Starting a company is an exciting time and for those in UAE, the chance to have your own start-up is remarkably high. Hundreds of start-ups are started each year in the Emirates. UAE actually leads Singapore, Norway, Japan, Sweden, Germany, and New Zealand in how many start-ups find life each year. Naturally, the sheer number of start-ups in UAE requires considerable capital and funding opportunities for entrepreneurs. Among these funding opportunities is VC Funding and Peer to Peer Funding. We will compare and contrast each of these funding types to help you make the best decision for your start-up in UAE.
What is VC Funding
VC Funding is Venture Capital Funding. With VC Funding, capital is invested into start-ups from larger corporations. VC Funding is a way that larger companies help the little guy, so to speak, by providing essential funding for getting a start-up off the ground. Companies that invest in VC Funding maintain interest in the company and profit over their growth potential. Companies invest is a VC Funding group that helps to oversee money invested into start-ups. The company maintains an equity share in the start-up.
Benefits of VC Funding
Access to Available Funds from Established Companies – Much larger companies invest in up and coming ideas and ventures to promote growth and provide stability to the start-up.
Low Annual Fees – Generally 2% that goes to pay salaries of investment group overseers. This number can vary depending on the VC Funding deal you find.
VC Funding Offers an Exit Strategy – Once the start-up is off the ground, an exit strategy exists in which the owner can buy out of the deal by paying an average of 20% to the funding group and subsequently, the companies that helped in the beginning.
Negative Attributes of VC Funding
There are a few disadvantages to VC Funding that can sometimes turn start-ups away from the opportunity. The top major disadvantage is that money is controlled by the fund primarily and they must approve any financial decision made by the start-up owner. Additionally, you are giving up a portion of your equity in the company in exchange for funding. You do not have to pay the money back, but in a sense, your start-up pays as they advance. Primary control remains to the start-up owner, but when your dreams do not match up with the financial desires of VC Funding firm, things can become a little heated.
What is Peer to Peer Funding
With Peer to Peer funding, funds are provided through funding based on the needs of the start-up. Essentially, companies and individuals help raise funds for the start-up and often use social media to do it. Peer to Peer funding helps raise awareness and ultimately funding for start-ups as well as non profits through donors and can work to build a deeper connection between lender and those needing funding.
Essentially, peer to peer funding is an opportunity for larger companies to invest in smaller companies without a lot of strings attached. The larger company provides funds in a specialized online platform and can choose which start-up they want to invest in. Peer to Peer Funding offers both secured and unsecured loan opportunities, but most loans are unsecured. Secured loans are almost always tied to luxury goods in peer to peer funding.
A start-up can send their company outline to online peer to peer companies. Those online entities assess the start-up’s credit rating and determines overall risk to potential investors. Once the start-up is approved, the applicant is given an interest rate and options for their funding. The applicant is then able to set up payments and pay a set amount based on the overall maturity of their start-up.
Benefits of Peer to Peer Funding
Higher Returns for Investors – Investors maintain the potential for higher returns on funding as there is virtually no limit to how much can be made from a profitable start-up.
More Accessible Form of Funding – Peer to Peer Funding is often easier to obtain as investors are ready and willing to invest in start-ups through this platform.
Lower Interest Rate Opportunities – Some funding opportunities come with high interest rates, but Peer to Peer Funding is based primarily on the credit score. The higher your credit score the lower your interest rate can be. Higher credit scores ideally lower the risk to investors.
Negative Attributes of Peer to Peer Funding
High Risk – Naturally, unsecured loans from Peer to Peer Funding are considered high risk. However, the availability of higher profits often outweighs possible risks.
No Insurance or Government Protection – Government secured loans are notably more attractive to investors as there is less risk, but there can also be limits on available profits. Peer to Peer Funding is not secured, so there is more risk.
Legislation Restrictions – Certain areas have strict regulations on Peer to Peer Funding opportunities. As Peer to Peer Lending can be a form of open market, it is also at risk for fraud, so in areas where fraud risk may be high, there may be legislative restrictions.
Start-ups in UAE have an endless opportunity to grow as both VC Funding and Peer to Peer Funding are remarkably popular. It is up to the start-up owner to evaluate their business and determine which avenue fits with their values and growth potential.