How To Invest In Startups In Line With The Shariah

Think of the biggest, most revolutionary companies today - Apple, Microsoft and Google. These modern technological giants are constantly in the headlines and have a huge influence across society and also in the investing world.

As some of the largest companies in the stock market, they are a staple of many people’s investment portfolios. Yet, they are only the tip of the investing iceberg. Under the surface lies a vast and vibrant world of exciting startup opportunities.

This is where you’ll find the chance to fund innovative entrepreneurs building the next generation of high-growth startups.

The catch is that for Muslim investors it can be hard to invest in startups in a Shariah-compliant manner.

Read on to discover the tools required to screen startup investment opportunities to ensure that they are Shariah-compliant, so you can unlock and participate in the lucrative world of startups.

Advice from our Shariah Supervisory Board

We are proud to be amongst the few Shariah-compliant investment platforms that have a dedicated Shariah Supervisory Board. They review all of our activities to ensure that our investment opportunities remain Shariah-compliant.

Here is their advice for the three things you must always keep in mind when investing in startups. 

1. Business Model 

The first thing to consider is whether the core business activity of a company is permissible. Certain business activities like gambling, adult entertainment, tobacco, and others are impermissible to invest in. It is therefore extremely important that you stick to businesses that engage in halal¹ activities, and when in doubt, consult your local scholar.

2. Indebtedness

The debt levels and financing structure of companies should also be carefully evaluated before investing.

Our Shariah Supervisory Board advise that companies need to pass the following financial ratios to be considered Shariah-compliant: 

• Debt is less than 33.333% of total assets
• Cash and interest-bearing items are less than 33.333% of total assets
• Accounts receivable and cash are less than 50% of total assets 
• Total interest and non-compliant activities income should not exceed 5% of total revenue

These thresholds have been agreed upon by scholars based on the principle of necessity. Due to the lack of fully compliant options available, these thresholds have been set to allow Muslims to preserve and grow their wealth through investing.

3. Shareholding Structure

Finally, to prevent exploitation and align with Islamic finance principles, our scholars mandate that the shareholding structure must be equitable.

You need to stay clear of investments that come with preferred rights. Guaranteeing returns or giving preferential treatment in liquidation to certain investors violates the balance of risks and rewards. This structure is impermissible, as it is inherently unfair and unethical.

The Shariah mandates that all shareholders must share equitably in the fate of a venture. If it fails, everyone loses out. Conversely, if it succeeds, all the investors succeed.

How Wahed Ventures Upholds Shariah Compliance 

At Wahed Ventures, we take pride in providing strictly Shariah-compliant investment opportunities. Here’s how we do so by using guidance from the scholars on our Shariah Supervisory Board:

A. Only Invest in Permissible Businesses

We only curate and invest in permissible business models. Wahed Ventures also goes one step beyond to champion companies that are solving important problems faced by the community.

For example, our first deal was in Fairnance, an alternative home-financing platform that provides a real alternative to conventional interest-based mortgages. This directly solves a key problem for homebuyers who are excluded from homeownership due to non-financial reasons and who are not being served by the current mainstream offerings.

B. Riba-Free Financing

We provide equity financing by connecting companies to investors so that companies don’t have to resort to interest-bearing loans to grow their businesses.

All finance is strictly done on an equity basis ensuring that the risk and reward are shared equitably.

C. Equitable Treatment of both Parties

Wahed Ventures forces an ethical shareholding structure by making it a condition of the financing deal that there is no preferred liquidation and capital rights. 

There should be no unfair liquidation preference. In the event of liquidation, an investor and entrepreneur should receive returns proportionately. This is right as it is only fair that investors and businesses share the impacts of ups and downs in business.

Investor’s capital should be treated as a priority, but not above all else. An investor shall not make guaranteed profits when the business does not. This ensures equitable treatment of both parties.

Summary

By investing in startups, you can empower and contribute to companies that are trying to solve genuine problems and advance society.

Just remember the 3 factors that you need to consider to ensure opportunities are indeed Shariah-compliant. In short, the business model itself must be halal, the debt levels and financial structure of a company must be within advised thresholds, and all shareholders must be treated equitably.

Platforms like Wahed Ventures further enable access to compliant startups 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 halal pre-vetted startup opportunities to the community in a transparent and compliant manner.

If you want to invest in 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}