Elixir Capital sees poor understanding about growth equity in Asia
Fund invests to scale business model, not take business model risks
IN the last nine months, the team from San Francisco-based equity fund Elixir Capital have gone through almost 200 companies from Malaysia, Singapore, Indonesia and the United States, conducting due diligence on a fraction, offering term sheets to fewer than six, and about to announce its first investment within the next two weeks.
Its managing director Abrar Hussain couldn’t be happier – especially since he claims that the announcement of the first deal will be the trigger for Elixir Capital to “consistently announce new deals.”
The first deal will involve a US company in the big data and analytics space for the agriculture sector. It will be a significant investment into a company whose product Abrar describes as being “truly a game-changer in Asia.” The investment will be made through ECM Straits Fund as the lead investor.
Elixir Capital, together with Malaysia Venture Capital Management Bhd (Mavcap), officially launched the ECM Straits Fund in April 2014 with US$50 million (RM160 million), which targets a gap in growth stage investing in Asia, and South-East Asia in particular.
Mavcap is the cornerstone investor with US$25 million (RM80 million).
Elixir Capital however started meeting potential companies from November 2013, when the agreement was initially inked, with some fine-tuning that finally got ironed out in April.
Aside from Abrar (pic above, centre), Elixir Capital’s key management consists of cofounder and managing director Arshad Ahmed (pic, right), and managing director Amir Azahar (pic, left).
A former senior vice president of Mavcap, Amir runs the Malaysian operations. An office in Jakarta is about to open to give it better visibility into the opportunities there.
While delighted with the opportunities they see, in the process of meeting the various companies and investors, Elixir Capital has also come across an unexpected challenge – one that strikes straight at the heart of what it is doing: Growth Equity, which has even been a deal-breaker in some cases.
This has to do with Asian-based investors’ lack of understanding over what growth stage investing actually is, Abrar tells Digital News Asia (DNA) in a recent interview.
“For instance, there seems to be a belief that growth stage investors come in at a pre-determined valuation, but that is not always the case,” says Abrar, who also finds that early stage companies in Asia have raised money at too high a valuation. “I am seeing a lot of that.”
This in turn makes it tough for Elixir Capital to invest when it comes in and does its exhaustive evaluation, which includes speaking to customers, assessing the corporate and marketing strategies, and assessing its own possible exit strategies.
This lack of understanding also leads to the belief that growth stage investors will take common stock as the early stage investors have done the same. But Abrar is unequivocal in stating that growth investors do not take common stock. “It is completely not the industry practice.”
While he is confident that the market will quickly come to terms with how growth investors act, in the meantime, this lack of education has cost Abrar some deals, he says.
And it has also led to some entrepreneurs claiming that it is hard to meet his team and that they are even “arrogant.”
To which Abrar says, “We have met almost every single company that has emailed us, even those that we know don't fit the profile we look for. We are inherently picky, but that is just the nature of the business. And we will continue to be picky.”
It may also surprise entrepreneurs that Elixir Capital does not solely look at technology companies.
“We look at any company that is in the growth stage and needs funding to further scale its business model,” he says.
In addressing a gap, finding another
There is some irony here as while Elixir Capital and Mavcap launched the ECM Straits Fund to target a gap in growth stage investing, it has stumbled upon a gap in market understanding of what that actually means. “Even among the more sophisticated investors,” argues Abrar (pic).
The fundamental point about growth stage investors is that they look at three key features of any company. “The first is that they have already figured out the business model and need to raise money to scale that model,” he says.
And really, this is the biggest trigger point that growth investors look at. “We do not take business model risks, which is what early stage investors do,” says Abrar, adding that the funding a company has raised before is not contingent on it having solved this business model risk.
“It is never about the latter [funding round]. That does not matter. The key question is whether the company has figured out how to make money,” he says.
This then ticks two more boxes – that is, having a product in the market; and the product is making money.
In tandem with this is looking at the management team and gauging their capabilities to scale the business model, and having a strong plan in place to invest the money once it comes in.
One interesting point about the management teams of the Asian-based companies that Elixir Capital looks at is whether they can unite existing investors to a common vision. This requirement arises from the unique nature of Asian companies, which Abrar finds tend to have many investors.
“It can be a problem as each of them will have their own idea of the direction of the company. It will be hard for the company to seize any opportunity if it has this disorganised approach, which is why we look to see if the entrepreneur can unite his investors under a shared vision,” he says.
This, in essence, is how growth investors such as Elixir Capital look at companies. The fund, with a target of US$150 million (RM480 million), represents the first of the partnerships targeted to be signed under Mavcap's third Outsourced Partners Programme (OSP3).
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