Start-ups lack solid fundamentals to attract funds

The lack of tangible fundamentals hinders startups from accessing grants, seed capital and loans

by SHAHEERA AZNAM SHAH / Pic by BLOOMBERG

START-UP firms’ lack of solid fundamental business principles and practices is creating risks that contribute to restrictive access to funding in Malaysia.

Malaysia Debt Ventures Bhd (MDV) business and technology advisory VP Zuhry Rashid said the lack of tangible fundamentals in the start-ups’ business model poses risks for investors, which hinders start-ups from accessing grants, seed capital and soft loans offered by venture capitalists and local government agencies.

“The business structure of start-ups is quite complex for agencies to understand as they involve emerging technologies. They are also often built on intangible business models that are mostly digital in nature with no asset backups.

“Their ability to generate revenue without seeing much fundamentals is where it gets complicated,” he said during a webinar on “Financing The Future: Investing in Creating and Building Digital Business Models” conducted by Cyberview Sdn Bhd.

Zuhry said in more matured markets such as the UK and the US, funding activities for start-ups are more vibrant as their business structures are more established.

“MDV has strategically positioned itself to enable financing for start-ups that are able to imitate what we see in Western markets.

“These start-ups need funds to reach their next milestone, but there is always a concern of liquidity. We have a bit of flexibility in terms of growth capital.

“But to reach their next round of financing, companies have to look at their equities and present a higher valuation,” he said.

Zuhry said while Malaysia has been producing numbers of successful start-ups, funding gaps remain a visible issue in the local ecosystem.

The e-Conomy SEA 2019 report produced jointly by Google LLC and Temasek Holdings Pte Ltd noted that the lack of homegrown unicorns contributed to the slowdown of funds for Malaysian digital companies.

The first half of 2019 (1H19) saw a significant drop in the number of deals concluded to 59 deals worth US$140 million (RM573.62 million) from 83 deals amounting to US$200 million done in 1H18.

According to the Malaysia Business Angel Network (MBAN), 2018 saw only 18 successful pitches accepted from 79 submissions compared to the previous year where 22 out of 105 pitches were accepted. Zuhri said the financing gap is less visible currently due to the relief funds issued by the government to assist local businesses in mitigating the impact of the Covid-19 pandemic.

“In terms of the current situation, we are seeing a lot of positive traction. The companies are able to secure new rounds of funding and a lot of investors are back into the market as they are looking at alternative assets,” he said.

Zuhry said working capital requirements had to be revised during the pandemic as some startups had to reduce headcounts and opt for salary cuts to maintain their operations.