Depending on idea, market size, startup pre-valuations should be within RM5m to RM10m
Entrepreneurs seem fearful of being controlled by VCs, says Mavcap CEO
MOST of the companies Malaysia Venture Capital Management Bhd (Mavcap) has invested in since 2011 have been startups, and quite a few of them have failed, says its chief executive officer Jamaludin Bujang (pic).
But others have been doing well and he names a bioinformatics company called iGene that at least has a lot of activity going on around its Virtual Autopsy solution.
There is also a company in China called CMTS, the pioneer, largest software developer and provider of online cinema ticketing services in China; and Tripod Pictures, which has produced the steam-tech science fiction War of the Worlds: Goliath, an animated 3D movie.
Jamaludin goes on to name a few more, with 3Di being of particular interest as Mavcap invested RM22 million (US$7.2 million) there about three years ago and recently exited the company via a management buy-out or MBO. It was one of Mavcap’s largest investments and he admits, “a bit out of our comfort zone.”
Among the company’s products was 3D technology that did not need glasses. Ideal for game console companies, it was also a very tough market as it could only take off if a major game developer adopted its technology for its gaming consoles.
Mavcap’s comfortable investment amount is between RM5 million and RM10 million (US$1.6 million and US$3.2 million) and with an average of two subsequent follow-on investments.
Jamalaudin says that typically a venture capital (VC) firm will limit its exposure to any company by capping its maximum investment to between 10% and 15% of its total fund size.
Asked about his biggest issue with entrepreneurs, he says it is on valuation or rather over-valuation. “Entrepreneurs are not equitable enough when they ask for money. Chances are they only want to give up between 20% to 40% of a company but this is not always correct as the chances are also high that they cannot deliver on their financial projections in the first three to four years,” he says, adding that it would be a welcome change if they could be “more realistic.”
Jamaludin thinks one of the reasons that entrepreneurs are reluctant to give up a higher stake, even a majority, is the fear of being controlled by the VC, but he says this is not always the case.
“The VCs obviously do not want to run your company. But they do want to exit at some point and when that happens, they will likely sell the stake back to the entrepreneur,” he says.
Unfortunately, most entrepreneurs do not see it this way, hence their need to control a majority stake with the rest given out in exchange for their valuation of the business. “This is actually not good however, as I find it very hard to justify their valuations, especially when they have no revenue.”
Jamaludin feels that pre-valuation of a start-up should be between RM5 million and RM10 million, not RM30million! “But this again depends on how good the idea is and the market size.”
He also feels that having family members on the board is not a good idea for a startup and says Mavcap has imposed the condition against this on entrepreneurs who want funding. Surprisingly, Mavcap has had offers for funding rejected by entrepreneurs when it comes with this condition.
He observes that often the success of a company is down to the resourcefulness and drive of the entrepreneur, and the desire to build the business beyond Malaysia. “You have to grow beyond Malaysia and we are also looking for entrepreneurs who can enter foreign markets very fast.”
Digital News Asia asked Jamaludin about Leon Tan of Tripod Pictures who has been relentless in his use of social media to promote the upcoming launch of his movie, War of The Worlds: Goliath (click to check out the trailer).
“It is difficult to find many entrepreneurs like him. I find Tan to be very driven, he is very much into what he is doing and this is good for us! He wants to prove himself and is brave. He talks to people in the industry from all over the world to promote his project and they say good things about him too.”
For Jamaludin, who is approaching his first year at the helm of Mavcap come November, he will be hoping the players in the ecosystem say good things about him and the role Mavcap is playing too.
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