I will cover a few types of venture capital funding including Angel Investment, VC investment, PE investment and so on. We will also cover a list of Venture Capital in Malaysia at the end of this article.
Venture capitalists have become more and more important in the start-up scene, as almost any major technology company launched in recent years has been financed by a VC company.
Aspiring entrepreneurs need to know what VC companies are looking for and how they can best be presented. Hire a good management team, learn how to pitch and show you understand the objectives of VC's exit strategies.
Securing funding is an important part of making your start-up dream come true.
Many venture capital firms either have funds or a holdings company. The funds range from small funds of a few million to billions. The smaller VCs are backed by family offices while the larger funds are typically funded by pension funds, insurance companies, foundations, fund-of-funds, and sovereign wealth funds. They are known as the Limited partners in a fund. General Partners are those managing the fund - but their business title is usually Venture Partner.
Venture Capital Funds in Malaysia require Startups that have the potential to grow at least 30X within 5-10 years to justify their investments. Below are the typical returns of Startups after 5-10 years. As you can see, those that return more than 30X will need to cover those that lose money (0-1X returns), plus give them enough returns to have at least 20-25% Internal Rate of Return (IRR). The data is from the US since the Malaysian market is just getting started.
To raise money from Venture Capital funds in Malaysia, there are a few key things to watch out for, like your Team, Financials, Traction (Results), Product, Market, and so on. All of these are detailed in our Startup Pitch Deck guide - which also helps Startups to understand how VCs think when they go through your Pitch deck. Do look below as we detail how to secure venture capital investment in the Malaysia & Southeast Asia context.
VC deals are made throughout the world with the start-up boom. But how exactly does a VC company work?
Venture capital funds in Malaysia is usually structured as a private limited company and sometimes as a limited partnership. The majority of the capital of investment comes from the limited partners (LPs), whilst the General partners (GPs) of the Fund invest the capital on behalf of a limited partner in different projects.
General partners invest money in projects as well. Typical is that if a general partner raises a total of $100 million from limited partners for a particular project, the general partner is likely to raise an additional $1 million to $5 million to demonstrate the VC firm's trust in the project.
Ultimately, venture capital funds in Malaysia have one goal: to make a profitable exit if a funded start-up is either sold or published. A venture capital group will aim to repay its investors with a decent margin for their initial investments. The venture capitalist in Malaysia would naturally like, if possible, to make some money, usually about 20% of the final sale or public valuation, taken from their investors.
A venture capital firm pays for its expenses by retaining a management fee of approximately 2% annually for the entire amount of its original investment.
So, who are you talking to when you want to reach a risk capital venture?
General partners, managing directors and then partners are at the top of the hierarchy. These are the people who decide and define investment strategies. These are the people you want to talk to when you are ready to pitch your great idea.
There are a few things to consider when looking to secure venture capital funding in Malaysia. Some Venture Capital firms only do certain stages of funding in different stages of the Startup Lifecycle. Some others only do specific industries - so watch out for those that only do one specific industry, e.g. Fintech Startups only. Some others have a list of Startups that they can invest into - and this depends on the Malaysian VC's mandate or agreement with their Limited Partners/Investors. Venture Capital Malaysia will explain below how to find the right VC alogn with other things to note.
The golden rule of real estate is location, location, location. For venture capitalists, however, it’s management, management, management.
A start-up’s success depends on having a flexible yet skilled management team. It doesn’t matter if the start-up has a great business plan. Realistically, the management team will have to revise that plan, changing directions to respond to market needs and pressures. They will always need to be ready to face unexpected challenges.
That’s why venture capitalist in Malaysia rarely invest in ideas alone. It’s a much safer bet to invest in a great team.
Most successful companies are founded on strong, balanced teams. In fact, when you look at Silicon Valley success stories, a pattern emerges: a successful company often springs from the combination of a visionary leader with a global perspective, a technician with the skills to turn the vision into reality, and a salesperson who can tailor a product to market expectations.
