UNIVERSITI UTARA MALAYSIABPME6093 ENTREPRENEURSHIP DEVELOPMENT SEMESTER NOV 2010/2011 (DC102) INDIVIDUAL ASSIGNMENTTITLE: Securing the capital for growth: Sources, issues an challenges facing Malaysian entrepreneurs PREPARED FOR: Dr. Norashidah Hashim PREPARED BY: CHING CHECK SENG (804251)
Contents PageIntroduction 2Sources of securing capital 3 Debt 3 Equity 5 Venture Capital 6 Angel fund 11Issue and challenges of securing capital in Malaysia 12Conclusion 14Reference: 16
IntroductionWhether it is in the start up or expansion stage, securing capital is a huge challenges for most of theentrepreneurs. This is especially after one of the most severe financial crisis in the history in 2008 afterthe Great depression in 1929. The financial crisis resulted banks in US has since tighten the borrowingand more risk averse. Hence, the rack record of a borrower must be good enough to convince thebankers to lend out the money.Besides, Dow Jones and NASDAQ have slump over 50% respectively. The poor market sentiment doesnot encourage any company to raise capital through equity for their expansion plan as well. Venturecapitalist firm will do a thorough due diligence of a business and company before they will allocatefunds to invest. The overall environment made only the good company with a sustainability businessmodel able to secure capital and survive while the average facing insufficient capital to run theirbusiness.The scenario in Malaysia has not much difference although the country did not hit by the financialcrisis as deeply as the US. Entrepreneurs are hard to secure capital for different reasons. The issues andchallenges will be discussed besides the sources of capital available to the entrepreneurs in Malaysia.
Sources for securing capitalIn general, there are four ways for an entrepreneur to obtain capital, debt, equity, venture capitalistand angel capital (informal risk capital). All of the sources have their own advantage anddisadvantages. Thus, entrepreneur must smartly know which sources to get the capital according to theneeds of their company conditions. For example, a firm in the start up stage which needs RM 2 millioncapitals is unlikely to secure capital though equity as initial public offer (IPO) is very costly andinvestors also most likely shun away as the firm may not have sufficient track record to convince them.None of the four sources is better one than another. It is determined by the needs of an entrepreneuritself.•DebtDebt financing is also known as borrowing or loan. Debt financing normally involves payback of theprincipal with a fee (interest) within agreed period. There are to type of institutions in Malaysia thatoffer debt financing.a) Commercial banksCommercial banks refer to Maybank, Public Bank, Hong Leong Bank, CIMB and etc. Capital that issecure by entrepreneur though commercial banks usually payback in an intermediate term which isform 1 to 5 years. Commercial banks generally are strict in evaluating a loan application. Collateral(property, inventories, receivables or assets) is needed in order to get a loan from commercial banks.Bankers are conservative in evaluating a business and prefer to lend money to the company with trackrecords. Hence, firm in the start up or seed stage usually hard to get loan from bank or with a smallamount. Typical questions that an entrepreneur may need to answer are such as,How do you plan to use the money?
What is the amount of loan you needed?When do you need the money?How long will you need it?How will you repay the loan?b) Development Financial Institutions (DFIs)The DFIs in Malaysia are specialised financial institutions established by the Government with specificmandate to develop and promote key sectors that are considered of strategic importance to the overallsocio-economic development objectives of the country. These strategic sectors include agriculture,small and medium enterprises (SMEs), infrastructure, maritime, export-oriented sector as well ascapital-intensive and high-technology industries.As specialised institutions, DFIs provide a range of specialised financial products and services to suitthe specific needs of the targeted strategic sectors. Additional services in the form of consultation andadvisory services are also provided by DFIs to nurture and develop the identified sectors. DFIs worksas an complement to the commercial banks with the purpose of of the countrys long term economicdevelopment. Thus, DFIs offers a lower financing rate than commercial banks and consider toapprove a loan even without sufficient collateral. However, DFIs only approve loan that is in linewith the government economic plan.Some of the DFIs are:•Small Medium Enterprise Bank (SME Bank) The purpose of the set up of SME bank is as a one stop financing and business development centre to accelerate the growth of SME. SME able to provide loan to new venture in manufacturing, ICT and agriculture. The loan for a start up venture is from RM 50k to RM 10 million with a pay back period up to 15 years.
