Question

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

Answer 1

Hello there,

Let me tell you the Venture Capitalists ("VC") do take serious risk, since the new businesses do not have any great sales or other lucrative numbers. This is the reason the VC always wanted to reduce the risk.

Despite facing such a huge risk, VCs still shower multi million dollars deal on the startups. The startup could be established or might be in process of estabhlishment. Some startups could present there financial statement and cash flow statement, in orde to show the VCs the correct picture and calculate the fair value of the Firm. Some startups could also be in their early-stage.

In Saudi Arabia, a sudden push hard has been seen, in terms of startups. The country does not want to limit its GDP source to Oil.

Below are the points the VCs keep in mind, before investing in a startups.

1. Top- management

The sucess of a startup depends on its decision making penal, since they are the one who ultimatly take responsibility of sucess and failure of the startups. The VCs look generlly get the background cheecked of the Top-management and their past sucess stories. There is an old saying that investing in a company with good idea and bad management is worst than investing in good management and idea. There fore the VCs in order to reduce risk invest ina astartup having good management.

Mr. Nadeem Bakhsh and Faheem Bakhsh are a reknowned name in Saudi, who had sucessfully ventures various startups like HalaYalla, a online platform provider for entertainment & UXBERT, a boutique web and mobile consultancy serive provider.

2. Potential market size

The ultimate value which a VCs forecasting for a startup, shall not be a number just imagined. The VCs generally at the first, evluate the market size of the business in which the startup is engaged. Its a fact, that a true and fair value if a startup cannot be determined without knowing the market size. The VCs generally reduce risk by investing in startup which is engaged in the business having large market size.

Startups like NuYu in Saudi is something like having a huge market size. NuYu, a exclusive women's gym chain is having a huge market and may attract all the womens to join. VCs like Arcapita had invested a huge chunk of money in it.

3. Products or service

The VCs reduces risk by investing in those startup which are engaged in the business of products and services ahving good competitve edgge. If your prooduts have less or no substitute, the better are the chancess for its success. Therefore, the VCs reduces risk by analysing the competitvenes of the products as offered.

Startups like Paytabs, an advanced system of paying and get paid & Nana Direct, an online delivery of grocery business, have attracted a good amount of investment in Suadi, just because of potential competive edge in there products and services.

4. Due Diligance

The VCs always face risk of forgery in the numbers as stated by the startups. therefore in order to reduce the risk the VCs gets the due diligance of the startup done and after duly exaaming their diligance report, the investment is further done.

5. Existing investors on board

The VCs also reduces risk by first analysing if the startups already have any business tycoon on investors board. SInce the startup already have an expert and won his trust, the risk of failure of startup gets decreased.

If investors in Saudi like Abdulaziz Aljouf and Abdulla Elyas others alike have already invested, then there are less chances of failure of startups.

6. Getting on decision panel

By getting on the decision making board of the startup, the VCs generally get the failure risk reduces, as all the decisions taken by startups would now be after consulting the VC.