A guide to crowdfunding, venture capital and angel investors

You might have the best business idea, but without adequate investment funds, it will be very hard to get your company off the ground. Only a few banks in Malaysia are willing to lend to start-ups, and that leaves many entrepreneurs with limited sources of investment. However, with a knowledge of alternative financing options like crowdfunding, peer to peer (P2P) lending, Venture Capital and Angel Investors, you might be able to access the cash you need to succeed.

The good news is that the government is doing a lot to support Malaysia’s small businesses, and the Security’s Commission has now approved a total of 12 platforms for equity crowdfunding and P2P lending (just two of the various forms of crowdfunding investment options). If your company is looking for investors, these new sources of financing might just offer you the support you need to turn your idea into a thriving business.

Let’s look at the five main sources of alternative funding for Malaysian businesses that are available today:

What is crowdfunding?

Crowdfunding is a way of raising investment into a business or project which uses online platforms to promote the concept and raise funds. Crowdfunding websites, like Kickstarter, support crowdsourcing investment into your business. As opposed to traditional lending from a bank where you’d receive a large lump sum from one provider, crowdfunding platforms allow many investors to contribute to your business.

Methods of crowdfunding

There are numerous crowdfunding websites where you can promote your business or project. Different crowdfunding platforms will be appropriate for different kinds of projects. Here are the three main methods of crowdfunding:

1. Equity Crowdfunding – Equity crowdfunding is most often used by businesses and start-ups to raise serious funds. When an investor decides they like your project they will normally invest a larger sum for some equity in your business, which they hope will give them a return once your company grows.
2. Rewards-based crowdfunding – Reward-based crowdfunding tends to be used for smaller projects – often arts and culture initiatives such as funding for a film or an exhibition. People will provide money but will not expect a cash return – the reward will be something like a free sample, or ticket to your event.
3. Donation-based crowdfunding – This is typically for charity activities or can sometimes be used for educational purposes. Donators are not expecting to be rewarded financially at the end of the project but donate because they are passionate in your cause.

What crowdfunding websites are available?

Malaysia’s crowdfunding scene is still relatively young, as platforms only really became available in 2012. Nonetheless, interest in, and awareness of crowdfunding has grown and there are now a range of websites on offer.

For rewards-based crowdfunding, Kickstarter remains the best-known crowdfunding platform worldwide. Nonetheless, there are other options beyond Kickstarter in Malaysia, including homegrown and PitchIN:

• Kickstarter
• Indiegogo
• PitchIN

For equity crowdfunding and debt-based crowdfunding, the Securities Commission has approved six platforms for the Malaysian market:

• FundedByMe (Alix Global)
• Ata Plus
• Crowdo
• Eureeca
• pitchIN
• Crowdplus

Donation-based crowdfunding websites in Malaysia include:

• Give.my
• 100PercentProject

How does crowdfunding differ from P2P lending?

Peer to peer lending is another way of finding finance online by promoting your business on a platform. With P2P lending, you simply borrow sums of money from investors, and negotiate an interest rate which is usually lower than what a bank would offer. You then pay back your loan and the interest over an agreed time.

Equity crowdfunding is often ‘all or nothing’ for the investor: if your company is successful they hold shares and stand to get rich quick. But, if your business fails, they lose all their investment. By contrast, P2P lending is a less risky investment – the lender normally has a guarantee that they will get at least some of their money back should you fail.

The Securities Commission has approved 6 peer to peer lending platforms in Malaysia:

• B2B FinPAL
• Nusa Kapital
• FundedByMe Malaysia
• QuicKash
• Fundaztic
• Funding Societies

What business loans are available?

P2P lending and crowdfunding websites tend to cater for investors who are interested in high returns on their investment. But if your firm doesn’t plan to be the next big Malaysian tech start-up, there are plenty of alternative small business loans and grants you can apply for.

• Personal loans – Borrowing money from friends and family who trust you can always help get your business off the ground – although the risk is that if you fail, there could be negative repercussions in your personal life.
• Small business loans from regular banks – If your small business is a few years old and has a good financial record, you may be able to access small business loans from a bank.
• SME Bank loans – SME Bank is a bank focused on supporting small businesses and is wholly owned by the government. Its purpose is to provide start-up business loans and micro loans.
• Government grants – The government’s SMECorp website provides a wealth of info on start-up grants and how to apply for them – but beware they often come with a lot of bureaucracy attached.

What is Venture Capital?

If your business is already well established or your product is close to being complete, Venture Capital (VC) can provide you with the funds you need to go to market and expand. You will need to approach a venture capitalist firm who will study your business plan and your forecasts and then decide if they want to invest in you.

A VC company is normally a highly professional organisation and they will want to see proof of your claims. They will almost always demand shares in the company, a seat on your board and influence in the direction of the business. Working with venture capital firms therefore means you give up some control of the company – but you also have the potential to accelerate your growth fast.

Finding Venture Capital funds

If you decide to go down the VC route, here’s how to find the right firm for your business:

• Research venture capital companies by their area of specialism
• Visit their websites and explore their portfolios to find if they work with companies like yours
• Create a shortlist of VC businesses to approach
• Approach them one by one with a personalised pitch
• Provide a short but compelling description of your business, a one-page summary or video and detailed business plan
• Prepare thoroughly for a pitch in person

Here are some of the biggest venture capital companies in Malaysia:

• Malaysia Venture Capital Management Berhad
• Navis Capital
• Khazanah Nasional

What are Angel Investors?

Angel investors tend to be wealthy individuals or consortiums of investors who take a personal interest in your start-up and will provide funds and advice to get you going. Depending on your relationship with your business angels, they may want equity in the company and a seat on the board, but they may also be happy to simply provide funding and advice with no expectation of return. You can approach an angel investment network via crowdfunding websites, attending networking events or by approaching a start-up incubator.

Choosing the right business funding for you

The recent growth in alternative business financing sources opens a wealth of opportunities for Malaysian start-ups and small business owners. You are no longer dependent on having a high interest bank loan – all you need is a good idea, a great pitch and a knowledge of the right alternative funding solutions for you.

So, if you’re struggling to find traditional business loans to start up your passion, don’t give up on your dream, instead take a look at all of the above options to see if they can help you on your way.

*At Sage, we advise that you should be aware of all the risks associated with the different funding models, and seek advice from an independent financial advisor if you have any doubts.