Question

Discuss how venture capitalists reduce their risk when investing in startup businesses. Justify your answer citing appropriate examples from Saudi Firms.

Answer 1

We will intitally form a basis for this answer, the venture capitalist firms tend to invest in a lot of startups and as per certain studies a lot of startups tend to fail, so how do these firms manage the risk, let us understand.

How do these firms indentify risk and reduce the risk, the answer lies on these factors.

1. Risk Identification Process- It is the first and the foremost step wherein the VCF's identify whether a particular factor is considered as a risk or not, i.e it serves as a basic benchmark for an event to be considered as a risk or not.

2. Perform the qualitative Risk Assessement- The QRA series is basically a interview with the stakeholders of the entereprise in order to obtain information on possible worst case scenarios.

3. Organize a consensus meeting with all the QRA contributors of the company– including the board of directors, senior management, and strategically chosen staff. The purpose of the consensus meeting is to collectively choose the key 30 risks facing the company.

4. The Risk quantification process- he rest of the risks that did not make the key risks (in this case, the rest 90 non-key risks) are assigned Key Risk Indicators to track their severity escalation overtime and maintain awareness regarding when they cross the predetermined risk limits and start to become as severe as the key risks.

Now let us further understand the same concept with the help of examples, in context to saudi firms,

we will use the example of a very renowned saudi arabia venture capital company,

Saudi Venture Captial Company (SVC) they are currently undergoing what is to be considered tipping point of the saudi arab venture capital activity, the SVC in the year 2019 invested around $40M in startups, which is the record amount of total funding in any first half of the year, so the SVC proves that the risk management in startups could be done with the approroriate steps taken.