Why You Should Invest In Startups and Why This Matters For Muslims

The world as we know it was transformed in the 20th century.

At the heart of it have been technological advancements that have given rise to some of the biggest companies today. We’re all familiar with the likes of Google, Microsoft and Facebook which have revolutionized the world and along the way have become some of the most valuable companies in the world.

At one point, all of these companies were startups, fighting to prove themselves and secure the funding required to propel them to the next level. Soon these companies will be replaced by the next generation of startups that can solve the biggest problems of today.

Startups are a way to make a difference in society and potentially generate new wealth in the process.

However, not everyone has it within them to be entrepreneurs like Elon Musk, Jeff Bezos or Mark Zuckerberg. For those who don’t, the next best option is to invest in these founders and give them the funding they need to succeed. 

This article will make the case for why your investment portfolio should have a space for investing in startups and why this has extra importance for Muslims.

Firstly, what is a startup?

Is there a difference between a startup and any other small business, like your local corner shop?

Yes, a startup is a business that is newly created, innovative and aims to grow quickly. Unlike small businesses, startups often rely on technology, have a global vision, and focus on scalability.

They want to take over markets with their innovative products or services. Most aim to make millions if not billions in revenue from building a massive customer base. 

This potential for massive growth and market disruption is why investing in startups has more risk but also more upside. Finding and financing the next unicorn (i.e. a startup that has a valuation of over a billion) that becomes hugely successful is every investor's dream.

Okay, but what’s the big deal?

Startups add tremendous value to society. Here are some of the outcomes that supporting startups can achieve:

1. Get in Early for Growth Potential

Unlike established companies, startups offer the potential for greater growth opportunities. When you invest early, you can get in on the ground floor before the valuation rises. 

Let's go through a worked example to illustrate this by looking at Google.

In 1999, they were valued at $75m. 

In 2004, they went public (listed on the stock market) with a valuation of roughly $23bn.

Today in 2023, they are worth ~$1.7 trillion.

The overall point is clear: Getting in early allows you the potential to fully capture the upside growth.

2. Support Innovation and Progress

Investing in startups allows you to support innovation and technological progress. Startups are often at the forefront of developing new products, services, and ways of doing things. 

By providing them with capital, you empower innovative entrepreneurs to bring their ideas to life. This leads to advancements that can improve people's lives.

3. Diversify Your Investments

Diversification is when you spread your investments across various asset classes and sectors to avoid the dangers of over-concentration.

For example, if all of your investments are in property and the property market crashes, your entire portfolio will be in trouble. It would have been safer to spread your money across different areas.

Startups operate in diverse industries working on innovative ideas and as such have risk-return profiles that differ from other assets such as stocks, real estate and commodities (like gold or silver) providing valuable diversification. 

Adding startup investments gives you exposure to high-risk high-reward investments that can potentially boost your overall investment returns. Of course, startup investing is risky as many fail which is why investing in startups should always be done as part of a diversified portfolio.

4. Support Your Community

Furthermore, investing in local startups supports your own community's entrepreneurial ecosystem. It creates jobs, drives innovation, and leads to economic growth in your city or region. By funding local startups, you contribute to the success of your community and potentially earn returns in the process. 

The next section will expand on how this point is particularly important for Muslims.

Why this is particularly important for Muslims

Muslims across the globe aren’t as strong as we can be. Investing in Muslim-owned startups is one of the solutions to this problem.

How does supporting the next generation of Muslim startups make the ummah stronger?

1. It increases our influence - the likes of Microsoft, Apple and Amazon possess tremendous influence in modern society. Having more successful businesses and Muslim founders will directly translate to Muslims having more influence in society.
2. Aids the Muslim circular economy - by investing in startups that solve problems that help Muslims and also enrich Muslim entrepreneurs, this will directly trickle through to the rest of the community.
3. Aids the fight against riba (interest) - to fight riba, we need to support and elevate Muslim startups that don’t opt into the riba system that dominates today’s economy. This will also showcase to the rest of the world that you can still thrive financially without resorting to riba. 

Are there any risks to be aware of?

Yes, while the upside potential can be enormous, startup investing also comes with major risks to be aware of:

• High-risk - Startups are a high-risk investment where many of them will fail due to competitive pressures and the difficulty of scaling. Investors must be aware that they could lose all their money when they invest in startups.
  With startup investing, you want to spread your investments across multiple startups and aim to find a few that generate outsized returns to cover any losses and generate healthy returns.

• Illiquidity - Unlike public stocks, equity in private startups can be difficult to sell until a liquidity event like an acquisition or IPO (listing on a stock market). Therefore startup investing requires a long-term commitment and you shouldn’t invest money that you are likely to need in the short-term.

Okay, how can I get started?

Investing in startups on your own can be tricky. Not everyone is equipped to be able to do the necessary due diligence to make sure your money is going to the right places where it has the best chance of being returned to you.

The other challenge for Muslims specifically is ensuring that everything you invest in is shariah-compliant. We’ve addressed this in more detail in this article here.

The good news is that there is a platform that exists to solve these specific challenges.

Enter Wahed Ventures, which provides access to curated investments in ethical, early-stage startups. 

Wahed Ventures makes investing in startups easier for Muslims by doing both the Shariah and investment screening for Muslim investors. By working diligently with our scholars and implementing robust ethical policies, Wahed Ventures brings halal¹ pre-vetted startup opportunities to the community in a transparent and compliant manner.

If you want to invest in what can potentially be the next generation of the world's most successful businesses, with the assurance that it's all being done in line with your values, get started at Wahed Ventures today and let's invest in our future together. You can get started here.

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