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How To Invest In Startups In Line With The Shariah
November 14, 2023
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 halal activities, and when in doubt, consult your local scholar.
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.
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.
Risk Warning: Equity investments are not readily realisable and involve risks, including loss of capital, illiquidity, lack of dividends and dilution, and it should be done only as part of a diversified portfolio. Investments of this type are only for investors who understand these risks. You will only be able to invest in the company once you have met our conditions for becoming a registered member.
Risk Warning: As with any investment, a Wahed Invest Ltd investment puts your money at risk, as the value of your investment can go down as well as up. The tax treatment of your investment will depend on your individual circumstances and may change in the future. If you are unsure about whether investing is right for you, please seek expert financial advice.
Maydan Capital Limited, trading as WahedX, is registered in England and Wales (Company No. 13451691), registered office: 87-89 Baker Street, London, W1U 6RJ, UK. Maydan Capital Ltd (FRN: 963613) is an appointed representative of Wahed Invest Ltd (FRN: 833225), an authorised and regulated firm by the Financial Conduct Authority.Wahed Invest Ltd. is registered in England and Wales (Company No. 10829012), registered office: 87-89 Baker Street, London, W1U 6RJ, UK and is authorised and regulated by the Financial Conduct Authority: FRN 833225.
Disclaimer: This material has been distributed for informational and educational purposes only and the opinions expressed represent the views of the author and not necessarily those of Wahed Invest LLC or any of its affiliates, directors or personnel (“Wahed”). Any assessment of the market environment as of the date of publication is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice.
Wahed assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. Any strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. Furthermore, the information presented may not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance.
There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented. Any links to third-party websites are provided strictly as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites nor do we endorse the content and information contained on those sites. When you access one of these websites, you are leaving our website and assume total responsibility and risk for your use of the third-party websites.