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Discuss how venture capitalists reduce their risk when investing in startup businesses. Justify your answer citing...

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

Solutions

Expert Solution

Venture Capitalists generally face the following risks:

Agency Risk(can be minimized by clear selection and clause in the agreement for moral hazard)

Liquidity Risk( can be minimized by options of buyback and IPO.In few tech based startups they like to make an early exit if the firm requires more than three series of fundings)

Technology Risk(can be minimized by doing due dilligence of the product.In some markets in Saudi its also known as product or technical risk)

Market Risk( can be minimized by having a separate team which can commercialize the technology and hence can prepare a go to market)

Human Resources Risk(albeit the selection of team with the necessary expertise.In Saudi its also termed as management risk.It can be elminated only by having the team vetoed by the board or some entry level barriers must be present for the VC firm to have its say alongside the founder)

Failure Risk( can be elminiated with a clear exit plan in case of bankruptcy/insolvency by the startup)

Prominent Saudi firms in the VC space is RTF(Riyad Taqnia Fund)/Saudi Venture Capital Company(SVC).Their portfolio as per crunchbase is mainly on ecommerce wherein premier players like Aeroz/Daily Meatz/Taker and Golden Scent have raised more than three rounds with a considerable ticket size.It is hence evident that the risks faced in ecommerce and logistic startups can be minimized by the above means.


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