What are some common terms used in Venture Capital in the UAE
What are some common terms used in Venture Capital in the UAE?
Venture Builders
Also known as “startup studios” or “startup factories,” these firms generate new businesses internally from their operations, rather than investing in external startups. They conceive, build, and launch startups, often playing a foundational role in the startup's inception -- having "skin in the game". Here within the UAE, eg: Turn8, Further, GlowFish, Raha Beach Ventures, etc.
Startup Accelerators
Accelerators help slightly more mature startups scale quickly and get them ready for major investment. Eg: Y Combinator, Tech Stars, Hub71, Innovation Hub (DIFC), Flat6 Labs.
Startup Incubators
Incubators nurture startups in their earliest stages, providing a supportive environment. Eg: DIFC Innovation Hub, In5, etc.
Lifestyle Businesses
Businesses that provide their owners with a steady income but lack the potential for exponential growth.
Limited Partners (LPs)
Investors in a venture capital fund, often institutional investors like pension funds, endowments, or wealthy individuals.
Initial Public Offering
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. This allows companies to raise capital from public investors.
Mezzanine Round
A mezzanine round is a late-stage round of financing meant to bolster a company financially before it goes public. It is typically the final funding round before an IPO and serves as a bridge between venture capital and an IPO.
Secondary Sale
A secondary sale in venture capital is the sale of a startup’s shares from one private investor to another, without the shares being made available to the public through an IPO. This allows early investors to cash out their investment before an IPO or acquisition.
Carried Interest
aka Carry, refers to the share of profits that the General Partner receives from the investments made by the fund. It’s a percentage of the profits, typically around 20%, that the General Partner receives as compensation for managing the investments.
Due Diligence
The process of carefully investigating and evaluating a potential investment opportunity to assess its risks and merits. In the context of venture capital, it includes analyzing the business model, financial statements, market potential, management team, and legal considerations.
Term Sheet
A non-binding agreement setting the basic terms and conditions of an investment. It serves as a template to develop more detailed legal documents.
Exit Strategy
A way for an investor to exit their investment in a company, typically through a sale, merger, or IPO.
Board Seat
A position on a company’s board of directors. After investing, a VC often takes a board seat to influence and monitor the company’s strategy and decisions.
Private Equity
A type of investment that involves buying shares in companies that are not listed on public stock exchanges.
Investment Deployment
The act of using invested capital for its intended purpose.
Institutional Investors
Organizations that invest on behalf of their members. Examples include pension funds and insurance companies.
Follow-on Rounds
Additional rounds of funding that a startup may go through after the initial investment, to support continued growth and development.
Investor Conviction
The belief and confidence that an investor has in the prospects of a startup, often influencing the decision to invest.
Post-Investment
The stage of the investment process where the venture capitalist provides strategic guidance, oversight, and other support to the startup after the investment has been made.
Secondary Sale
The sale of a startup’s shares from one private investor to another, often enabling earlier investors to exit their positions.
Endowments
Funds donated to institutions or foundations, where the principal amount remains intact, and only the income or interest earned on it is used.
Family Offices
Private wealth management advisory firms that serve ultra-high-net-worth investors.
Receivable Funds
A type of funding where capital is provided based on the accounts receivable of a company.
Revenue-Based Funds
Investment funds that provide capital in exchange for a percentage of ongoing gross revenues until a predetermined return multiple is reached.
Search Funds
Investment funds set up by entrepreneurs who raise a pool of capital to fund the search for a promising company to acquire and manage.
Secondary Funds
These funds specialize in buying existing stakes in venture-backed companies from early investors looking to exit.
Specialty Funds
These are alternative investment vehicles that deviate from the traditional venture capital model. They may be types of private equity or debt funds.
Special Purpose Vehicles (SPVs)
These are simplified funds that pool investments typically for a single, specific investment deal.
Outsourced Funds
These funds allow part-time or amateur investors to establish venture capital funds, simplifying the investment process and reducing administrative work.
Pass-Through Entities
A legal structure where an entity does not pay income taxes at its own level. Taxes are “passed through” to the owners, who report the income, deductions, and credits on their individual tax returns.
Pro Rata
A term that refers to the proportional allocation of something, such as ownership or investments. In the context of the article, it relates to the General Partner’s commitment to the fund based on ownership.
Hard Circled
A term used to describe committed capital from investors that is considered secure, though not yet legally binding.
PACT
A term used in this context to refer to a commitment letter from a potential investor expressing their intent to invest in the fund.
TVPI
Total Value to Paid-In, a ratio used to measure the value of a fund’s investments compared to the amount of capital paid into the fund.
Investment Memo
A detailed document prepared by venture capital professionals, summarizing the analysis and evaluation of a particular investment opportunity.
Carried interest
Carried interest = share of profits
The more significant earnings come from carried interest, which is a share of the profits from the fund’s investments. This is typically around 20% of the profits, with the remaining 80% going to the LPs. Example: if a VC fund of $100 million returns $300 million after a decade, the $200 million profit is split with $40 million (20% of the profits) going to the GPs as carried interest and the remaining $160 million returning to the LPs.
Valuation
Valuation = current market value
Basically estimated worth of the company, using different methods to value startups
Most common: discounted cash flow (DCF), gross merchandise value (GMV), comparable companies method, etc.
Inflated valuations
Venture capitalists sometimes contribute to overvalued startups, leading to market instability. WeWork, valued at $47 billion in January 2019, fell to $12 billion
Klarna raised $800m at a valuation of $6.7 billion, down 85% from $46B just last year
When market doesn't have all the info, a divide between market value and intrinsic value can appear.
Exit strategy
An exit strategy is a plan for how VCs will eventually get their investment back.
Some common exit strategies: going public or IPO, being acquired, or selling the company outright.
Secondary sale
A secondary market transaction is when shareholders of a company sell their stock to another investor. Or, the sale (of a startup’s shares) from one private investor to another = secondary sale. Enables earlier investors to exit their positions.
A venture secondary transaction involves the sale of private stock in a company that is backed by venture capitalists.
Liquidation preference
A clause in a VC investment agreement that gives VCs priority over other investors in the event of a liquidation event, such as a bankruptcy or acquisition.
Conversion rights
Conversion rights give VCs the option to convert their preferred stock into common stock at a certain price. This is typically done when a startup goes public.
Anti-dilution provisions
Protect investors from their investment potentially losing value. Anti-dilution provisions protect VCs from their ownership stake in a startup being diluted by future investment rounds. Variety of different anti-dilution provisions types, most common: weighted average price (WAP) anti-dilution provision and the full ratchet anti-dilution provision.
Full ratchet anti-dilution provision
A contractual provision designed to protect the interests of early investors
