Securing capital for Malaysia Entrepreneur

1. UNIVERSITI UTARA MALAYSIA
BPME6093 ENTREPRENEURSHIP DEVELOPMENT
SEMESTER NOV 2010/2011 (DC102)
INDIVIDUAL ASSIGNMENT
TITLE: Securing the capital for growth: Sources, issues an
challenges facing Malaysian entrepreneurs
PREPARED FOR:
Dr. Norashidah Hashim
PREPARED BY:
CHING CHECK SENG (804251)

2. Contents
Page
Introduction 2
Sources of securing capital 3
Debt 3
Equity 5
Venture Capital 6
Angel fund 11
Issue and challenges of securing capital in Malaysia 12
Conclusion 14
Reference: 16

3. Introduction
Whether it is in the start up or expansion stage, securing capital is a huge challenges for most of the
entrepreneurs. This is especially after one of the most severe financial crisis in the history in 2008 after
the Great depression in 1929. The financial crisis resulted banks in US has since tighten the borrowing
and more risk averse. Hence, the rack record of a borrower must be good enough to convince the
bankers to lend out the money.
Besides, Dow Jones and NASDAQ have slump over 50% respectively. The poor market sentiment does
not encourage any company to raise capital through equity for their expansion plan as well. Venture
capitalist firm will do a thorough due diligence of a business and company before they will allocate
funds to invest. The overall environment made only the good company with a sustainability business
model able to secure capital and survive while the average facing insufficient capital to run their
business.
The scenario in Malaysia has not much difference although the country did not hit by the financial
crisis as deeply as the US. Entrepreneurs are hard to secure capital for different reasons. The issues and
challenges will be discussed besides the sources of capital available to the entrepreneurs in Malaysia.

4. Sources for securing capital
In general, there are four ways for an entrepreneur to obtain capital, debt, equity, venture capitalist
and angel capital (informal risk capital). All of the sources have their own advantage and
disadvantages. Thus, entrepreneur must smartly know which sources to get the capital according to the
needs of their company conditions. For example, a firm in the start up stage which needs RM 2 million
capitals is unlikely to secure capital though equity as initial public offer (IPO) is very costly and
investors also most likely shun away as the firm may not have sufficient track record to convince them.
None of the four sources is better one than another. It is determined by the needs of an entrepreneur
itself.
•Debt
Debt financing is also known as borrowing or loan. Debt financing normally involves payback of the
principal with a fee (interest) within agreed period. There are to type of institutions in Malaysia that
offer debt financing.
a) Commercial banks
Commercial banks refer to Maybank, Public Bank, Hong Leong Bank, CIMB and etc. Capital that is
secure by entrepreneur though commercial banks usually payback in an intermediate term which is
form 1 to 5 years. Commercial banks generally are strict in evaluating a loan application. Collateral
(property, inventories, receivables or assets) is needed in order to get a loan from commercial banks.
Bankers are conservative in evaluating a business and prefer to lend money to the company with track
records. Hence, firm in the start up or seed stage usually hard to get loan from bank or with a small
amount. Typical questions that an entrepreneur may need to answer are such as,
How do you plan to use the money?

5. What is the amount of loan you needed?
When do you need the money?
How long will you need it?
How will you repay the loan?
b) Development Financial Institutions (DFIs)
The DFIs in Malaysia are specialised financial institutions established by the Government with specific
mandate to develop and promote key sectors that are considered of strategic importance to the overall
socio-economic development objectives of the country. These strategic sectors include agriculture,
small and medium enterprises (SMEs), infrastructure, maritime, export-oriented sector as well as
capital-intensive and high-technology industries.
As specialised institutions, DFIs provide a range of specialised financial products and services to suit
the specific needs of the targeted strategic sectors. Additional services in the form of consultation and
advisory services are also provided by DFIs to nurture and develop the identified sectors. DFIs works
as an complement to the commercial banks with the purpose of of the country's long term economic
development. Thus, DFIs offers a lower financing rate than commercial banks and consider to
approve a loan even without sufficient collateral. However, DFIs only approve loan that is in line
with the government economic plan.
Some of the DFIs are:
•Small Medium Enterprise Bank (SME Bank)
The purpose of the set up of SME bank is as a one stop financing and business development
centre to accelerate the growth of SME. SME able to provide loan to new venture in
manufacturing, ICT and agriculture. The loan for a start up venture is from RM 50k to RM 10
million with a pay back period up to 15 years.

