Learning Center
Plans & pricing Sign in
Sign Out

The MSC Technopreneur Development Flagship prepared this funding


Venture capitalists are the entrepreneurs to invest in other entrepreneurs, investors and other risks, they through the investment profit. But the difference is venture capitalists all cast out of the capital owned by all of its own, and not entrusted the management of capital.

More Info
									Funding Guide

The MSC Technopreneur Development Flagship prepared this funding section
for entrepreneurs involved in the ICT/multimedia industry in Malaysia. Its aim is
to serve as a guide to the various sources of funding available to entrepreneurs
in the local ICT/multimedia industry. This area covers an overview of venture
Capital and seeks to give entrepreneurs a brief introduction to the industry.

Please visit our Venture Capital directory, Business Angel directory, Grant
directory and Debt Financing directory for information on sources of funding and

What Is Venture Capital?
What Is The Difference Between Venture Capital, Angel Funding, Debt Financing
and Grants?
What Are The Various Stages of Company Growth?
Why Is Venture Capital Needed?
Why Is Venture Capital Needed?
What Is The Current State Of The Venture Capital Industry In Malaysia?
What Do Venture Capitalists Look For?
How Do I Approach A Venture Capitalist?
What Is Venture Capital?

Venture capital (VC) is in a nutshell “risk money”. This is because VC
investments in companies are often not supported by any collateral and venture
capitalists are dependent on the founders/management to make a success of the
company. Thus, whilst venture capitalists put in sizeable investments into
companies, they have little control over the management of the company and
face the risk of losing their entire investment in the event the company fails.
However, the high risk is offset by high returns when an investee company
succeeds – in fact, because of the spectacular successes of some investee
companies within the entire portfolio, venture capitalists expect to produce an
ROI (return on investment) of at least 20% to 25% per annum on the VC funds
they manage. This level of ROI is exceptional compared to many investment
benchmarks such as the S&P Index and US Treasury Bills.

VC investments are typically equity based, meaning that the venture capitalist
takes a percentage of the equity in the company that receives VC funding. Unlike
debt financing through bank loans for instance, VC funding requires no collateral
and no repayment period. The venture capitalist receives its repayment in the
form of – hopefully huge – capital gains when the investee company undergoes a
liquidity event, for example, an IPO or trade sale.

Due to the high risk nature of the investments, venture capitalists will carry out
extensive screening, or due diligence in VC parlance, on potential investee
companies from various aspects such as management, technology, and
business model. A venture capitalist typically looks at a mid-to-long term
partnership (3-5 years) with any company that receives its funding. The keyword
“partnership” is important here – venture capitalists are not mere providers of
capital, but business partners providing guidance, management assistance and
networking to companies in their portfolio.
What Is The Difference Between Venture Capital, Angel Funding, Debt
Financing and Grants?

It should be noted that different enterprises present different risk profiles to
financiers, hence the need for different funding regimes such as venture capital,
angel funding, grants and debt financing. Enterprises that do not fit the criteria for
one funding regime may well fit another. For example, a solid yet low-growth
company may not be suited for venture capital funding but would be better
served by a working capital loan to finance its operations. Similarly, a company
heavily involved in R&D should target the many R&D grants available rather than
apply for debt financing.

               Venture CapitalAngel          Debt Financing            Grants
 Objective  Capital gains     Capital gains Interest       and         Development
 Holding    Mid-to-long term Short-to-mid Short-to-mid                 -
 Period                       term           term
 Collateral No                No             Yes                       -
 Criteria   Potential returns Potential      Interest spread           -
            on investment     returns    on and security
 Impact on Reduce leverage Reduce            Increase                  -
 Balance                      leverage       leverage
 Impact on Dividend payout Dividend          Interest/principal        -
 Cash Flow                    payout         repayment
 Monitoring Seat on Board of Management Loan servicing                 -
            Directors,        control     in
            monthly/quarterly day-to-day
            operational       operations &
            reports           decision-
 Value Add Management         Management None                          -
            assistance,       assistance,
            strategic         strategic
            alliances through alliances
            contacts etc.     through
                              contacts etc.
 Exit       IPO, trade sales, Trade sale, Principal                    -
 Mechanism buy-back           buy-back       repayment
What Are The Various Stages Of Company Growth?

The terms seed stage, startup, mezzanine and others are often used by venture
capitalists in categorising a company’s stage of growth. Although their
classification may differ slightly from one venture capitalist to another, the stages
of company growth can be broadly classified into the categories below.

 Stage of Growth  Description
 Pre Seed         Individuals or companies that just have ideas or
                  concepts and require funds for prototypes or proof of
 Seed/Start up    Companies that may be in the process of setting up or
                  have been in business for a short period of time and
                  require capital for commercialisation in the areas of
                  production, marketing or sales. These companies may
                  not be generating profits yet
 Growth/Expansion Companies that may be breaking-even or trading
                  profitably but require additional capital to increase
                  production, expand market presence and/or further
                  develop their products
 Mezzanine/Pre-   Companies that are seeking capital, advisors and
 IPO              partners to assist in a public floatation or corporate
 IPO/Public       Companies that are publicly quoted on a stock

It is important to note that different venture capitalists may choose to focus their
funding on different stages of company growth based on their risk appetite. In
general, the earlier the stage of growth of a company, the higher the risk or
probability of failure. It is therefore imperative for the entrepreneur seeking
funding to ensure that his company’s stage of growth (or its risk profile) is
compatible with the risk appetite of the venture capitalist he is approaching; the
company will not be funded if there is a mismatch.