Computer graphic card pioneer 3Dfx was one such company. In the 1990s, the company’s founding trio included a visionary expert on polygonal mathematics, a professor from the Massachusetts Institute of Technology specializing in 3D mathematics, and a senior sales vice president with years of experience.
This is the sort of team a venture capitalist wants. If a company is missing a key position, it’s an indication that the management team might not be well-balanced. What’s more, venture capitalists also question a start-up that can’t attract at least one founder with a solid technical background.
In sum, if the management team doesn’t impress, a venture capitalist in Malaysia might feel the start-up isn’t yet ready for investment.
Check out some Malaysian Startups.
Not all venture capitalist in Malaysia invest in everything. For example, many venture capitalists in Malaysia do not invest in e-commerce websites, property projects, Bitcoin mining projects, etc. because these projects rarely have the potential for a 30X return in 5-10 years. The majority of VCs are looking for businesses that are somehow enhanced by IT - but not necessarily in the IT space. For example, Uber, Airbnb and Foodpanda are all IT-enhanced businesses in the industries of Transport, Accommodation and Logistics, which are in the past very traditional and slow growing businesses. The IT solutions implemented give these businesses huge scalability in their business models to grow fast enough to give a 30X return within 5-10 years.
Venture capital Malaysia aims to explain when the right time to raise venture capital. There are a few things to consider before raising from Malaysian venture capital. This includes things like if it is time to trade ownership equity for capital investment. Should you work hard on becoming cash flow positive before raising money or at least have some revenue before raising money? It definitely affects your valuation negatively if you have not validated revenues or if you have not become breakeven. Most Startups that approach us are not break-even yet but those that get invested have at least some sort of revenues proven. We work with many Startups that are not yet break-even but have some sort of revenues. We support them with our network of successful business owners. We understand that taking off is hard, so we look to support Startups as much as we can. We usually separate Startups with and without revenue, where those with revenue are considered Startups with some sort of Validation and can be valued as much as 4X higher due to the fact that they may have enough revenue to justify the valuation. For example, some highly scalable startups with RM50k revenue a month can be valued at about 4X Revenues, which is:
If they were to raise RM200k, that would be:
200k/2.4m = 8.3% equity dilution
At NEXEA, we never want to take more than 10-20% of the company because we want the founders to continue to be motivated in the case that more funds are raised later on.
Do you want to hold on to your company forever, or are you willing to let it go after some time and retire young? Does raising capital fit to the vision of the company and yourself, as the founder?
Some founders tend to want to own their business forever, and that is fine. Some others feel that by sharing the pie, the pie actually grows larger. One of the advice that we usually give is to think of the amount of money you need to retire young or to live the rest of your life without financial worries.
For example, if you think you need Rm10M to retire young and live the rest of your life financially free, then you only need to own 20% of a RM50M company by the time you exit. Venture capital funding can help you reach that goal.
To make the most of Venture Capital in Malaysia, you need to be ready for it. One of the things you will need to ensure is that you have your business plan tested and ready to be executed. One of the biggest mistakes we have seen is a Startup founder raising more than RM10m from Venture Capital and then spending it on the wrong things which brought little to no return to the value of the business. That is where testing/validation comes in to help you avoid mistakes like that.
For example, if you are an idea stage startup, you will want to ensure that there is a market, that your product is needed, and that people are willing to pay for it. Some Startups (even very large ones) have not done so, and are now paying the consequences in the form of down-rounds (valuation drops significantly), being avoided by VCs, or even having the CEO removed by their board members. It is always important to have the fundamentals of any business right so that you can build up your empire fast and steady. A great example of a Startup that validated well is Airbnb where there is a huge global demand, that people need cheaper accommodation, and that people are willing to pay for their fees. A huge factor for their success is that they are disrupting hotels that have traditionally been demanding high prices.
Venture Capital Firms (VCs) in Malaysia look for a few key things in Startups. Of course, they give you money in exchange for your equity, or shares in your business. However, it also includes the Pitch Deck, asking amount, and usually Financials. If the deal starts to get serious, then they will start to do their due-diligence process, which can include calling up your suppliers and customers, checking your financials and accounting, and doing other forms of checks to ensure that they are not investing in something too risky.
