Advertisement

Venture capital and equity crowdfunding are gaining more acceptance among small businesses as credit gets tighter and word spreads on the upside to these alternative sources of funding, writes JOY LEE.

WITH credit expected to get tighter this year as the economy slows, more and more small and medium enterprises (SMEs) are warming up to the idea of alternative financing.

Secretariat for the Advancement of Malaysian Entrepreneurs (SAME) CEO Neil Foo noted that the awareness level on alternative funds among SMEs was increasing, resulting in more companies looking into such options.

Small businesses have generally been hesitant to explore alternative financing, such as those offered by venture capitalists (VCs), as they require business owners to give up a portion of their stakes in return for funds.

 

According to investors, VCs are looking at holding a minimum of 30-40% stake in companies that they are investing in.

Foo said most were also concerned that these new investors might interfere in the daily operations and management of their business. This was not necessarily the case, he pointed out.

“Investors with minority equity will mainly act more as a mentor for SMEs,” he assured.

“They would be able to advise on marketing strategies, systems and can offer SMEs access to their networks.

“SMEs are more open these days to alternative financing such as VCs, and more small businesses are becoming aware of this concept with the dissemination of information through financial roadshows, our talk programmes, as well as SAME VC programme,” he added.

DOERS Knowledge Management Group Sdn Bhd business development director Ken Choo concurred, noting that SMEs were no longer just looking for money but were also seeking strategic investors who would be able to add value to the business. The right investors would certainly give the company a boost.

Notably, the Government has acknowledged the importance of developing alternative funding for small businesses. The revised Budget 2016 saw a RM6bil increase in funding to state-owed development financial institution and venture capital funds to provide financing specifically to SMEs and startup companies.

Although VCs tend to prefer investing in startups with high growth potential, Foo said they were also looking into other business sectors.

“VCs are interested in high PE (price-earning ratio) for ICT companies such as apps businesses. But now, VCs are also expanding to other areas such as F&B companies which can multiply with chain shops. Even housing developments are being considered now,” said Foo.

Alternatively, SMEs can opt to apply for loans with development financial institutions like SME Bank and Credit Guarantee Corp (CGC), and more recently, equity crowdfunding platforms.

The main problem for most SMEs in obtaining funds, however, is the lack of a convincing business proposal, according to Foo.

SAME recently organised a business proposal seminar to address the challenges faced by SMEs in generating good business proposals and offered possible solutions to resolve their financial constraints.

Some 150 participants had the opportunity to learn writing skills and techniques to ensure minimal rate of rejection when applying for loans.

The panellists for the seminar included former director of development banking and liaison for SME Bank Asbullah Adnan, SAME advisor and UniPacific Corporate Services executive director and CEO Peter Phang, Propellar Crowd+ chief operating officer Bryan Chung, and DOERS’s Choo.

Asbullah noted that statistics showed only 7% of proposals for loan get through. Proposals are rejected mainly due to non-compliance with guidelines and what is perceived to be projects that are not viable, among other things.

For equity crowdfunding, Chung said it was important that a business proposal was positioned to address a need in the market.

“The power of the funds is in the hands of the crowd. As long as you can convince the crowd, you can get the funds.

“Your proposal has to be concise with relevant information. It has to be something that strikes a chord and not just mere compliance and standards,” said Chung.

 

Source - http://www.thestar.com.my/metro/smebiz/news/2016/02/22/alternative-financing-beckons/