I recently shared my view on new finance at a luncheon talk. There are several pre-IPO funding options that start-up companies and SMEs can explore as a source of alternative funding such as angel investment, venture capital (VC), equity crowdfunding (ECF) and peer-to-peer (P2P) lending.
This kind of “new finance” has long been available in the US, especially among the technology companies.
New finance is a tool for investors to look for both money and talent. This channel has been widely capitalised by the startup and SME sector in China, Taiwan, Hong Kong, Singapore and Israel.
Entrepreneurs can leverage this new market for them to scale and gain attention.
Being a pioneer in this area, I have gathered 20 investment organisations to form a VC group
to help startups and SMEs who have been unsuccessful at getting funding from conventional banks.
We have gone through more than 200 pitches (business proposals) and helped 20 companies get funding. They are companies in various sectors such as dental chain, hotel management, ice cream factory, steamboat chain, and app-based firms. The funding size range from RM200,000 to RM14mil.
Angel investors refer to high net worth individuals, while VCs are investment institutions. ECF, on the other hand, sources for funds from the public.
These three kinds of investors are generally more interested in getting their return on investment after a careful due diligence on the company. They are not looking to manage the company that they are investing in. However, investors such as a VC, may consolidate resources among companies under its portfolio to help the company scale up.
As for P2P loans, they refer to loans obtained from the public, which help the company in need of a short-term loan.
While conventional banks are more concerned about the past performance of a company, new finance looks at the company’s future potential. This will help startups with little track record to get funded.
Funders, or investors, should not underestimate a startup. They have the potential to someday become a unicorn (companies with valuation of US$1bil and above).
Take Jack Ma of Alibaba, for example. He was previously rejected by VCs. But with the right strategy and good storytelling, the e-commerce company has become a giant in the field. When Alibaba went public, it had a market capitalisation of US$234bil -- the largest IPO ever.
A good business plan is vital to garner investors’ interest.
If we look at Grab, it has been funded for more than ten rounds over the past five years, accumulated about US$4.1bil in funds and is worth an estimated US$6bil.
That is the power of the new finance concept with a capital mechanism leverage.
Another new kid on the block is P2P operator Funding Societies Malaysia. Within a year of establishment, they have disbursed about RM100mil. Their performance has attracted big VCs such as Sequoia Capital and Japan’s SoftBank.
This could attract more investors, which will help pool together relevant resources to speed up the company’s scale and increase valuation.
We worked closely with this P2P platform in 2018 and have helped companies obtain short term loans from the public to expand.
Recently, we facilitated a fashion company in getting funds for their working capital through one of the new finance channels so that it can adopt artificial intelligence-led precision marketing management in its business.
With the growth of smartphones, it is becoming easier to raise funds from the public quickly from all over the world. It has disrupted the process of finding startup capital and shortened the timeline from months to a few weeks.
I have been following a few VC pitch programmes in Malaysia where participants pitch their business proposals to a panel of judges. The winners are usually awarded with some form of funding.
While it is good to see such programmes mushrooming, it is also important to have a panel that is knowledgeable in this sector and understand the risk of investing in startups.
Neil Foo is the Malaysian representative of APEC SME Forum