6. •Agro bank
Agro Bank aim to provide financing for primary agriculture activities such as fisheries, forestry and
horticulture, production, processing and marketing for production activities. The company must be
at least 51% Malaysian owned and has a minimum 3 years track record. The repayment period is
maximum 10 years.
•Export-Import Bank of Malaysia (EXIM Bank)
EXIM Bank's role is to provide credit facilities and insurance services to support exports and
imports of goods, services and overseas investments with emphasis on non traditional markets as
well as the provision of export credit insurance services, export financing insurance, overseas
investment insurance and guarantee facilities. The repayment is done quarterly up to 10 years.
Advantages of Debt financing
•No need to relinquish the ownership and have the full control of the company.
•During the low interest period, debt financing is preferred as it justified the opportunity cost.
Disadvantages of Debt Financing
•Regular repayment is needed (monthly)
•Heavy debt will distort the growth of the company due to shortage of cash flow.
•Equity
Equity financing is money that invested in the venture but entrepreneur has no legal obligation to repay
the principal amount or pay interest on it. There are two ways to raise the capital via equity, public
offering and private placement.
Public offering is a form to raise capital from through the sale of securities (common stocks) in the
stock market. For a company to be able to sell their shares in the open market, a company must offer

7. Initial Public Offer (IPO) to list in the stock market. For example, company A must offers IPO before it
can raise capital and the shares traded in Bursa Malaysia.
Equity financing favours companies which have established with a good track records. Generally,
companies in the later stage or expansion stage use this method to raise capital. Besides, capital that
raise from IPO is normally over RM 5 million as the cost of making a public listed company is costly
(legal fee, accounting auditors fee, professional fee, securities commissions fee and prospectus printing
cost).
Private placement involves selling shares to private parties such as friends, relatives, employees,
customers and professionals. In Malaysia, some listed companies do private placement by selling to
some institution, individual or a holding company but usually with a certain large amount units of
shares. Any private placement for a listed company, the company needs to inform Securities
Commissions Malaysia and need to make announcement in the Bursa Malaysia website.
Advantages of equity financing
•Able to raise large capital with normal from a minimum several million to billions
•Liquidity of shares that allow to buy and sell in open market
•Listed in stock market can enhance the image of a company
Disadvantage of equity financing
•Start up or seed stage companies normally not qualified to be listed
•The listed cost is from RM 2 million to over RM 10 million
•Listed companies need to disclose details future business plan which make known to pubic include
competitors
•Need to responsible to shareholder and they may not agree with the company expansion plan and ask
for dividend payout for the earnings

8. •Venture Capital
Venture capital (VC) is financial capital provided to high-potential, early stage growth companies. A
venture capital firms normally form by experts from finance and experts with technical background.
Venture capital firms differ with private equity firms as VC not only invest but they also provide
market research, strategy, management consultation to the companies that they invest in. VCs also have
good networking with customers, suppliers and business people. The venture capital fund makes
money by owning equity in the companies it invests in, which usually have a novel technology or
business model in high technology industries, such as biotechnology, ICT, software, semiconductor etc.
The typical venture capital investment prefer later stage and expansion stage of a company as the
realization of product and initial marketing make it easier to make profit through IPO and trade sale of
the company.
Most of the venture capital firms in Malaysia are set up under the fund of Ministry of Finance (MOF).
Among the venture capital firms are Malaysia Venture Capital (MAVCAP), Cradle Investment Fund
(CIF), Malaysia Technology Development Corporation (MTDC) and etc. The venture capital firms in
Malaysia normally concentrate in ICT, biotechnology, hardware and software which is in line with the
government economic plan.
An entrepreneur needs to submit their business plan to the venture capital firms. Some of the capital
firms have dateline to accept the business proposals for each round. Some will accept and evaluate
business proposal all year round. Investment teams in the VC will evaluate and select the proposals
they interested to do a due diligence study. They will meet the entrepreneurs before they make a
investment decision. The evaluation process is complex and take up to several months of time.
a)Malaysia Venture Capital Management Berhad (MAVCAP)
MAVCAP was incorporated in 2001 by the Malaysian Government and is the nation’s largest

