Question

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

Answer 1

Venture Capitalists are the ones who invest or build their portafolio by investing their funds in diversified businessess. Startups seeking financing often turn to venture capital (VC) firms. These firms can provide capital; strategic assistance; introductions to potential customers, partners, and employees; and much more.

venture capitalists consider variety of factors before investing in startup businesses and thereby substatially reduce their risk. These components may include following:

1. Experience of Operation and Mangment of Key executives/founders.

2. The size of the Market Opportunity

3. The revenue model of the Business

4. Potential Growth in the sector in which business will operate

5. Governamnet regulation, if any

6. Burn Rate i.e capital needed to reach profitablity

7. Valuation of Comparable income

8. Business Competitors

9. Financial indicators like EBITDA, ROI, ROE

10. Use of Technology

11. Major supplier and many more

the aforesaid factors vary from one venture capitalist to other.

By taking into account the aforesaid factors, a venture capitalist will infuse their funds in Startup that will substantially  reduce the risk from expectations.

Recently, In Saudi Arabia, Paytab emerged as innovative start up venture.which offers a hassle-free online payment solution with the will to empower the business of e-commerce especially on the Small and Medium enterprises to allow them to accept credit and debit payments at reasonable rates to grow their business with stronger cash flows while still providing us a significant profit opportunity.

Considering the Market potential of the business, revenue model, burn rate and other aforesaid factors along with competitions and innovative technology , Start up is able to get the funding and recently, It secure $20 million funding from Saudi Aramco Entrepreneurship Ventures (a renowned Venture Capital company in the world).

Therefore,The ways that VCs measure, evaluate and try to minimize risk can vary much depend upon the aforesaid factors and many other things as well. Further, It also depends upon the perception of the person taking the Investment decisions.