Venture Capital Malaysia will try to explain the term sheet briefly for the main things to watch out for. The term sheet is an agreement where the VC in Malaysia and the Startup sign before the actual transaction. Startups need to negotiate and sign this upon both parties agreeing to the terms.
Investment Tip: Ensure that you write down the terms discussed and agreed upon so that they do not change by the time it is time to draft the actual term sheet. Do this in the order of importance to not-so-important, so that both parties can save time.
Going deeper, they may require things like Preferred Shares which have additional features and protection like a Liquidation Preference where they are guaranteed a certain return before the common shareholders get anything. Some Venture Capital in Malaysia also practices anti-dilution protection where in the event of a down-round (valuation goes down), they get protected from dilution of their equity. They can also have pro-rata rights and rights of refusal to invest further before an existing or new investor can, to maintain their equity percentage. Malaysian VCs can also ask for the right to be paid dividends, although dividends are usually not required by them. They would want Voting Rights and Board Seats to give them some control over the company in the case that there might be disagreements down the road.
It does not occur to many Startups just how important the pitch deck is to Malaysian VCs. It is the reference point to most important aspects of your business. That is why it is important to understand how a VC in Malaysia thinks when they are looking through your pitch deck. Here is an example pitch deck that does just that.
For example, the Problem & Solution slides are important for venture capital fund managers to understand what problem you are solving, and why it is important to society. It seems that society highly rewards people who solve painful problems (by paying for your service), so this is one of the main things VCs look at when evaluating your business. The problem being solved must be painful enough for people to throw money to solve it. A good example is a food delivery service like RunningMan, where people are willing to pay extra for food to be delivered. It is not the most painful problem all the time, but when you are stuck in a meeting or just had a really tiring day, it makes a lot of sense. Or, it must evoke so much desire that they just end up needing to pay for it. A great example is Spotify, where it is so much more convenient to subscribe and get all the music in the world compared to buying albums or downloading music.
Venture Capital people are busy. Don't waste the precious time they grant you to secure the financing they need. Have all your materials ready to make a good impression before you meet.
Know that long multi-page business plans are gone for a long time. Investors want to see snappy, concise plans with clear objectives. Entrepreneurs must show that they can launch their ideas on the market and quickly analyse the results – and be prepared to make big changes if necessary.
Today, the VCs deal with a tonne of communications, email or otherwise. They therefore prefer newsletters that deal with major issues in a few words.
You should have an understanding of the financial requirements of your start-up, the talents of your management team, your current development stage and future objectives. The executive summary of your business plan – one or two pages, topics – should cover these key subjects.
You may provide other support documents, such as the so-called investor slide deck, once you are at the door. This is a set of ten slides that address the most important issues for your startup like your competition or your company value proposition.
You also need a financial model to demonstrate your project's viability. Your model should provide financial data for three to five years covering issues, e.g. projected revenue, significant costs and net results. All this should be organised clearly in a table.
A good model accurately describes the factors that determine the profitability of your company. Don't skimp at the details! Don't skimp! For example, you have to consider how many customers you serve if you open a restaurant, fluctuating the price of raw materials, potentially increasing rent costs, etc.
Below are the links to Venture Capital that invest into Malaysian companies by their investment stages. Venture Capital Malaysia List of VCs is to be updated regularly so that inactive venture capital in Malaysia are removed from this list.
Let me know if you have any further questions. Let me know in the comments below what worries you and I will try to give you a good answer on how Venture Capital in Malaysia works for Startups. Venture Capital Malaysia is a side product Nexea aimed to help educate young Startups on venture capital.
If you want to raise funds, feel free to contact us here: Venture Capital - we have one of the fastest deal times and we cover early stage venture capital for Startups in Malaysia. NEXEA adds value like no other VC - because we are also a hybrid Angel Investment Fund. Our Angel Investors who are actual high net worth individuals, businessmen and ex-entrepreneurs are here to mentor and connect you with their networks.