Why Is Venture Capital Needed?

Despite having excellent business ideas, many companies have failed to
succeed due to the difficulty in financing their operations in the early stage of
company growth. At this point, the company is still developing its
products/services and may have limited sales, and is therefore unable to cover
its expenses. A graphical representation of the various stages of company
growth is shown below.
Due to the lack of tangible, bankable assets, and a reliable, profitable track
record, a company is unlikely to obtain loans from banks and other “traditional”
sources of financing. This is where VC money serves a purpose. VC funds are
often geared towards funding high-risk early stage companies that offer potential
for high growth and returns because of their innovativeness. It is at this stage that
the venture capitalist steps in with the funding required; in addition, the venture
capitalist will more often than not help enhance the company’s business model
and facilitate the growth of the company towards becoming a profitable self-
sustaining entity. However, it should be noted that venture capital is relevant not
just for companies in the early stage of development but at all stages of growth.

What Is The Current State Of The Venture Capital Industry In Malaysia?*

Malaysia Venture Capital Management Bhd (MAVCAP) and MSC Malaysia –
through its caretaker Multimedia Development Corporation (MDeC), had signed a
Memorandum of Agreement (MoA) in June 2008, aimed at spurring the growth of
the indigenous industries and nurturing them into global players.

An initiative, known as Innovation Eco-System for Industry Development, is
aimed at enhancing competitiveness of the information and communications
technology (ICT) industry by addressing the challenges faced by technopreneurs
namely technology risks, funding risks and market risks.

This initiative plans to facilitate the formation of necessary connectivity from
technology perspectives, funding assistances and market access. Under the
MoA, MIMOS will help facilitate with technology acquisition and adaptation, CIP
to fund promising ideas and provide mentoring and commercialization support,
MDeC to assist with Technoprenuer Development and Market Access while
MAVCAP consider injecting necessary Commercial venture funding.

The VC industry in Malaysia continues to play an important role in providing an
alternative source of financing to the economy.

On this note, new funds raised in Malaysia’s venture capital industry in 2006 had
increased significantly to RM715 million from RM323 million in 2005.
Government agencies and local corporations continue to contribute to the
majority of these funds at 40.73 percent and 37.59 percent respectively.

The Malaysian government, having long recognised the strategic importance of
the venture capital industry as a source of funding for growth, has been
promoting the industry through the provision of funds and incentives.

These measures include the RM1.6 billion allocated for venture capital under the
Ninth Malaysia Plan to bridge the crucial financing gap in the early stages of
enterprise development, and tax exemption for 10 years granted to venture
capital companies investing at least 50 per cent of funds in seed capital, as
announced under the 2007 Budget.

Excerpt from:

What Do Venture Capitalists Look For?

Venture capitalists typically look at several fundamental investing principles when
evaluating a company’s attractiveness as an investment. When assessing the
company and its business plan, the key factors examined and some typical areas
of focus are:

         o Is management committed? How much of a stake do they have in
            the company?
         o Is management focused and of high caliber? What is their expertise
            and background?
         o What is the track record of the senior management team?
         o Have they been successful businessmen or entrepreneurs before?
         o Is the management team complete?

   •   Product/Service or Technology
          o What is the value proposition to customers?
          o Is the product/service or technology unique? What are its
             breakthrough qualities?
          o Does the company have a sustainable competitive advantage?
          o What are the barriers to entry for other companies?
          o Does the company own the intellectual property/patents?

       Business Model
          o What are the revenue drivers?
          o How workable is the business model?
          o Is the business sustainable? Is there a clear path to profitability?
          o   How will the company market its product/service?

   •   Market
         o Is the market insular, regional or global?
         o Is it expanding, shrinking or plateauing?
         o Are there signifcant competitors in the market?
         o How does the company stack up?
         o Do potential customers exist or does the market have to be

   •   Financial and Legal
          o Are the company’s financial projections reasonable?
          o How well does the company manage its cash?
          o Is the valuation offered reasonable given the company’s track
             record (if any), potential for growth and current market conditions?
          o What is the likelihood of an exit event (IPO, trade sale etc) within
             the next 3-5 years?
          o What is the expected return on investment (ROI)?
          o What are the terms and conditions of investment that the
             entrepreneur is willing to accept? Is there a seat on the board of
             directors for the venture capitalist?

Although all the factors above are important, having a solid management team
ranks as one of the more salient attributes that a venture capitalist would look for.
Be sure to cover these key areas before meeting a venture capitalist and while
crafting your business proposal.

How Do I Approach A Venture Capitalist?

When approaching these exotic creatures known as venture capitalists for
funding, we the following advice for the entrepreneur:

   •   Understand the risk profile you present to the venture capitalist i.e.
       whether your company is in the seed, startup, growth or mezzanine stage.
       The earlier the stage of growth, the riskier the investment for the venture
       capitalist. Hence, this impacts whom you approach and also the valuation
       of your company.

   •   Know your investor and their investment focus areas – be it
       communications, content, biotechnology and so on.

   •   Look for value in addition to money, that is, make sure the venture
       capitalist can provide guidance, contacts and other value added
       assistance in addition to monetary investment.
•   Have a complete business plan ready

•   Be realistic about your valuation, rollout and IPO plans

•   Know your market segment or niche

•   Separate hype from reality. Investors do try to verify your claims

•   Be upfront and honest

•   Keep an open mind. Many venture capitalits are free with their advice, so
    use the advice to improve your proposal further

To top