•Agro bank Agro Bank aim to provide financing for primary agriculture activities such as fisheries, forestry and horticulture, production, processing and marketing for production activities. The company must be at least 51% Malaysian owned and has a minimum 3 years track record. The repayment period is maximum 10 years.•Export-Import Bank of Malaysia (EXIM Bank) EXIM Banks role is to provide credit facilities and insurance services to support exports and imports of goods, services and overseas investments with emphasis on non traditional markets as well as the provision of export credit insurance services, export financing insurance, overseas investment insurance and guarantee facilities. The repayment is done quarterly up to 10 years.Advantages of Debt financing•No need to relinquish the ownership and have the full control of the company.•During the low interest period, debt financing is preferred as it justified the opportunity cost.Disadvantages of Debt Financing •Regular repayment is needed (monthly) •Heavy debt will distort the growth of the company due to shortage of cash flow. •EquityEquity financing is money that invested in the venture but entrepreneur has no legal obligation to repaythe principal amount or pay interest on it. There are two ways to raise the capital via equity, publicoffering and private placement.Public offering is a form to raise capital from through the sale of securities (common stocks) in thestock market. For a company to be able to sell their shares in the open market, a company must offer
Initial Public Offer (IPO) to list in the stock market. For example, company A must offers IPO before itcan raise capital and the shares traded in Bursa Malaysia.Equity financing favours companies which have established with a good track records. Generally,companies in the later stage or expansion stage use this method to raise capital. Besides, capital thatraise from IPO is normally over RM 5 million as the cost of making a public listed company is costly(legal fee, accounting auditors fee, professional fee, securities commissions fee and prospectus printingcost).Private placement involves selling shares to private parties such as friends, relatives, employees,customers and professionals. In Malaysia, some listed companies do private placement by selling tosome institution, individual or a holding company but usually with a certain large amount units ofshares. Any private placement for a listed company, the company needs to inform SecuritiesCommissions Malaysia and need to make announcement in the Bursa Malaysia website.Advantages of equity financing•Able to raise large capital with normal from a minimum several million to billions•Liquidity of shares that allow to buy and sell in open market•Listed in stock market can enhance the image of a companyDisadvantage of equity financing•Start up or seed stage companies normally not qualified to be listed•The listed cost is from RM 2 million to over RM 10 million•Listed companies need to disclose details future business plan which make known to pubic includecompetitors•Need to responsible to shareholder and they may not agree with the company expansion plan and askfor dividend payout for the earnings
•Venture CapitalVenture capital (VC) is financial capital provided to high-potential, early stage growth companies. Aventure capital firms normally form by experts from finance and experts with technical background.Venture capital firms differ with private equity firms as VC not only invest but they also providemarket research, strategy, management consultation to the companies that they invest in. VCs also havegood networking with customers, suppliers and business people. The venture capital fund makesmoney by owning equity in the companies it invests in, which usually have a novel technology orbusiness model in high technology industries, such as biotechnology, ICT, software, semiconductor etc.The typical venture capital investment prefer later stage and expansion stage of a company as therealization of product and initial marketing make it easier to make profit through IPO and trade sale ofthe company.Most of the venture capital firms in Malaysia are set up under the fund of Ministry of Finance (MOF).Among the venture capital firms are Malaysia Venture Capital (MAVCAP), Cradle Investment Fund(CIF), Malaysia Technology Development Corporation (MTDC) and etc. The venture capital firms inMalaysia normally concentrate in ICT, biotechnology, hardware and software which is in line with thegovernment economic plan.An entrepreneur needs to submit their business plan to the venture capital firms. Some of the capitalfirms have dateline to accept the business proposals for each round. Some will accept and evaluatebusiness proposal all year round. Investment teams in the VC will evaluate and select the proposalsthey interested to do a due diligence study. They will meet the entrepreneurs before they make ainvestment decision. The evaluation process is complex and take up to several months of time. a)Malaysia Venture Capital Management Berhad (MAVCAP) MAVCAP was incorporated in 2001 by the Malaysian Government and is the nation’s largest
venture capital (VC) firm which focuses on investments in the local information, communicationsand technology sector (ICT). The firm provides an alternative source of high-risk financing forstart-ups, seed capital and early stage ventures in the ICT sector and high-growth industries.The Company commonly invests for a period of 5 – 8 years in seed, start-ups and early stagecompanies, during which it holds a Board position and drives key management decisions. Initialinvestments of RM1 million – RM3 million are complemented with Mezzanine allocations valuedat RM5 million – RM10 million to fund companies through to the pre-IPO stage. In later stageinvestments, MAVCAP typically invests between 3 - 5 years.Application for the fund is via their website and is open all years round.b) Malaysia Technology Development Corporation (MTDC)MTDC has invested more than RM500 million in both local and foreign high-tech companies.Many of these companies have been successfully listed on Bursa Malaysia. MTDC prefer to investin companies that have marketable