Venture capital is a type of funding often sought by startup companies besides funding from banks and individuals. However, many people are still unaware that sharia venture capital exists in addition to conventional venture capital. Similar to banks, there are conventional banks and sharia banks.
Beforehand, it should be noted that a venture capital firm is a business that provides financing in the form of equity participation in a company that receives financial assistance for a certain period.
Venture capital funding tends to target high-risk startup companies without bank access. Then what is its difference from sharia venture capital?
differences between sharia venture capital and conventional venture capital
Also read: What is Venture Capital? Definition, Benefits, How It Works
According to Peraturan Otoritas Jasa Keuangan Nomor 35/POJK.05/2015, a sharia venture capital business can be interpreted as a financing business through investment activities and/or services carried out to develop a business partner company’s (PPU) business following sharia principles.
PPUs that receive funding from sharia Venture Capital firms (VC) must be established as a business entity, whether in the form of a limited liability company, cooperative, or limited partnership.
Generally, PPUs that receive funding from sharia VC are companies still at the startup stage. Usually, these companies also have not met the requirements to get funding from banks.
Also read: The Top Venture Capital Firms in the World
Generally, this type of venture capital manages funds and fee-based services like conventional venture capital. The distinction is in the application of profit sharing and contracts according to the sharia or Islamic principles.
There are several differences between sharia venture capital and conventional venture capital, such as the type of funding and selected company. Check out the explanation below.
Also read: 5 Main Role of Venture Capital on Startup Business
Funding Type
differences between sharia venture capital and conventional venture capital
Sharia Venture Capital
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Equity participation
The first one is equity participation, in which capital participation is in the form of shares for PPU in the form of a limited liability company. The term of equity participation ranges from ten to twenty years.
After the equity participation, the company will usually divest. This divestment indicates that the funded PPU is large enough and able to make offers through the capital market. -
Purchase of sharia bonds
In this scheme, funding is done by purchasing convertible sharia bonds or sukuk.
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Profit sharing
Lastly, there is profit sharing by complying with sharia principles according to the agreement of both parties. Equity participation is also carried out using contracts in accordance with sharia principles, namely mudharabah, musyarakah, and mudharabah musytarakah contracts.
Also read: What Does A Venture Capitalist Do? 7 Things You Need to Know
Conventional Venture Capital
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Direct equity financing
Direct equity financing, or venture capital financing (PMV), is carried out by taking several shares from the PPU concerned. This method is also known as equity financing.
The fund comes from a share of the PPU’s ownership, so the PPU must already be set up as a limited liability company. -
Semi-equity financing
Then, there is also semi-equity financing, where funding is done by purchasing convertible bonds issued by the PPU. Venture capital firms and PPUs prefer this method because it is more flexible.
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Profit sharing
Apart from the two methods above, there is also profit-sharing financing. This method emphasizes the profit-sharing aspect of the profits obtained by startup companies.
The method of profit-sharing funding is a modification to accommodate financing constraints for business entities that are not yet legal entities.
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Selected Company Type
Sharia PMV can be a source of funding for Micro, Small, and Medium Enterprises (MSMEs) and startups, especially those engaged in halal business. Meanwhile, conventional venture capital focuses more on high-risk technology-based startups.
So, that is the difference between sharia venture capital and conventional venture capital at a glance. It can be concluded that the most striking difference between the two is the application of sharia principles in sharia PMV.
Furthermore, sharia PMV has so far focused on MSMEs, whereas conventional venture capital has grown in popularity and is targeting startups with high business risks.