9. venture capital (VC) firm which focuses on investments in the local information, communications
and technology sector (ICT). The firm provides an alternative source of high-risk financing for
start-ups, seed capital and early stage ventures in the ICT sector and high-growth industries.
The Company commonly invests for a period of 5 – 8 years in seed, start-ups and early stage
companies, during which it holds a Board position and drives key management decisions. Initial
investments of RM1 million – RM3 million are complemented with Mezzanine allocations valued
at RM5 million – RM10 million to fund companies through to the pre-IPO stage. In later stage
investments, MAVCAP typically invests between 3 - 5 years.
Application for the fund is via their website and is open all years round.
b) Malaysia Technology Development Corporation (MTDC)
MTDC has invested more than RM500 million in both local and foreign high-tech companies.
Many of these companies have been successfully listed on Bursa Malaysia. MTDC prefer to invest
in companies that have marketable products or services.
MTDC invest in early, developing and late-stage technology-based businesses as a way to manage
their risks. To further diversify the risks, MTDC invest only around 30% equity stake in any
investments. This strategy also allows the investee companies to drive their companies in their own
creative ways as the investee companies still hold the majority shares. MTDC investment horizon
is limited up to five years. Exit strategies include public listing, trade sale, management buy-out,
shares redemption by company and/or shares sale to project promoters.
Prior 2004, MTDC was concentrate in the venture capital for ICT. They started to involve in non-
ICT industry in 2004 and subsequently in biotechnology in 2005. MTDC launched the country’s
first biotechnology venture capital fund known as the Malaysian Life Sciences Capital Fund
(MLSCF) which successfully raised USD150 million. This fund is co-managed with our strategic

10. partner, Burill & Co., a life sciences merchant bank based in San Francisco, California. Up un-
til February 2010, MLSCF has made direct investments in 12 biotechnology companies globally
and another 19 indirect investments via BLSCFIII.
MTDC`s investment criteria focus on the following :
•Non-ICT sector e.g. life-sciences, clean technology, alternative energy, other high technology
areas
•Strategic technologies
•High investment return i.e. minimum 25% IRR
•Clear and well-defined business model
•Credible management team
c) Cradle Fund Sdn Bhd (CFSB)
Cradle Fund Sdn Bhd (CFSB) is the company that forms under the support of the Ministry of
Finance (MOF). CFSB is a wholly owned subsidiary of MAVCAP. Cradle Fund manages Cradle
Investment Programme (CIP) which is a conditional grant to the successful applicants. Applicants
can submit the ideas and proposals though Cradle Fund’s website and their investment team will
evaluate the viability of the ideas or proposal.
CIP is different from other venture capital firm’s capital as they only offer grants to entrepreneurs
in the seed stage. Besides, only one of the conditions below a recipient need to repay the grants
they received:
• The recipient's idea receives further funding or a sales contract worth a minimum of

