Fresh approach to fundraising

IT is not easy to be your own boss. Owning your own business has been romanticised across the media, novels, and movies.

The actual path towards building a successful business is treacherous. The hardest part about building your own business is getting started.

How does one even get the necessary startup capital if one has a good idea? If you do not have money, how then do you convince those around you to entrust you with their hard-earned savings for you to start your business?

For the longest time, especially in this part of the world, Asian entrepreneurs usually start their business with what little seed capital they can gather from their family members or relatives. Bonded through blood helps to address trust issues.

Yet, there is a limitation to how much seed capital one can possibly raise via this route. Those with the network or access to certain bankers may then rely on the goodwill or trust of these influential bankers to extend credit.

With millennials coming into the workforce today, the trend appears that the majority aspire to be their own boss and rather not work for others.

While that is good for the growth of our small and medium enterprise (SME) sector, the challenge of fundraising then becomes the number one issue for many of these aspiring entrepreneurs.

Innovative fundraising solutions

The capital markets around the world have evolved tremendously in the past decades.

Today there are many innovative avenues to raise funds legally without resorting to your friends and family or relying on the goodwill of bankers.

We are seeing the rise of platforms like peer-to-peer lending, equity crowdfunding (ECF), angel investors alliance, venture capital, private equity, and fund management companies.

All these are new paths for startups or businesses that are seeking funding but may not be able to obtain it from the traditional commercial banks.

These platforms and companies were not available in the past but have taken on a significant role in recent years in building up the startup and SMES ecosystem in our country.

While it is still far from the developed countries’ level, more and more small business owners and founders are relying on the above mentioned routes to obtain seed or growth capital to bring them to the next level.

Apart from that, there are more government agencies or statutory bodies providing grants within certain industries or sectors based on the economic policies to further the national agendas.

For example, businesses within the space of industrial manufacturing or electrical and electronics products under New Industrial Masterplan or green energy under National Energy Transformation Roadmap.

The regulators and Bursa Malaysia also introduced the LEAP Market to provide additional avenues for companies to raise funds from sophisticated investors.

Given the many fundraising opportunities, why do we still hear the number one problem for startups or SMES is the lack of access to funding?

Lack of awareness

From my observations, there is a severe lack of awareness of the fundraising opportunities available out there among the SMES and startups in our country.

Simply put, those who know, know. Those who don’t, don’t. Sadly, the latter forms a larger percentage among the SMES and startups.

From those who have approached my company for funding, it is largely because they are based in the Klang Valley or have the benefit of network proximity to allow introductions to be made.

Even though with social media presence, many out there are still flying blind and opting for painful means such as moneylenders or loan sharks for their business capital.

There is a saying that urban folks often live in their “Bangsar bubble”. When it comes to startups and SMES going for fundraising, it is not that much of a difference.

I have noticed that many of the founders of startups getting wonderful capital injection from venture capital funds or grants from certain agencies are those who fit within certain stereotypes such as having a good university degree, from middle class or high-net-worth family, speaks good English, active in local startup networking events, among others.

This may appear as a superficial generalisation, but it is my personal view. To take things further, I have even seen some founders who have obtained funding moving on to another business and obtaining another round of fresh capital even before the earlier venture has achieved some level of success.

Some who have failed in their previous ventures, but with great access to resources and networks are able to raise funds again for the next “new venture” with an almost similar atrocious outcome.

Let’s not even talk about second generation tycoons who easily raise funds compared to those who come from the B40 or M40 socioeconomic status.

It is worrying indeed because this effectively means a larger portion of startups or SMES in our country would be totally excluded from the conversation when it comes to fundraising.

Valuation expectation gap

Another challenge to fundraising is the valuation expectations gap between startup founders and business owners who are seeking to raise funds.

Many have unrealistic valuation demand for the shareholding in their company despite the short tenure in business and weak financial metrics.

This is particularly prevalent in startups compared to SMES which have been in operation for some time. A contributing factor is the rise of startup “gurus” or seminars run by questionable characters.

Profitability is an important measure and was largely disregarded during the time of low interest rate environment when cost of capital is low.

As a result, we have seen many startups managing to raise funds at ridiculous valuation be it via ECF or venture capital routes. This has affected the eco-system as the subsequent startups which are fundraising benchmark on the past rounds of their peers or competitors.

Many investors in ECF or venture capital funds have as such lost money in their investments and till today have yet to realise the value of their investments even at breakeven levels.

In an environment where capital is limited, it is important to allocate it to the best business owner to achieve the most economically viable outcome for the stakeholders.

It is not about getting the highest return on investment in the shortest span of time but the one which potentially provides greater economic spillover effects and can be sustainable in the long run.

Agencies and statutory bodies or venture capital firms need to realign their priorities to focus on several aspects to achieve a more reasonable outcome.

One, provide more equitable opportunities to startups or founders outside of the city and of different socioeconomic background.

Two, focus on local startups and SMES before thinking about allocating capital to foreign names in foreign countries.

Three, drop the obsession of finding the next unicorn or soonicorn or any corn for that matter.

Emphasise profitability rather than revenue growth as the model itself is broken in many ways. There is no meaning in having eye-popping revenue but remaining loss-making and cash flow negative while requiring endless injection.

It will end up being a journey of finding a greater fool to cash out the initial investment. Often, it will end up in tears.