VENTURE capitalists (VCs) are known to make risky bets backing startups and emerging companies/small businesses with long-term growth potential, some of which have turned into unicorns.
But VC money is not for the long term.
Normally, they have a 10-year horizon but by the fifth to seventh year, they are already in the divestment phase.
By then, the VC should have made sizeable returns. Of course, not all bets on startups land VCs with handsome gains, as there have been failures too.
What a VC firm does is buy a stake into an entrepreneur’s idea, nurtures it for a short period of time and then exits with the help of an investment banker, said a report.
Their preference is for tech-focused companies with the spectrum getting wider over time to include climate tech, electric vehicle manufacturers, renewable energy, female technology, space technology, health technology, financial technology, eCommerce and even cryptocurrencies.
Ficus Capital executive director Abdullah Hidayat said there was growing interest in startups that have the environmental, social and governance or ESG element ingrained as part of their business and even those that are syariah-compliant.
“We believe in the coming years, businesses that have good governance and give a positive impact to the community as well as the environment will thrive,’’ he said.
If you are thinking of getting funding from a VC, then you need to ensure you have a saleable idea and a fundable company.
The VCs will do their due diligence as they are accountable to their investors. VCs invest in startups for capital gains and dividends.
VC’s normally charge a 2% management fee per annum and split the capital gains on the ratio of 20:80 with their investors.
VCs in Malaysia are regulated by the Securities Commission (SC).
“The main motivation for VCs to invest in early-stage companies is to make huge price gains. Typically, in the VC world, the price return is calculated in multiples, ie, invest RM1mil in a company and sell the investment at RM3mil in three years,’’ Abdullah said.
He added that VC is really a long-term game for any (individual) investor to consider, as it provides the potential of having very handsome returns, which can be more than 15% per year and sometimes as high as 50% per year.
There are many ways for individuals to build wealth and make their money work for them. There are safe and risky instruments out there.
A lot depends on a person’s risk appetite. A diversified portfolio is preferred as it allows a person to spread their risks. High-net-worth individuals have wider investment options.
Investing into VC funds is an option but one has to be a “sophisticated investor’’ to do so.
“The minimum amount that an individual investor can invest into a VC fund is about RM250,000. However, some VCs put it higher at RM500,000 and others, lower at RM100,000.
“It all depends on the constitution of the fund and the ‘know your customer (KYC)’ guidelines as they need to show that those who invest are sophisticated investors,’’ he added.
VC, just like private equity (PE), falls under higher risk investment instruments which are governed by the SC. The SC has outlined that only sophisticated investors can invest in VCs.
However, with recent developments in equity crowdfunding (ECF), there is an opportunity for individual investors to invest in VCs via the ECF Microfund. Abdullah said the investment can be as low as RM25,000 per person.
Each VC has its own set of risk/return perspectives. Both companies and individuals investing in VC funds are eligable for some tax deduction benefits.
Last year, the total committed funds in Malaysia for PE and VC stood at RM14.83bil, according to the SC.
In South-East Asia, VCs have been funding growth opportunties in the technology eco-system and startups raised US$25.7bil (RM114.38bil) last year, doubling that of 2020, a report said.
There are many local startups in the country that have been funded by VCs. Some have turned into unicorns, including Carsome and Grab.
HSBC and KPMG in the recent report “Emerging Giants in Asia Pacific’’ identified 100 leading emerging giants in Asia Pacific. This includes Malaysia’s Boost Holdings, Exabytes, Jirnexu, Presto Mall, Neurogine and PolicyStreet.
Abdullah believes the outlook of the VC market in the country is promising, as there is a growing trend among graduates to opt to start their own business instead of working for others and VC funding is an option for them.
Global VCs are still raising a lot of funds to invest in startups, including those from South-East Asia. Even with so much money from VCs, failures are to be expected.
Abdullah cited several reasons for failure.
They include startups not having a firm operating structure as they are still in iteration mode, brand loyalty being still low including market awareness, technology being at a nascent stage and the founder of the startup having limited experience.
“The rule of Pareto really works in VC investing, whereby for the VC fund to perform, the fund only needs 20% of its portfolio to perform really well in order to give handsome returns to its investors,’’ Abdullah added.