The Pitch Deck: Is early-stage start-up funding sorted?
This article first appeared in Digital Edge, The Edge Malaysia Weekly on August 26, 2024 — September 1, 2024
Entrepreneurs in Malaysia are actually a very lucky lot. They may not think so but if they were to ask their counterparts anywhere else in Asia, they would realise that being a start-up in Malaysia, they are blessed with a highly supportive government with many entrepreneur-related agencies and even a very supportive regulator in the Securities Commission.
Start-ups have always complained about the lack of funding and with good reason, but now there are so many sources of funding that entrepreneurs are spoilt for choice.
Start-ups today have many sources of funding including grants, angel investors, equity crowdfunding (ECF), peer-to-peer lending, venture capital (VC), private equity (PE), venture debt, entrepreneur-friendly bank loans, digital banks and even token-based funding via initial exchange offerings (IEO). There is funding for every type of business venture at every stage of growth from the early stages to maturity. So, the question is whether early-stage start-up funding is sorted out or whether we still need to find other forms of funding for start-ups.
Grants
Early-stage funding is highly risky and best suited to founders’ funding, angel investors and grants. In the US, the website Grantwatch lists 1,964 different types of grants. In the most mature country in the world with thousands of venture capitalists, there’s still a lot of grant money available.
In Malaysia, the best-known technology grant provider is Cradle Fund, which was set up 20 years ago thanks to the lobbying efforts of the Technopreneurs Association of Malaysia (TeAM). Cradle has funded more than 1,000 start-ups with grants, many of which have become success stories.
Now, there is also sector-specific funding via different ministries and agencies; for example, grants for digital companies via Malaysia Digital Economy Corp, research and development funding via the Ministry of Science, Technology and Innovation, and even export grants from Matrade.
Unfortunately, many entrepreneurs are not well read and, hence, are unaware of the availability of these grants.
Angel funding
Another great source of funding is from angel investors. Angels are high-net-worth individuals (HNWIs) who provide early-stage funding for entrepreneurs. Today, there are tax incentives for angels to invest either directly in start-ups or via equity crowdfunding platforms. The tax incentive of RM500,000 per year for direct investments is available only to accredited HNWIs who are members of the Malaysian Business Angel Network (MBAN). To qualify, they must earn RM180,000 a year or, together with their spouse, earn RM250,000 a year or have a net worth of RM3 million. The tax incentive of up to RM50,000 a year for investing in ECF is 50% of the investments made and this is available to all investors including non-HNWIs.
This has incentivised many individuals to enter the start-up ecosystem and has made angel investing more accessible to start-ups. MBAN even runs monthly pitching sessions for start-ups with an average of 50 to 60 angels in attendance monthly.
Equity crowdfunding
ECF was first licensed in Malaysia by the Securities Commission (SC) in 2015 when it licensed six parties to provide ECF for start-up funding. Additional licences were issued later with up to 10 platforms currently licensed.
According to the SC’s 2023 Annual Report, a total of 377 companies raised RM687 million from more than 16,000 investors since 2015. The largest amount raised by a single issuer is RM20 million. About half of the funds raised were from technology companies. ECF has become a very attractive platform for fundraising for early-stage companies.
The government is also supporting ECF by providing matching funds via the Malaysia Co-Investment Fund (MyCIF) in ratios ranging from 1:2 to 1:4, depending on the type of organisation doing the fundraising. This support is also provided for P2P lending platforms.
Peer-to-peer lending
While equity funding via angels and ECF has grown, debt funding has also grown very strongly via peer-to-peer (P2P) lending platforms. There are 11 licensed platforms for different forms of funding from business financing and micro loans to invoice financing.
The SC’s 2023 annual report indicates that since inception in 2015, RM5.96 billion has been raised via 85,793 campaigns by 14,715 companies (many companies ran more than one campaign) from more than 34,000 investors. Fifteen per cent of the campaigns were shariah-compliant. While P2P does not specifically target the start-up sector, it is a viable platform for start-ups.
Debt financing
There are also many other sources of debt financing. Bank loans are still available with some loans offered at low interest rates especially by developmental banks like SME Bank, Exim Bank and others. These are usually supported by the government, which subsidises the interest.
Then there is venture debt which is offered by Malaysia Debt Ventures and two venture debt firms under Penjana Kapital, the government fund-of-funds agency — Iris Capital and Crewstone International.
Venture debt is usually only provided as a matching loan to start-ups that have received funding from a VC or PE, hence the name “venture — debt”. Start-ups that need high levels of funding don’t have to give up too much equity if they use venture debt as they could raise some money via VC and match it with some venture debt.
We also have the new digital banks, three of which have started operations: GX Bank, Boost Bank and AEON Bank. The digital banks are there to provide financing for the underserved and this includes start-ups. These banks are still very new and we need to see if they are able to support the start-up ecosystem.
Venture capital and private equity
VC and PE funding are well known to start-up founders but it is more challenging to receive such funding as these institutional investors are highly selective. Only high-growth start-ups with the potential to provide a 20-to-50-times return on investment are selected for investment.
Anecdotally, only one or two out of 100 start-ups that pitch get funded, so while such funding is available, it’s harder to obtain.
Additionally, PE investors only invest at the later stage, rarely below US$10 million (RM44 million) per investment and often more than US$50 million. There also aren’t enough local VC funds but the government is committed to creating more by providing matching investments to new VC funds.
Read the full article: https://theedgemalaysia.com/node/723878