products or services.MTDC invest in early, developing and late-stage technology-based businesses as a way to managetheir risks. To further diversify the risks, MTDC invest only around 30% equity stake in anyinvestments. This strategy also allows the investee companies to drive their companies in their owncreative ways as the investee companies still hold the majority shares. MTDC investment horizonis limited up to five years. Exit strategies include public listing, trade sale, management buy-out,shares redemption by company and/or shares sale to project promoters.Prior 2004, MTDC was concentrate in the venture capital for ICT. They started to involve in non-ICT industry in 2004 and subsequently in biotechnology in 2005. MTDC launched the country’sfirst biotechnology venture capital fund known as the Malaysian Life Sciences Capital Fund(MLSCF) which successfully raised USD150 million. This fund is co-managed with our strategic
partner, Burill & Co., a life sciences merchant bank based in San Francisco, California. Up un-til February 2010, MLSCF has made direct investments in 12 biotechnology companies globallyand another 19 indirect investments via BLSCFIII.MTDC`s investment criteria focus on the following : •Non-ICT sector e.g. life-sciences, clean technology, alternative energy, other high technology areas •Strategic technologies •High investment return i.e. minimum 25% IRR •Clear and well-defined business model •Credible management teamc) Cradle Fund Sdn Bhd (CFSB)Cradle Fund Sdn Bhd (CFSB) is the company that forms under the support of the Ministry ofFinance (MOF). CFSB is a wholly owned subsidiary of MAVCAP. Cradle Fund manages CradleInvestment Programme (CIP) which is a conditional grant to the successful applicants. Applicantscan submit the ideas and proposals though Cradle Fund’s website and their investment team willevaluate the viability of the ideas or proposal.CIP is different from other venture capital firm’s capital as they only offer grants to entrepreneursin the seed stage. Besides, only one of the conditions below a recipient need to repay the grantsthey received: • The recipients idea receives further funding or a sales contract worth a minimum of
RM500,000 within the Ideas Bank stage (which is a period of 12 to 24 months, subject to terms and conditions). •The recipient fails to complete the implementation of deliverables (i.e. Business Plan or Prototype) that he/she has committed to. •The recipient wishes to withdraw from CIP during the implementation process CIP focus in diverse areas of ICT, non-ICT and high-growth technology industries, which includes: •Software and information services, •Internet (e-services, e-commerce and e-content), •Communication and networking, •High-tech consumer and business products, •Electronic and semi-conductors, •Medical devices and advance material, •Biotechnology and life sciences, •Environmental resources management and renewable energy, and •Technology innovation created for any industry (subject to our discretion). Cradle fund also play a role for getting suitable mentors to entrepreneurs in order to increase the chance to succeed the project. Advantages of venture capital as financing sources:•Able to secure a large sum of fund up to several millions sometimes.•Able to get business advisory, networking and expertise though venture capital firms
•Get recognition from VCs peer and easier to obtain additional capital in the future Disadvantages of venture capital as financing sources•Loss the total control of the ownership of the company as venture capital firms usually put somemembers in the board of directors•Evaluation of the fund approval is a long and complex process and can take up to a few months beforethe venture capital firms decide to invest.•Venture capital firm prefers to invest in the later stage rather than the early stage as the failure rate inthe early stage is too high and is too risky for most of the venture capital firms to invest.•Angel Fund (Informal risk capital)In US, there are wealthy people that want to seek higher investment return and willing to take higherrisk to invest in start up company. Since the investment is by individual, they may invest in varioustype of industry from IT to independent music. In Malaysia, there are not much angel investor and theyare limited to certain people that have good networking and able to convince them to invest in theircompany. Generally there is no formal way to an entrepreneur to apply a fund from an angel investor.Advantages of angel fund as financing sources:•Fast evaluation and decision making of investment as the assessment is simpler•Angel investor normally has their on career and will not take part in the company normal dayoperation and decision (less control over company)•some angel investors who are successful entrepreneur himself willing to give coaching and mentoringDisadvantages of angel fund as financing sources:
•capital normally smaller by individual•lack of networking that may not help to the growth of the company•Not well recognised and may not attract other venture capital to invest.•Issues and challenges of securing capital in Malaysia•Difficulty to raise capital during startup or seed stageUsually debt and equity financing required past years track records or historical financial result.Bankers do not want to loan to start up company that has no proven track record, lack of collateral anda new venture that unable to repay the borrowing when the business go insolvent.Risk averse investors also avoid to invest in the company in the start up company. Furthermore,securities commission’s regulation restricted all listed companies need to have at least 3 years ofhistorical financial report.In Malaysia, VC also has a tendency to invest in later stage or expansion stage. This due to the failurerate is too high in the seed stage where only 1 out of 25 projects or ideas were successfully to the stagethat can marketable according to Cradle Fund. Cradle fund is currently the only VC in Malaysia thatconcentrate involves in seed stage by offering grant to selected ideas that has viable business model.Besides, VC firms concentrate in certain industry such ICT, biotechnology and science.
