Differences between a programmed economy and a market economy

Definition of a risk investment

Venture capital or venture capital is an investment or equity from a private fund that provides capital to companies with high growth potential, and in return, the investor receives a share of the capital. This capital is usually intended to support start-up projects or small companies that want to expand but do not have access to the stock market.

However, venture capital investment is not necessarily just about money, but also about technology and management know-how, and venture capital is usually provided to SMEs with high growth potential or those that are growing rapidly and have the potential to expand further.

Such investments are riskier for venture capitalists, but more attractive to investors because they offer above-average returns if successful.

Types of venture capital funds

Types of venture capital funds can be distinguished according to the stage of the investor.

Venture capital funds provide seed capital to support start-up companies. At this stage, venture capitalists generally do not receive funds or, if they do, only in small amounts.

Seed capital: Sometimes also called post-seed capital, because at this stage the company may already have a sample of its product.

Seed capital: This is provided two to three years after the investment in order to increase sales.

Development capital. Used to expand the business.

The aim at this stage is to meet and exceed sales and profit targets.

Intermediate financing: when a successful SME wants to merge or acquire a company.

Three factors that make a venture capital fund successful

Setting strategic objectives

All investors should first focus on one of two main investment objectives: financial and strategic interests.

They should then ask themselves whether their primary objective is to benefit financially by gaining market knowledge and experience or to accelerate their strategic involvement in business models that will help them grow and test new markets in the future.

As these two objectives require fundamentally different approaches and mindsets, it is important to clarify expectations for action and to plan and act accordingly.

Experience shows that venture capital investments are more successful when minority shareholders are involved and when the portfolio company is given sufficient freedom.

Don't put all your eggs in one basket.

In addition to the performance and scale issues associated with venture capital funds, investing in start-ups and sole traders still involves risk, and while the growth potential of the investment is usually twice that of a quoted stock, there can be many failures. Moreover, there is no free lunch for any type of investment other than diversification.

Therefore, when investing in start-ups, it is very important to diversify across companies, sectors, funding stages, regions, etc. to reduce the increased risk of failure of start-ups.

Choose investments that are consistent with previous investments.

Many financial advisors are reluctant to invest in venture capital funds because they consider this type of investment too risky. Many financial advisors are reluctant to invest in venture capital funds not only because they do not specialize in this type of investment, but also because they always prefer to work with established firms.

This is because the inclusion of emerging sectors in traditional investment portfolios has so far been impractical or underestimated due to the non-traditional risks associated with fiduciary nature, management costs, and various other factors.

It is therefore always preferable to invest in products and assets that are consistent with existing investments to avoid significant integration problems. [2]

Difference between venture capital and angel investment

Both venture capitalists and angel investors are people who invest in companies and take calculated risks, assuming a good return on investment. There are, however, important differences between angel investment and venture investment, as follows.

Nature of the investor

Venture capitalists are individuals or companies that invest in small and medium-sized enterprises using funds from investment firms, large corporations, or pension funds. Venture capitalists do not usually invest in companies from their own resources.

An angel investor is a person who invests in small and medium-sized enterprises with his own funds. To qualify as an angel investor, an investor must have net assets of at least USD 1 million and an annual income of at least USD 200 000. Angel investors are usually relatives of the business owner. Small, family and friends.

Size of capital

Another difference between angel investors and venture capitalists is the size of the capital provided by the investor.

Venture capitalists typically put more money into a company than angel investors, with the average deal size for venture capitalists being $11.7 million, according to the Small Business Administration.

According to the American Small Business Association, the average angel investment is $330 000.

Investment timing

Angel investors differ from venture capitalists in when and at what stage they start investing their money. When a small business is trying to find investors to back its business, whether it approaches investors depends on whether the business is established or just starting up.

Venture capitalists tend to invest in established businesses to reduce the risk of losing their investment.

Angel investors are more likely to invest in venture capital-backed companies. Angel investors take greater risks than venture capitalists because they tend to select companies in which they have an interest and are convinced that the company will be profitable, even if it is not yet established.

The role of the investor in the company

Angel investors usually want to acquire assets or business rights or to gain some control over the management of a project. They want to make sure that they get the best value for their money, so they always try to form the board of the company they work for and demand a seat on that board, but ultimately they are not interested in running the company.

Angel investors often act as mentors to the company, making suggestions, helping to liaise with banks and accountants, and assisting in decision-making." [3]

Venture capital funds in Saudi Arabia

Venture capital investment in the Kingdom began to emerge in 2018 with the establishment of the Saudi Venture Capital Company, and in just two years venture capital investment has grown by 124%.

The balance of venture capital investments has reached approximately $152 million and in the first half of 2021 AD, the amount of venture capital invested in Saudi start-ups was approximately $168 million.

This represents an increase of 65% in the UK's venture investment compared to the previous year, coming close to the UAE, which leads the region in venture investment [4].