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Why Silicon Valley investors just can’t quit Saudi money

People talk about money from “the Saudis.” But it’s not that simple. Who exactly are “the Saudis,” anyway?

Participants arrive to attend a session of the Future Investment Initiative FII conference in the Saudi capital of Riyadh on October 24, 2018.
Giuseppe Cacace / AFP / Getty Images

It’s not just startups that thrive on Saudi Arabian cash. It’s venture capitalists, too.

Silicon Valley is beginning to question its ties with Saudi Arabia. But there are many skeptics these days who privately question whether the relationship will actually change once the news of the day moves away from the Middle East.

Why? Because in addition to the Saudis giving billions of dollars directly to startups, they are also investors, or limited partners, in a number of elite venture capital funds that do their own deals. Those relationships don’t untangle easily — and are usually legally required to be kept secret.

The Saudis’ marquee investment conference this week has been beleaguered after the brutal killing of Saudi dissident journalist Jamal Khashoggi. But some American financiers still came to Riyadh, from established investors like Jim Breyer to budding investors like ousted Uber CEO Travis Kalanick, who was spotted in the city at the time of the conference by a source. There’s a sense that Saudi Arabia will remain a big player in Silicon Valley finance once the news cycle moves on to something else.

“People have to pull out of the conference for optics. But they can basically accept the capital and say, ‘Oh well, we’ll let you be an investor, but you can’t tell anyone’,” said one person tracking the Saudi footprint in Silicon Valley. “It’ll basically mean that everything is more discreet and under the sheets.”

The most public is the Saudis’ main sovereign wealth fund, the Public Investment Fund, which is spending $45 billion to back startups globally through the SoftBank Vision Fund. That’s the biggest Saudi investment in Silicon Valley by far.

But focusing solely on SoftBank misses the totality of the Saudis’ under-the-radar investments that still come from the same oil money machine. The Saudis’ exposure to venture capital has not historically been vast, but it is growing rapidly — there are a lot of different wealthy Saudi investing firms. It is not simply “The Saudis.”

The most underappreciated is King Abdullah University of Science and Technology, an English-language, postgraduate school built about a decade ago that is essentially trying to become the MIT of the Middle East. While it is a private school that has tried to stress its ties with the West, the school’s $20 billion endowment comes from the Saudi royal family, which makes it one of the biggest university endowments in the world.

And it is, as you’d guess, named after a Saudi monarch.

That endowment has quickly become a major player in the world of U.S. venture capital, with investments in many top-tier investment firms in Silicon Valley, such as Sequoia Capital, according to people familiar with their activities. Managed by bigwigs who used to work at the World Bank, KAUST has however struggled to get into other investment vehicles, such as Benchmark Capital, the people say.

Here’s how this all works: The best Silicon Valley investors hold the leverage in conversations with eager limited partners, and so they can decide which LPs to let into their funds. Investors with choices tend to favor the endowments of U.S. colleges, in part because of their prestige; in part because their longevity in venture capital investing makes them less of a hassle; and in part because venture capitalists — all things being equal — would prefer to make money for institutions with a mission like teaching kids.

So for elite, smaller investing firms, how to treat the Saudis is mostly a question for their startups, not for themselves. They’ll stick with their existing loyal endowments. But for investors hoping to expand and rake in more cash — or for investors with a spotty track record, and who are therefore more desperate — the Saudi funds are some of the biggest pools of capital around.

Prominent Silicon Valley investors, from Founders Fund investor Peter Thiel to Y Combinator president Sam Altman, have been working over the last few years to build a strong relationship with the Saudis and their leader, Mohammed bin Salman, people familiar with the matter say. (Altman, for what it’s worth, told Recode that Y Combinator had never accepted any Saudi-linked money.)

KAUST is a little bit different from other Saudi funds, since after all it is a college endowment.

Another on-the-rise investor in venture capital firms is Wisayah, a planned spin-out from Saudi Arabia’s massive state-run oil company, Aramco. Aramco has been a backer of venture capital firms like Notion Capital, according to one person briefed on the arrangement. Wisayah in recent months has been approaching many venture capital funds in Silicon Valley about possible investments, another person said.

Then there is Sanabil, which focuses primarily on investing directly into startups, and its parent company, PIF. Until the last few years, PIF had not been a major investor in U.S. venture capital, but it made its first splash with a $3.5 billion investment into Uber in May 2016 that cemented it as a bona fide player in Silicon Valley.

PIF, which Silicon Valley insiders had expected to soon open an office here to do more deals, is guided in the world of U.S. investing by Kevin O’Donnell, who moved to Riyadh from San Francisco around that time after leading deals for Kaiser Permanente. PIF soon after committed $45 billion to the SoftBank Vision Fund, the most powerful investor in tech,

PIF money is now though emerging as a liability. Sequoia, which has a growing rivalry with SoftBank, has no backing from PIF in its new late-stage funds, according to a person familiar with the arrangement, despite its KAUST ties. SoftBank’s leadership, including Masayoshi Son, skipped his speaking engagement at the conference in what was seen as a snub of his key benefactor.

One conference attendee close to the Saudis said that, after the Khashoggi killing, he worried that venture capitalists with choices would make similar decisions: “If they have a dollar sitting down next to another a dollar, they might use this as an excuse.”

And in fact, one investor previously told Recode that he cut off talks with Saudis about a possible investment into his fund as more news about the murder emerged.

Who else could the Saudis’ struggles be good for? One name that has come up in conversations: The Qataris, a geopolitical adversary of the Saudis, and who are trying to quickly invest $35 billion into the U.S. through their own sovereign wealth fund. Expect them to get a new look from some late-stage companies and venture capitalists — although Qatar’s own blemished human rights record begs the question: What money is clean these days?

There is some hope from fans of the Saudis that this will be an isolated black mark, and that the oil nation will retain their relationships in Silicon Valley. You wouldn’t guess that from the conference, which does not feel like a gilded celebration of Saudi ambitions as originally planned.

As the attendee close to the Saudis put it:

“It’s like a funeral.”

Correction: This story has been updated with more details on Travis Kalanick’s appearance in Riyadh.

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