How Saudi entrepreneurs are navigating the shift to public markets

18/04/2025 10:08 AST

As startups approach the critical stage of an initial public offering, one of their biggest challenges is the transition from a fast-paced, founder-driven company to one that must meet the rigorous demands of public markets.

This shift often requires a fundamental change in mindset - particularly in areas such as governance, financial discipline, and regulatory compliance.

The journey from a nimble startup to a publicly traded company is a transformative one, and it is a challenge many companies in Saudi Arabia's rapidly evolving startup ecosystem will soon face.

Historically, strategic acquisitions were the primary exit strategy for startups seeking liquidity. However, with an increasing number of late-stage companies reaching scale, IPOs are rapidly emerging as a viable - and increasingly attractive - option.

As the Kingdom's entrepreneurial landscape matures, the path to public markets is becoming a more prominent choice for startups looking to grow beyond their founding teams and tap into the capital needed to expand.

"Many startups struggle in this arena because what worked in their early years - fast decisions, aggressive growth, and loose structures - won't hold up under public scrutiny," said Mohammed Al-Meshekah, founder and general partner of Outliers, an early investor in Saudi Arabia's Tabby, now valued at $3.3 billion and on track for an IPO.

Speaking to Arab News, Al-Meshekah said that "the right investors work with founders to institutionalize their company without killing its agility."

He added: "This means tightening financial discipline early, not as a last-minute fix, ensuring reporting is clean, unit economics are sustainable, and capital allocation is intentional."

Mohammed Al-Zubi, managing partner and founder of Nama Ventures, which backed Saudi unicorns Salla and Tamara - both preparing for public listings - echoed this sentiment, saying that the best approach is to build with IPO-level governance long before it becomes necessary.

"This means structuring financial reporting properly, ensuring compliance frameworks are in place, and building a leadership team that can transition into a public company environment," Al-Zubi told Arab News.

Regulatory hurdle
Regulatory compliance is another hurdle, particularly in regions where high-growth technology startups must navigate frameworks originally designed for traditional industries.

"At the same time, there's an opportunity to evolve regulatory frameworks in the region to better support high-growth companies," Outliers' Al-Meshekah said.

"Many existing standards were designed with traditional industries in mind, which naturally differ from the structure and scaling needs of technology-driven businesses," he added, noting that regulators must strike a balance between ensuring market stability and enabling companies with global potential to list locally.

"Striking this balance could position Saudi Arabia and the region more broadly as a leading destination for high-growth IPOs, attracting not just companies built in the region but those from around the world looking for a strong public market to scale."

Investor alignment also plays a key role in a smooth IPO transition. "Startups that have investors who prioritize short-term gains over sustainable growth often face challenges when transitioning to public markets," Al-Zubi said.

"Those backed by long-term partners who guide them toward disciplined execution, regulatory readiness, and scalable operations are the ones that make the leap successfully."

IPO as the new exit strategy
Al-Zubi said that just five years ago, IPOs were not considered a viable exit path for startups in the region - with strategic acquisitions seen as the only clear exit strategy.

"While acquisitions provided liquidity, they often left a lot of money on the table because startups were being acquired before realizing their full potential," he said.

Today, Al-Zubi noted, the dynamics are changing. "IPOs are now the dominant exit strategy, and we're seeing more late-stage startups actively preparing for public markets. Companies like Tamara and Salla are proof that regional startups can scale to IPO readiness, and as capital markets continue to evolve, this trend will accelerate."

However, acquisitions and secondary sales will continue to play a role, particularly in industries where global players are looking for entry points into the Saudi market.

"With IPOs now a real option, founders are no longer forced to sell prematurely," Al-Zubi added. "Instead, they can scale further, capture more value, and exit at a much higher valuation through public markets."

Al-Meshekah agreed that IPOs will become an increasingly important part of the exit landscape but noted that they will complement acquisitions or secondary sales, not fully replace them.

"As more Saudi startups mature, we'll see a broader mix of exit strategies, with IPOs becoming a key path for companies that can sustain independent growth. But the best companies aren't built for a single outcome; they create lasting value with optionality, whether through an IPO, acquisition, or secondaries," he added, pointing to historical trends in the US to illustrate how dynamics evolve in maturing ecosystems.

"If we look to the US as a reference point, IPOs once dominated venture-backed exits, accounting for over 80 percent in the 1980s, before dropping to 50 percent in the 1990s and falling below 10 percent in the past 25 years," he said.

"It's natural for IPOs to lead in a developing ecosystem, with M&A following as incumbents acquire innovation to stay competitive."

Role of investors post-IPO
While going public is a significant milestone for any startup, it marks the beginning of a new phase rather than the end of the journey.

The transition from a venture-backed private company to a publicly traded entity brings new challenges, requiring founders to shift their focus from high-growth execution to long-term financial discipline and shareholder management.

"Going public isn't the finish line. It's just another phase of a company's evolution," Al-Meshekah said.

"The role of investors at this point shifts to long-term stewards, helping ensure a successful transition into the public markets without losing what made them great in the first place."

He warned that one of the biggest risks post-IPO is "short-termism" - the pressure to prioritize quarterly performance over long-term value creation.

"Early-stage VCs who've been with the company since its inception play a key role in keeping the leadership grounded in its original vision while adapting to the new expectations of public shareholders," Al-Meshekah said.

He added that the best companies "balance financial discipline with the agility to innovate, resisting the urge to optimize for near-term stock price movements at the expense of long-term market leadership."

Al-Zubi highlighted how the investor base also changes once a company reaches public markets.

"Every stage of a startup's journey requires a different set of investors with specialized expertise," he said.

"Early-stage VCs play a critical role in getting a company from idea to scale, but once a startup reaches the public markets, the baton must be passed to public equity investors and institutional funds that are better suited for this phase."

At this stage, a startup is no longer judged solely on its growth potential but also on its ability to deliver sustainable profitability, shareholder value and robust governance.

"Early-stage VCs, whose expertise lies in navigating uncertainty and scaling startups, must step back and allow the company to be guided by those with deep public market experience," said Al-Zubi.

That doesn't mean early investors disappear entirely. "Some remain involved through board positions, but their influence naturally diminishes as new stakeholders, financial structures, and operational expectations take priority," he explained.

Al-Zubi emphasized that founders must embrace this transition and surround themselves with the right advisers.

"IPOs are not just exits - they're a shift to a new way of operating, and founders who understand this transition will be the ones who thrive in the public markets."

Al-Meshekah echoed this sentiment, noting that successful tech IPOs share common traits.

"They don't just scale their existing product; they expand into new markets, deepen customer relationships, and build sustainable competitive moats," he said.

"Early investors who stay engaged can provide continuity, supporting founders as they navigate this shift while maintaining the principles that drove their early success."

Arab News