13 August 2019 - 08:37
News ID: 446507
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Introduction of the paper “A Mathematical Approach to the Exit Strategy in the Model of Islamic Venture Capital” (Part 2)
The idea of the venture capital financing introduced through the Islamic capitalization was originated from some contracts such as partnership and bailment of capital. In partnership contracts, the financer and entrepreneur both have a share of the profit of the economic project.

RNA - Nowadays, venture capital is a chief type of capitalization/financing in the world economy. This investment, known as venture capital or entrepreneurship capitalisation, is the provision of the needed capital by the newly founded and entrepreneur companies that are competent in terms of their value growth and considerable risks.

In the initial stages of their economic growth and development, such companies attract those investors that, following a critical analysis, meet the capital need and compensate the liquidity lack of entrepreneur companies and act as their financers. Indeed, with regard to the newly founded firms’ lack of financial resources, venture capital plays a vital role in the growth and development of such firms.

As the traditional venture capital is not commensurate with the religious principles in terms of contractual frameworks, its employment is not appropriate for Muslim societies; thereby, a new venture capital, which is in conformity with the religion of Islam should be developed. Islamic venture capital is a good option in this regard.

Provided that the Islamic venture capital is implemented properly, it will bring the economy of the Islamic countries some sustainable resources. Accordingly, these countries can create a diversity in their economies and back up the creative youths in order to use their ideas for their development and growth, and in result, it will bear them the fruit of their people’s growth of wealth and improvement of public welfare. An important factor required for the development of venture capital is laying some appropriate foundations within the economy, and to that end, some economic and lawful structures should be built for the development of new technologies.

The idea of the venture capital financing introduced through the Islamic capitalization was originated from some contracts such as partnership and bailment of capital. In partnership contracts, the financer and entrepreneur both have a share of the profit of the economic project.

What is important is that, following a specific period, the investors of the venture capital need some strategies to stop the capitalisation, a strategy that is called the exit strategy and is highly significant. This strategy let financers take out their capital form the economic project gradually and pass the ownership of the project into the entrepreneur following the initial stages of the development of an economic project and supporting entrepreneurs.

It helps financers launch capitalisation of new projects afresh, and overall, it helps the production boom, construction and economic development.

An exit strategy in the Islamic venture capital is the employment of “Reductive Partnership” contracts. An advantage of such contracts as the exit strategy in Islamic venture capital is that it facilitates the entrepreneur's access to the ownership of the assets. Through the generation of a shared profit, an increase of entrepreneur's share and reduction of financer’s share, this strategy gradually transfers the ownership of the assets to the entrepreneur.

This paper, employing a mathematical approach, examines and analyses the financer’s exit of the Islamic venture through the reductive partnership contract. The results of this approach demonstrate that the duration of time needed by the entrepreneur in order to assume the full ownership of the economic project depends on three following factors:

Capital of the capitalise 2. (K), entrepreneur’s capital 3. (B), and the expected profit of the two (P)

The comparison of the time needed for the assumption of the project’s ownership by the entrepreneur in venture capitals can be compared in two immutable and mutable conditions, this comparison showed that in both mentioned situations, the time needed for the assumption of the project’s ownership has an inverse relationship with the efficiency/returns of the project.

Besides, it was suggested that in immutable return situation, the increase in the capital of entrepreneur and financer will respectively shorten and lengthens the time needed for the assumption of the project’s ownership.

In addition, in the mutable return condition, the increase of the entrepreneur’s capital (B) will shorten the time needed for the assumption of the project’s ownership.

With regard to the aforesaid results, it can be concluded that the increase of the expected profit in each period (P) shortens the time needed by entrepreneur to fully assume project’s ownership in venture capital projects, and consequently, it benefits entrepreneur; in other words, entrepreneur’s further endeavours and the announcement of the actual profit/income of the project, and accordingly the growth of the expected profit, will shorten this time. This important result of the present research can be a help to resolve the problems of asymmetric information and representativeness/agency problems in employing partnership contracts in venture capital projects.

 

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