11. RM500,000 within the Ideas Bank stage (which is a period of 12 to 24 months, subject to
terms and conditions).
•The recipient fails to complete the implementation of deliverables (i.e. Business Plan or
Prototype) that he/she has committed to.
•The recipient wishes to withdraw from CIP during the implementation process
CIP focus in diverse areas of ICT, non-ICT and high-growth technology industries, which
includes:
•Software and information services,
•Internet (e-services, e-commerce and e-content),
•Communication and networking,
•High-tech consumer and business products,
•Electronic and semi-conductors,
•Medical devices and advance material,
•Biotechnology and life sciences,
•Environmental resources management and renewable energy, and
•Technology innovation created for any industry (subject to our discretion).
Cradle fund also play a role for getting suitable mentors to entrepreneurs in order to increase the
chance to succeed the project.
Advantages of venture capital as financing sources:
•Able to secure a large sum of fund up to several millions sometimes.
•Able to get business advisory, networking and expertise though venture capital firms

12. •Get recognition from VCs peer and easier to obtain additional capital in the future
Disadvantages of venture capital as financing sources
•Loss the total control of the ownership of the company as venture capital firms usually put some
members in the board of directors
•Evaluation of the fund approval is a long and complex process and can take up to a few months before
the venture capital firms decide to invest.
•Venture capital firm prefers to invest in the later stage rather than the early stage as the failure rate in
the early stage is too high and is too risky for most of the venture capital firms to invest.
•Angel Fund (Informal risk capital)
In US, there are wealthy people that want to seek higher investment return and willing to take higher
risk to invest in start up company. Since the investment is by individual, they may invest in various
type of industry from IT to independent music. In Malaysia, there are not much angel investor and they
are limited to certain people that have good networking and able to convince them to invest in their
company. Generally there is no formal way to an entrepreneur to apply a fund from an angel investor.
Advantages of angel fund as financing sources:
•Fast evaluation and decision making of investment as the assessment is simpler
•Angel investor normally has their on career and will not take part in the company normal day
operation and decision (less control over company)
•some angel investors who are successful entrepreneur himself willing to give coaching and mentoring
Disadvantages of angel fund as financing sources:

13. •capital normally smaller by individual
•lack of networking that may not help to the growth of the company
•Not well recognised and may not attract other venture capital to invest.
•Issues and challenges of securing capital in Malaysia
•Difficulty to raise capital during startup or seed stage
Usually debt and equity financing required past years track records or historical financial result.
Bankers do not want to loan to start up company that has no proven track record, lack of collateral and
a new venture that unable to repay the borrowing when the business go insolvent.
Risk averse investors also avoid to invest in the company in the start up company. Furthermore,
securities commission’s regulation restricted all listed companies need to have at least 3 years of
historical financial report.
In Malaysia, VC also has a tendency to invest in later stage or expansion stage. This due to the failure
rate is too high in the seed stage where only 1 out of 25 projects or ideas were successfully to the stage
that can marketable according to Cradle Fund. Cradle fund is currently the only VC in Malaysia that
concentrate involves in seed stage by offering grant to selected ideas that has viable business model.
Besides, VC firms concentrate in certain industry such ICT, biotechnology and science.

14. Angel fund remains the most unlikely way to get financing unless the entrepreneur has a good
networking with wealthy individual who willing to invest. Thus, most the capital during seed stage or
start up stage rely on self finance or ‘sweet capital’ from friends, family or relatives.
•Limited financing sources
Contrary to the US counterparts, local entrepreneur does not enjoy the ease to get financing. VC firms
and angel fund are very limited in Malaysia. VC firms will select one to two projects or ideas each
opening term due to the fund constraint. Many ideas or project has to be halted due to lack of financial
support that is available in Malaysia.
•Low involvement of private sector.
Most of the VC firm’s funds are provided by government or government related companies. MAVCAP,
Cradle, Malaysia Debt venture, MTDC are all using the fund allocate by government. Besides,
Development Financial Institution such as Agro Bank, SME Bank and EXIM Bank also are supported
by government. Only several investment banks that have a venture investment unit like CIMB and
OSK venture. Private sector participation is low as they are risk averse and not interest to high risk
investment. Furthermore, non government companies need to answer to the shareholders and if a new
venture fails, it will deeply jeopardize the company’s profit and loss and consequently shareholders’
benefits.
•Lack of appetite for long term investment
Over 50% of the share price in the ACE (formerly MESDAQ) market is below the IPO price. One of
the reasons is some of the big shareholders sell the shares after the gain from IPO listed. This will send

