Question

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

Answer 1

Ventue capital - is type of financing that investors provide to startup companies and small businesses that are delivered to have long tem growth potential. In other words, venture capital is a type of private equity capital invested in a startup business.

Venture capital investments are usually high risk in nature. Venture capitalist (the person who makes the venture investment) takes on a high risk of financing the risky start-ups with the hope that it will become successful at one of time. Since startups faces many uncertainties, VC investments has high rate of failures. There is 100% risk of loss in VC investments. Therefore it is very important to ensure the ways in which risk can be reduced to the maximum before starting the venture capital.

There are many ways in which venture capitalist risk can be reduced. They are.

• Risk identifying - Choosing the best company - The 1st and foremost way of reducing risk is to choose the best company which has more growth potentials.
• Analysis of market trend - It is very important to analyse the market situation and increase in the market trends. This implies the direction of movement of financial market over time (ex - in the current situation the world market has fallen due to COVID19. So based on the market trend, it is good to hold the venture capital investments.
• Government intervention - Government has major role to play in every business undertakings like tax policies, regulations taken to avoid negative externalities like pollution, ideas to break monopolies etc. So identifying the Govt intervention policies is very important.
• Taking insurance - Insurance helps to cover the loss incurred.
• Growth factor - Identifying the demand for the product is very important along with the competitive risk