The How-To: Choosing The Right Venture Capitalist For Your Startup
Being discerning when selecting venture capitalists is as critical as any other business decision.
Venture capital is a common parlance in the world of investment, which involves putting in a certain amount of capital in businesses, particularly startups, with long-term growth perspective. In such a scenario, venture capitalists gain substantial ownership of the business, thereby allowing them to exercise major influence in important organizational decisions, as a means to protect their capital, and ensure a high return on investment.
The UAE is teeming with investment activities in light of the booming number of local tech startups in the country. According to New York-based research outfit CB Insights, the country experienced a 45% increase in the number of private tech startups in 2016, resulting in significant growth of "equity rounds of funding" locally. Investments in Emirati tech startups are continuously going upwards at an astonishing rate to reach over US$1.7 billion in 2016.
In 2017, the UAE Government released new regulations for venture capital funds formulated by a Government Accelerators team comprising the Ministry of Economy and the Securities and Commodities Authority. Among the main goals of this latest legal structure are to foster a culture of innovation in the country and attract significant number of global venture capitalists to the Arab state to drive the domestic business community. Across the Middle East, UAE-based venture capital firm BECO Capital has predicted that the regional venture capital market will be worth $5 billion by 2019.
While this form of financing is highly appealing to a number of entrepreneurs –given the large amount of money, advice, and the prestige going into their relatively new businesses– choosing the right venture capitalists with shared vision and common goals is the key to ensuring that the partnership will lead to a harmonious relationship and high growth rate achieved through dynamic collaborative efforts.
Several factors have to be taken into account when choosing the right partner in this regard. One of these is the venture capitalists' credibility. Some have termed this as "social proof," noting that partnering with a renowned investment firm with deep pockets can positively impact a rising business, in terms of attracting high-caliber talents and generating customer confidence instantly.
Being discerning when selecting venture capitalists is as critical as any other business decision. Since venture capitalists are on board for years to come, an enterprise can find itself possibly stuck with that partner during the entirety of its existence. Changing partners as opposed to employees is highly impossible in the middle of organizational operations.
As in any other business alliances, it is significant to pick venture capitalists that have the same vision, corporate values, goals, and commitment. A startup journey is going to be expectedly hard and arduous, making fundamental adjustments along the way. In which case, a business needs a partner who is a strong believer in what the company is doing and where it is heading, and has faith in its leaders and their capabilities to lead the company to a long-term growth, no matter the challenges.
Furthermore, venture capitalists are likely going to be part of an enterprise's board of directors, giving them the power to exercise control over voting shares and major business decisions, among others. To avoid conflict between founders and board members, the best partner should be someone with the right qualifications to dish out sensible and reasonable business advice.
Besides business acumen, personality traits should also be considered as venture capitalists will play a key role in every aspect of the startup's journey. Transparent, straightforward and direct partners are always preferable over someone who loves to beat around the bush so to speak. Being respectful and modest are exceptional traits as well to help establish smooth and enjoyable working relationship.
The venture capital industry in the UAE and the rest of the Middle East is rising exponentially. The increasing number of local and regional startups can significantly benefit from this growth, with regional governments providing the needed support system and infrastructure to help flourish the industry and drive its expansion according to their respective economic growth agenda.