Angel fund remains the most unlikely way to get financing unless the entrepreneur has a goodnetworking with wealthy individual who willing to invest. Thus, most the capital during seed stage orstart up stage rely on self finance or ‘sweet capital’ from friends, family or relatives.•Limited financing sourcesContrary to the US counterparts, local entrepreneur does not enjoy the ease to get financing. VC firmsand angel fund are very limited in Malaysia. VC firms will select one to two projects or ideas eachopening term due to the fund constraint. Many ideas or project has to be halted due to lack of financialsupport that is available in Malaysia.•Low involvement of private sector.Most of the VC firm’s funds are provided by government or government related companies. MAVCAP,Cradle, Malaysia Debt venture, MTDC are all using the fund allocate by government. Besides,Development Financial Institution such as Agro Bank, SME Bank and EXIM Bank also are supportedby government. Only several investment banks that have a venture investment unit like CIMB andOSK venture. Private sector participation is low as they are risk averse and not interest to high riskinvestment. Furthermore, non government companies need to answer to the shareholders and if a newventure fails, it will deeply jeopardize the company’s profit and loss and consequently shareholders’benefits.•Lack of appetite for long term investmentOver 50% of the share price in the ACE (formerly MESDAQ) market is below the IPO price. One ofthe reasons is some of the big shareholders sell the shares after the gain from IPO listed. This will send
a negative message to other investors and more investors to sell off their shares. This will push downthe share price. Low share price also discourages listed companies to gain capital for expansion byselling off part of their shares. In the end, the new company unable to sustain the growth and willreelects in the low share price after that.•No participation of foreign venture capital firmAll of the venture capital firms in Malaysia are local firms currently. In year 2008, Japan AsiaInvestment Corporation (JAIC) gets the permit to operate in Malaysia but till now there is no office setup by JAIC.Malaysia is not a country that favorite by venture capital firms like India and China. Most of theestablished venture capital firms such as the largest venture capital firm Sequoia capital set up theirbranch in these two countries as new ventures in IT, software, green energy, and biotechnology aregrow like mushrooms. This also shows that we lack of new ventures that are really exciting to invest toventure capital firms.•Relationship between entrepreneur (investee) and venture capital firm (investor)Often there are different opinions how to manage and lead the company between entrepreneur andventure capital firms. Entrepreneurs want more capital to make the products perfect before launching.Venture firms prefer to launch a 80% workable products to capture the market (first movers strategy).Entrepreneurs request more capital spend on research while venture firms would like to spend more onmarketing. The fundamental reason is entrepreneur want to grow the company while venture capitalfirms prefer to take smaller risk while making massive profits when they exit.
•Non performing loan by Development Financial Institutions (DFIs)Some of the loan was approved to the unqualified entrepreneurs due to lack of due diligence by theDevelopment Financial Institutions. Generally, the non performing loan by commercial banks are muchlower as commercial are listed company and need to answer to the shareholders. Thus, they are moreconservative in loan approval. In the other hand, DFIs are more lenient in loan approval as the motiveis to help SME or entrepreneur towards the economic plan set by the government. Unfortunately, someof the party make use of the opportunity and result a higher non performing loan among DFIs.ConclusionGenuine entrepreneurs are looking for right financing sources that can help them realize the products,ideas or marketable the products. Banks, investors, angel investors and venture capitals firm makeprofits by helping genuine entrepreneurs realized their ideas. Ideally, it is a win- win situation.Participation of government as the main financing sources either with DFIs or venture capital firms isnot healthy. One of the main reasons of Malaysia has no famously successful venture is a proof that weneed peoples who really know how to run a venture capital fund. In a professional venture capital firm,there must be people who have the technology backgrounds and finance knowledge that can identifythe gems among the business proposal. It also needs experience people who sit in the new venture firmthat venture capital fund invests to give ideas, advices to grow the company. Besides, the venturecapital firm needs to have exit plan and strategies if the new venture firm fails. In Malaysia, we lack of
expertise who has both technology and finance knowledge, and most important an exit plan to cut loss.The simplest way is to encourage famous venture capital firms to set up their office here. We have torun our venture capital company in a professional way. The venture capital firm has to responsible ofthe unsuccessful investment they have made and also rewarded for the successful new venture. This isthe practice of the world famous venture capital firm.The growth of SMEs is the reason why United States was so successful and Malaysia is also follow thesame method to lead our economic to another level. However, we have to assess our execution inidentify the genuine entrepreneur, proper fund allocation, monitoring and coaching and also resultoriented in measuring the performance of a government venture capital fund. Refrences: http://www.mavcap.com/directseed.php http://www.mtdc.com.my/ http://www.cradle.com.my/cms/index.jsp http://en.wikipedia.org/wiki/Venture_capital http://www.mdv.com.my