’s worst inclinations are checked. The PIF, on the other hand, must contend with two new realities. First, losing internal capacity could hamper its deal-making ability, setting back the crown prince’s single-minded ambition for flashy new deals. Second, Silicon Valley, fearing reputational blowback, may begin denying PIF the high-profile, high-value deals that has made the fund’s name in the U.S. A full appreciation of the potential pitfalls of taking Saudi cash may be slow to come, but what’s for certain is that the seeds have been planted.

Varsha Koduvayur is a senior research analyst specializing in Gulf States issues at the Foundation for Defense of Democracies, a Washington-based nonpartisan research institute focusing on national security and foreign policy. Find her on Twitter @varshakoduvayur.


Gulf States Sanctions and Illicit Finance