Laying down growth pipes for the startup ecosystem

  • Much said about funding gap, but it’s really growth stage funding that is lacking
  • A void Mavcap and Silicon Valley’s Elixir Capital Management hope to fill

Laying down growth pipes for the startup ecosystemTHROUGHOUT the madness that was the weekend-long launch of the Malaysian Global Innovation and Creativity Centre (MaGIC) in Cyberjaya in late April, there was one particular announcement that really caught my attention.
 
It was an agreement signed between Malaysia Venture Capital Management Berhad (Mavcap) and Silicon Valley-based fund manager Elixir Capital Management to launch the ECM Straits Fund, which will target growth equity investment opportunities to help scale small-to-medium enterprises (SMEs) in the region.
 
The fund, which currently has a commitment of US$50 million with a target of US$150 million, represents the first of the partnerships targeted to be signed under Mavcap's third Outsourced Partners Programme (OSP3).
 
To say I was pleased at the news is a slight understatement. There’s been much discussion over the past few years about a ‘funding gap’ in the region, lamenting the lack of available venture funding for entrepreneurs.
 
However, to drill down a little deeper into the specifics of this issue, it is growth stage funding that Malaysia has a distinct lack of.
 
Really, only the Business Growth Fund offered by the Malaysian Technology Development Corporation (MTDC) comes to mind, offering up to RM4 million (US$1.2 million) in hybrid grant-equity funding.
 
In contrast, there are many funds which focus on pre-seed and seed stage startups, such as those offered by Cradle Fund and the Multimedia Development Corporation (MDeC), in addition to others with a focus on commercialisation or research innovation objectives.
 
It is one thing to help kick-start the fledging dreams of entrepreneurs, but it is when the survivors have emerged from that volatile first few years of existence that one could say the real fight begins.
 
Indeed, one could say that if the first three years are the hardest, the next five will definitely be the longest.
 
Abrar Hussain, Elixir’s managing director, agreed with the lack of growth equity funds active in this part of the world, but also sees it as a greenfield opportunity.
 
He noted that more often than not, it takes some time for a business to go from startup phase to be a target for a growth equity fund – enough time to create a viable business model, put the product on the market to get validation, and build a competent core team.
 
“The ecosystem in Malaysia has this; we have looked at over 50 companies in Malaysia over the past five months and we should be announcing a few things soon,” he shared.
 
Laying down growth pipes for the startup ecosystemAs helpful as the Government is in facilitating and funding companies in their ventures, internationally positioned private sector funding is the real ticket to accessing that global network of resources and contacts required to carve out an international footprint.
 
Indeed during the signing ceremony between Elixir and Mavcap, the latter’s chief executive officer Jamaludin Bujang (pic) said that the decision to partner with Elixir was based on the fund manager’s “extensive experience” in private equity society, as well as its “deep network” of fund managers and companies operating across the globe.
 
“We believe that its focus on growth equity investment opportunities is one of the best ways to provide exit avenues to our investee companies and give them exposure to a wider market, and thus command higher valuations,” he said.
 
When asked what Elixir looks for in potential investees, Abrar said that his team is “vertical agnostic” but focuses on four core fundamentals: Suitability to fund strategy, company fundamentals, their potential value-adds, and exit opportunity.
 
What should growth-stage startups know before they begin looking for funding? Abrar had this to say:
 
“Remember that investment funds are not ‘permanent’ capital – we invest with a target return in mind. Entrepreneurs looking for growth capital should be able to clearly articulate how much money they need, how it will be spent, and what sort of growth it will lead to within three to five years.
 
“They should be able to back up assumptions regarding growth and scaling the company. And, remember that most investment funds are targeting at least a 3x to 5x return on invested capital so their growth plan should try to articulate that.
 
“It’s fine to include inorganic as well as organic growth,” he said. 
 
So hang in there dear entrepreneurs, for the pipes to growth are being laid down as we speak, waiting for you once you’ve proven that you are ready for a global stage.
 
This column originally appeared in the Metro Biz section of The Star and is reprinted here with its kind permission.
 
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Disrupt: More success stories needed to plug funding gap
 
Malaysian VCs invested US$80mil in 2013
 
Launch of MaGIC ignites slew of partnerships
 
Week in Review: We need to get behind the MaGIC CEO
 
Angels with pitchforks, VCs who don't venture
 
 
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