Opinion

Rethinking Web3 Startup Valuations in Saudi Arabia

The Saudi startup scene is expanding rapidly, and while the Web3 ecosystem is still relatively small, it is growing at a promising pace. However, with this growth comes a crucial question: How do we accurately value these innovative companies? A recent Jada report highlighted the need for smarter valuation methods in our region. As the Founding Partner of Adaverse, I’ve invested in over 60 Web3 startups across 11 countries, including 8 in Saudi Arabia: TakaDAO, Nuqtah, Sorbet, Oumla, Mithu, Umrah Cash, Grintafy & Tharawat Green Exchange. 

Here’s my perspective on navigating the complex challenge of valuating a Web3 startup:

Web3 Startups: A Tale of Two Types

In our experience, Web3 startups generally fall into two camps:

  1. Real-world problem solvers: these startups have clear business models and use cases. We can value them using traditional methods, looking at market potential and growth projections.
  2. Tech innovators: these are the cutting-edge firms working on things like zero-knowledge proofs or AI-blockchain hybrids. They often command higher valuations due to hefty R&D costs and the need for top-tier global talent.

Early-Stage Valuation: It’s All About the Runway

In general, it is widely accepted that each round has it’s own particular thing to look at when making investment decision:

  • Pre-Seed: Idea
  • Seed: Team
  • Series A: Product
  • Series B: Traction
  • Series C: Revenue
  • Series D: Profit

*Traction here means more and more users want to use it, or more and more clients, the increase.

We are now discussing the early stages, such as pre-seed and seed rounds, for brand-new startups with incomplete products and little to no traction. At this stage, the focus is on their capital needs. Key considerations include:

  1. Idea and team
  2. How much and how long they need to build a MVP (minimal viable product)
  3. How much and how long they need to find the PMF (Product Market Fit) by showing positive early traction

Having built ventures in various markets, we’ve got a good sense of how these costs vary across different regions.

The Saudi Startup Scene: Times Are Changing

The Saudi ecosystem is evolving rapidly. In the past, abundant local capital led to some sky-high valuations, even for startups with just an idea. But things are shifting:

  1. Money’s getting tighter: global economic trends mean investors are more cautious. Early-round valuations of 5-10 million are becoming the norm.
  2. Investors are asking tougher questions: after some high-profile flops, there’s more focus on founders’ ability to actually run a business.
  3. Everyone wants to be first: there’s still a race to find untapped markets, with founders and investors alike hunting for the next big thing.

Valuing Web3 Startups in Saudi: Our Playbook

Here’s how we approach valuations:

  1. Get real about costs: building a Web3 startup isn’t cheap. Factor in tech talent, which is expensive and can be hard to come by, as well as infrastructure and regulatory compliance.
  2. Compare apples to apples: don’t benchmark against Silicon Valley. Look at similar startups in comparable markets.
  3. Keep founders motivated: make sure valuations leave founders with enough equity (minimal 33% and ideally 80+) to stay committed long-term.
  4. Think beyond borders: assess how well the startup could scale regionally or globally.
  5. Stay regulation-savvy: consider how the startup fits with Saudi’s tech vision and regulatory landscape.

Typically, the perceived valuation of pre-seed or seed-stage startups ranges from $5 million to $15 million, depending on the team’s experience and early-stage traction, with fundraising amounts between $500,000 and $3 million. However, exceptional founding teams can achieve significantly higher valuations.

What’s Next?

As Saudi’s Web3 scene matures, we expect valuation methods to get more sophisticated. This will likely blend traditional financial metrics with tech-specific factors and an understanding of Saudi’s unique market dynamics.

For founders, the message is clear: focus on building sustainable businesses with a path to profitability. For investors, it’s about understanding both the tech and the local market.

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