What is Venture Investing and Is It Halal?

Investing your wealth is incredibly important. For starters, preserving wealth is an integral part of the Maqaasid (higher objectives) of the Shariah. Furthermore, investing can potentially help you secure your family’s future, achieve financial goals, donate to causes, and leave behind a legacy. For more on why halal¹ investing matters, read our article here.

The good news is that investing your hard-earned money has never been easier! 

The rise of technology has revolutionized the financial landscape for everyday investors. Many previously inaccessible investments have now been democratized, allowing the everyday person to access new, innovative investment opportunities.

One of these investment opportunities is ‘Venture Investing’, an alternative method of raising capital that is rising in popularity. This article will break down what venture investing is and will also assess whether this is a halal option for Muslims seeking to grow their wealth.

What is Venture Investing?

Let’s start by breaking down what venture investing is all about. 

Venture investing involves investing in early-stage, private companies with high growth potential. Of course with high growth potential, comes high risk. Venture investing provides capital to innovators and entrepreneurs building disruptive businesses that are trying to solve big problems.

It’s similar to the concept of crowdfunding but with a focus on early-stage high-growth startups. In crowdfunding, funds are raised from a large group of people to fund something that they wouldn’t be able to do individually.

Crowdfunding is a concept that has been around for many years and even existed at the time of the Prophet ﷺ! We covered this in our introduction to crowdfunding article which also covered the different types of crowdfunding (including debt and charitable) available which you can read here. 

This article will focus solely on venture investing, which is a form of equity crowdfunding that focuses exclusively on high-growth startups.

How does Venture Investing work?

Venture investing platforms like Wahed Ventures serve as intermediaries, connecting startups and entrepreneurs seeking funds with potential investors. These platforms showcase investment opportunities, allowing the startups to present their business plans and growth prospects.

Interested investors can then browse through these opportunities, evaluate the risks and rewards, and decide on the ventures they wish to support.

When an investor decides to participate in a deal, they contribute a specific amount of money in exchange for ownership shares in the company. These shares give investors the opportunity to benefit from capital appreciation (the share value increasing) or dividends (a share of the profits generated by the business). Startups rarely pay dividends and instead reinvest any profits earned into generating growth so don’t expect to earn dividends when investing in startups. 

As the business grows and succeeds, the value of these shares may increase, potentially providing the investors with a return on their investment. For example, a startup you invested in may perform well and become more valuable, thus increasing the value of your shares. You could then sell these shares for a profit.

Here’s a diagram to help you visualise the process:

Who is Venture Investing for?

For Startups

Venture investing opens up a new avenue of fundraising for start-ups beyond traditional loans and venture capital. It allows them to raise growth capital by tapping into small investments from a large group of backers.

This is particularly helpful for Muslim founders who for obvious reasons can’t take out loans due to interest being prohibited in Islam. Wahed Ventures is a venture platform which directly addresses this problem and empowers Muslim founders who are solving the world’s biggest problems.

For businesses, having a network of investors also provides marketing exposure and fosters new motivated company ambassadors.

For Investors

Venture investing allows everyday investors to gain access to high-risk, high-return private investment opportunities that were previously restricted. Investors can diversify their portfolios with early-stage equity and exposure to different sectors at low minimums.

They also get the satisfaction of supporting innovative new companies that are trying to solve the world's biggest problems.

What are the wider considerations of Venture Investing?

Now that we know what venture investing is, let’s explore the pros and considerations that one needs to be aware of before investing. 

Pros

• Low barriers to entry - Venture investing allows small investors to participate in previously inaccessible investments with minimum investment amounts as low as £500, such as through Wahed Ventures. 
• Early access - Investors get early access to potentially promising startups before they become mainstream. This provides the chance to get in early and reap the benefits of growth. 
• Diversification - You can access previously inaccessible investments giving your portfolio much-needed diversification. Diversification in case you didn’t know is when you allocate your investments across a variety of assets, industries, markets, and other categories to reduce overall risk
• Exciting investments - Investors can contribute to innovative products, services and missions that resonate with their interests and values
• Potential for high returns - Though risky, equity investments in startups have a greater upside compared to other assets if the startup succeeds. Early investors can see outsized returns

However, there are also some things to think about: 

• High risk - The majority of startups fail, so startup investments carry a substantial risk of losing most or all of the invested capital. 
  You’ll want to ensure that you only invest a portion of your portfolio into high-risk equity investments and that you spread this portion across multiple startups. With startup investing, you only need a few big winners to be successful‍
• Illiquidity -  These investments can be highly illiquid, which essentially means that it is difficult to cash out. For startups, you’d have to wait for an exit like an IPO or acquisition.
  Alternatively, some platforms offer a secondary market where you can potentially sell your shares sooner to someone else. However, these don’t tend to be highly liquid. So be prepared for your money to be tied up for a long time‍
• Lack of due diligence - Investors have limited tools and expertise to deeply analyse the business models and valuations of these private startup
• ‍Dilution - For startup investing, additional funding rounds in the future will dilute early investor equity ownership and upside potential. This is normal practice but is something for potential investors to be aware of

Consequently, to reduce the downside risks, invest via trusted platforms that have credible and qualified people pre-vetting any deals they list.

Is Venture Investing Halal?

The central consideration for Muslim investors is whether an investment is halal. Venture investing involves the purchase of shares in an investment to share in the profits and the income generated. 

This concept is fine in itself but there are three considerations we need to factor in.

Firstly, all investments must be done on an equity basis (wherein you share in the profit or loss of the investment) and not via lending (promised a fixed return). With lending, the return you will receive will be interest which is not permissible. 

Secondly, when purchasing any investment, the underlying asset must be halal. So if you are investing in a startup, its primary business activity must not include any impermissible activities such as gambling, lending or alcohol. The financials of the underlying business must also be screened to check for interest-bearing debt. 

Lastly, you want to be purchasing shares that treat all investors the same (common stock). This means that types of stock that favour certain investors over others are not permissible (e.g. preference shares). This is just a quick overview as we’ll be covering this topic in more detail in a future article.

In summary, if it’s a straightforward equity investment where all shareholders are treated equally and the underlying investment is halal, you can invest in it. You can also find fully Shariah-compliant opportunities where the screening is done for you by experts at Wahed Ventures. 

Summary

Venture investing powered by technology is a relatively new and exciting way for Muslim investors to diversify their portfolios. It has opened up startup investing to everyday people. By enabling many small investments to be pooled together online, venture platforms provide access to deals that were previously restricted to wealthy, accredited investors and venture capital firms.

Done correctly, venture investing can be a great way to preserve and grow your wealth. To be successful, it’s vital to do your due diligence before investing. Muslim investors should therefore ensure that they only invest in startups that are halal and that they should only invest via reputable and trustworthy platforms.

If you want to get access to curated investments in ethical, early-stage startups check out Wahed Ventures. Wahed Ventures allows you to invest in fully Shari'ah-compliant startup companies that are solving the world's biggest problems. You can get started here.

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_{1. The term 'Halal' denotes that it is permitted and follows Islamic law}

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