Venture Capital Landscape in Malaysia

Venture Capitalist by Definition

As quoted from Investopedia, a venture capitalist (VC) is a private equity investor that provides capital to companies with high growth potential in exchange for an equity stake. A VC also refers to a company that invests in new business ventures as most of the VC work for venture capital firm and invest with the firm’s money instead of their own money. The money or capital invested by VC is referred to as Venture Capital.

Typically, a VC invests in a new promising business venture by providing capital for either expansion or a start-up business. According to businessdictionary.com, they commonly invest where at least 25% annual returns within 1-5 years are feasible and often demand for 50% or more ownership to exercise control over the invested business venture to offset their high risk. In exchange, they also provide management, industry expertise and access to business partner and connections to help the business or start-up to drive growth. Moreover, the business venture can also depend on the VC for assistance when they want to raise more money in the future round.

How does Venture Capital Work?

When a VC invest in a business venture, the ultimate end-goal for their investment is to aim for the profitable exit the invested business could offer either by selling their stake or via an initial public offering (IPO). VC firms usually come in during the early stage of the business development and provide funding in exchange of a certain ownership stake of the company, which is less than 50% typically. Here’s a simple illustration to explain how a VC works:

Mr Sam likes Michael’s idea and is keen to invest $1 million in his start-up but he wants to own 50% of the new company in return.

Generally, there are four types of players found in the VC industry. Each of these players have their own characteristics that determines what type of start-ups or business venture they seek to invest in. After all, it is the difference background and exposure under their belts that guided them in their decision making. The four players are as follows:

• Entrepreneur: Start companies or business and usually need funding to realise their vision.
• Investors: The one who’s willing to take on significant risk in pursue for higher returns.
• Investment Bankers: Always looking for good companies or deals to sell or go IPO.
• Venture Capitalists: Those who profit by creating an encouraging market for entrepreneurs, investors and bankers.

When an entrepreneur is looking for capital for the start-up, the first and foremost step is to get their business plan done and submit to prospective VC firms for review. The VC firm will have a panel of expertise to evaluate the business plan and conduct the necessary due diligence if they find the business plan to be promising. The evaluation and due diligence practice usually include but not limited to business model, product, experience and education background of management team, operating history, financial performance and the potential of the business and idea.

If the due diligence process is successful and the outlook for the business growth is promising, the VC firm will offer funding in exchange for an equity stake of the company. Often, funding will be provided in multiple rounds and the VC firm will also participate in active role to help run the portfolio of the company.

The typical process on how VC works

The Different Stages of Venture Capital Investing

As a start-up company grow and evolve, it passes through different stages of business growth and each stage would require different stage in VC investing process; from seed round funding to early stage funding and late stage funding.  Some VC specialize in particular stages whilst others may consider investing at any time. At the end of the day, the VC’s ultimate objective is to grow the companies under their portfolio to the point they become attractive targets for acquisitions or IPOs where the VC can sell off its stakes at a profit and distribute the returns to its investor.

The different stages of funding in VC

The Venture Capital Landscape in Malaysia

The VC industry in Malaysia has been thriving with the mushrooming of VC firms in the market in the recent years. The expansion of Securities Commission Malaysia’s registration framework has seen the VC industry in Malaysia developing and growing with a drastic increase of start-ups and young innovative businesses, leading to a surge of pitching and funding activities in the market.

The VC has a great influence on Malaysia economy as well as job creation and transitioning into a knowledge-based economy. As at end-2021, the market has recorded a total of 105 registered VC firms and management corporations and charting an encouraging growth of RM5.18 billion of committed funds.

Source: https://www.capitalmarketsmalaysia.com/

According to Securities Commission Malaysia’s 2021 Annual Report, the majority of the funding sources for VC funds comes from government agencies and investment companies at 45% whilst sovereign wealth funds contributed 27.9% and remaining 19.7% are derived from corporate investors.

Source: https://www.capitalmarketsmalaysia.com/

From the VC funds accumulated in 2021, a huge chunk of the investment goes to the medical and biotechnology sectors (63.6%), followed by information and communications (25.9%) and financial services (4.3%).

Source: https://www.capitalmarketsmalaysia.com/

The Major VC Players in Malaysia

The success rate of start-ups in Malaysia is often closely tied to the VC. VC firms bring in more value like connection to corporates then just money. The VC will follow in investments from other VCs that do larger deals that eventually leads to private equity, mezzanine investors or even public markets where the start-ups can exit by the end of the day.

You can also check out our article highlighting the top 10 best international venture capital firms in Malaysia to identify companies that invest in local businesses in return for equity participation. 

Last but not least, gain insights into the advantages and disadvantages of venture capital and compare VC’s differences with private equity.

*List could be non-exhaustive