By Jason Poh
EQUITY crowdfunding (ECF) in Malaysia started as early as 2015 when the Securities Commission Malaysia (SC) issued the first batch of licenses to 6 platforms.
Known as recognised market operators (RMOs), ECF platforms like these allow private companies to raise funds from the public legitimately, very much like a small initial public offering (IPO). We now have 10 RMOs for companies to choose to raise equity crowdfunding.
The total funds raised in the initial years (2015-2017), divided by the number of campaigns, implied an average raise of RM885,000 per campaign. Fast forward to 2020, the average raised per campaign has reached RM1.4 mil.
This growth shows the maturity of this market in terms of the issuer’s sophistication and investors’ appetite for illiquid “private equity” risk. This RM1.4 mil mark also sets the expectation for companies that aim to raise ECF funds.
According to the SC’s data, as of Sep 2020, we already saw a total of 119 campaigns launched with a total cumulative raise of RM129.64 mil so far. Breaking it down, we see a total of RM55.9 mil being raised nine months into the year, versus only RM25.2 mil for the whole of last year, more than double in terms of the new funding amount.
COVID-19 induced liquidity
While 2020 saw a volatile business condition due to the COVID-19 pandemic, the Malaysian government did not hesitate to soften the blow by introducing various incentives to boost economic activities.
Apart from reducing the overnight policy rate (OPR) interest rate to a record low of 1.75%, which gives a boost to loan borrowers, it also introduced various liquidity schemes to assist small and medium-sized enterprises (SMEs).
Among these is the Malaysia Co-Investment Fund (MyCIF), first introduced last year with a mandate to invest RM1 for every RM4 raised from any selected crowdfunding campaign. The fund has doubled its allocation in April 2020, essentially investing RM1 in a company for every RM2 raised, with a maximum of RM1 mil cap.
In simple calculation, companies planning to raise RM3 mil can do so by just getting RM2 mil from the crowd, and RM1 mil from MyCIF will be invested alongside. This was first due to end in September 2020 and it’s being extended and exhausted by mid-December.
Next year, there will be the same RM30 mil allocation, but back to the matching of 1:4 instead of 1:2, meaning, to get a maximum RM1 mil investment from MyCIF, it will require a company to raise at least RM4 mil.
The millennial Investors
It is also noteworthy that 46% of ECF investors are actually less than 35 of age, while 31% are between 35 and 45. This less than 45 age group, which forms 77% of the investors’ population, shows that it is the (digitally savvy) working-class that is the most active in ECF.
Companies that target such age group demographics as their customers may also be successful in their equity crowdfunding campaign by turning their raving fans into loyal investors.
The typical “ticket size” or minimum investment amount ranges from RM2,500 to RM3,500 in exchange for one lot of shares. Such affordability and including early incentive schemes (a type of gamification feature) do appeal to such segment of investors.
This is essentially the appeal of crowdfunding, where companies can reasonably raise funds on their own terms, without the long process of courting one single large investor with demanding terms. Even so, companies that have a fundraising road map can raise funds simultaneously from the crowd and large investors as well.
Which platform is the best?
Since equity crowdfunding is a regulated activity, there are certain hard rules to qualify a firm’s eligibility. Depending on your fundraising objective, each platform has its own merits.
It is important to note that most platforms only facilitate the campaign and are not involved in the entire fundraising preparation, campaign narrative, strategies, day-to-day roadshow or project management.
It is also noteworthy that so far, RM5 mil is the maximum a company has ever been raised for equity crowdfunding in Malaysia.
Moving forward, as the industry matures, we expect this amount to increase since RM10 mil is the maximum one can raise. Companies with well-defined business plan and trajectory can also launch the campaign in bite-size as the larger the amount to target, the harder it will be to close.
An ideal fundraising campaign is where you can launch and close fast hence, it’s not always wise to go all out. Thus, the RM1.4 mil average raise is an important yardstick.
Your business is eligible but is it suitable?
This is the most important consideration; capital is addicted to growth. Having an ambitious projection may backfire if the numbers and business plan are not defensible. The entrepreneur plays a crucial role too, in addition to a solid business model.
For example, while we know that the food & beverage (F&B) business took a hit badly and many have shuttered their operations, a capable entrepreneur can pivot and convert their brick-and-mortar restaurant into a virtual kitchen with delivery focus.
A single brand business depending on footfall, a traditional business that is hard and expensive to scale can become a multi-brand business from the same (or cheaper) location with highly profitable unit economics.
The pandemic disrupted his business, yes, but without it, he may have never known of such a pivot, which is much more scalable than before! Hence, an investor can imagine the (speed of) growth and be excited to invest in this deal.
Fundraising as a business strategy
The biggest advantage of ECF is that it democratises fundraising for private companies at terms that they set. The opaque nature of a 1-to-1 investor meet still has its function, but for companies looking to raise funds fast, ECF is the way to go. A 1-to-1 deal would usually take 6 months to 1 year due to various meeting courtships, negotiations, terms finalisation, due diligence, conditions precedents, etc, before you can see the money in the bank.
Compound that with multiple decision-makers and their peculiarities, a fast-growing company with immediate fund needs will not be able to afford such year-long endeavours.
Hence, equity crowdfunding is a strategy that should be undertaken for companies that show promising growth, especially so now when the government is giving tax breaks to individual investors in addition to the continuation of MyCIF from 2021.
For start-ups and as well as SMEs, equity crowdfunding and fundraising, in general, should be part of your business strategy right from the start. Such a pro-active approach can also serve as a go-to-market strategy in attracting clientele, merger and acquisitions (M&As) or discovering new verticals, on top of attracting investments. – Jan 1, 2021
Jason Poh is a principal consultant at Maeson and Co, a trusted advisor on business strategies, fundraising, and exit planning for forward-looking business owners.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