15. a negative message to other investors and more investors to sell off their shares. This will push down
the share price. Low share price also discourages listed companies to gain capital for expansion by
selling off part of their shares. In the end, the new company unable to sustain the growth and will
reelects in the low share price after that.
•No participation of foreign venture capital firm
All of the venture capital firms in Malaysia are local firms currently. In year 2008, Japan Asia
Investment Corporation (JAIC) gets the permit to operate in Malaysia but till now there is no office set
up by JAIC.
Malaysia is not a country that favorite by venture capital firms like India and China. Most of the
established venture capital firms such as the largest venture capital firm Sequoia capital set up their
branch in these two countries as new ventures in IT, software, green energy, and biotechnology are
grow like mushrooms. This also shows that we lack of new ventures that are really exciting to invest to
venture capital firms.
•Relationship between entrepreneur (investee) and venture capital firm (investor)
Often there are different opinions how to manage and lead the company between entrepreneur and
venture capital firms. Entrepreneurs want more capital to make the products perfect before launching.
Venture firms prefer to launch a 80% workable products to capture the market (first movers strategy).
Entrepreneurs request more capital spend on research while venture firms would like to spend more on
marketing. The fundamental reason is entrepreneur want to grow the company while venture capital
firms prefer to take smaller risk while making massive profits when they exit.

16. •Non performing loan by Development Financial Institutions (DFIs)
Some of the loan was approved to the unqualified entrepreneurs due to lack of due diligence by the
Development Financial Institutions. Generally, the non performing loan by commercial banks are much
lower as commercial are listed company and need to answer to the shareholders. Thus, they are more
conservative in loan approval. In the other hand, DFIs are more lenient in loan approval as the motive
is to help SME or entrepreneur towards the economic plan set by the government. Unfortunately, some
of the party make use of the opportunity and result a higher non performing loan among DFIs.
Conclusion
Genuine entrepreneurs are looking for right financing sources that can help them realize the products,
ideas or marketable the products. Banks, investors, angel investors and venture capitals firm make
profits by helping genuine entrepreneurs realized their ideas. Ideally, it is a win- win situation.
Participation of government as the main financing sources either with DFIs or venture capital firms is
not healthy. One of the main reasons of Malaysia has no famously successful venture is a proof that we
need peoples who really know how to run a venture capital fund. In a professional venture capital firm,
there must be people who have the technology backgrounds and finance knowledge that can identify
the gems among the business proposal. It also needs experience people who sit in the new venture firm
that venture capital fund invests to give ideas, advices to grow the company. Besides, the venture
capital firm needs to have exit plan and strategies if the new venture firm fails. In Malaysia, we lack of

17. expertise who has both technology and finance knowledge, and most important an exit plan to cut loss.
The simplest way is to encourage famous venture capital firms to set up their office here. We have to
run our venture capital company in a professional way. The venture capital firm has to responsible of
the unsuccessful investment they have made and also rewarded for the successful new venture. This is
the practice of the world famous venture capital firm.
The growth of SMEs is the reason why United States was so successful and Malaysia is also follow the
same method to lead our economic to another level. However, we have to assess our execution in
identify the genuine entrepreneur, proper fund allocation, monitoring and coaching and also result
oriented in measuring the performance of a government venture capital fund.
Refrences:
http://www.mavcap.com/directseed.php
http://www.mtdc.com.my/
http://www.cradle.com.my/cms/index.jsp
http://en.wikipedia.org/wiki/Venture_capital
http://www.mdv.com.my