Venture Cap : What entrepreneurs need to know

For technology companies and even dot-coms (yes, there are still such enterprises!), venture capital funding is like manna from the heavens. It is the closest to easy money these enterprises will find as there is no need for collateral. But VCs have to a large degree, skipped town. The Nasdaq crash last year, the effects which are still hurting the dot-com industry, made sure of that.

In a talk entitled "Raising Venture Capital in a Difficult Market: Overcoming the Challenges & Pitfalls" which was held recently in Kuala Lumpur, Celadon Capital Group founder and chief executive officer Nicholas Ashby points out "most of the VC funding now goes into existing companies." This is just another way of saying that VC funding is close to becoming an insurmountable barrier for many entrepreneurs in the world, let alone in Malaysia.

"The chances of getting venture capital funding are slimmer, with only between 2 to 20 percent of dot-coms receiving funding now," estimates Ashby. "This figure would be far lower if you are not in a 'sexy' sector." He adds that the number of successful funding deals has also halved, with once popular acronyms like B2C, B2B fading into the sidelines.

VCs following market trends

3Capital.com chief executive Sivapalan Vivekarajah agrees. B2C, B2B, marketplaces, exchanges, are all out of favor right now, he explains, mirroring what is happening globally. Venture capitalists are also caught up in the fervor of market trends where funding for certain sectors experience an explosion and then plateau. According to Ashby, it all started with the B2C model, followed by B2B, information exchanges, wireless technologies, broadband and finally at the last count, optical networks.

"The VC window has really shut down ¡K I feel sorry for local entrepreneurs. These days, for a company to get funded, it takes at least 6 months when during the good days, it was only 2 months in Malaysia," Sivapalan says. VCs are extremely tight-fisted and for good reason too; they want to get rid of half-baked entrepreneurial ideas and just concentrate their limited resources on good businesses with a clear path to profitability (P2P). "They want to know who your potential customers are, details about your market segment, how you are going to make money and details about your rivals, if any."

It is back to the Old Economy. VCs will not swayed by giddy talk of quick profits either. They want to see real growth and a positive cash flow situation within a set period, Sivapalan says. And when it comes to local entrepreneurs, he says their offerings are still limited and not enticing to VCs as their businesses still have a problem penetrating regional markets. "A lot of Malaysians don't know how to market themselves outside the country," he says adding when it comes to regionalizing, only two local Internet companies comes to his mind--Jobstreet and Asiatravelmart.

Only profitable companies need apply

Venture capitalists are now only interested in companies that are already profitable. Ashby says the practice now is that VCs are consolidating their funds and efforts into their existing investments. No surprise there, Sivapalan says, as VCs have to pump in more funds into existing investments that are having a bad time, in order to stem the bleeding, in this context, the burn rate.

"That's another reason why the window is small as VCs have more on their plates ¡K they have to spend more time strategizing with the dot-coms and even doing business development for these companies," he adds. "Unless there is enormous value straightaway, they've got no time for new enterprises as it is a strain on their resources."

Another reason why VCs are more likely to focus on companies they have already funded, trying to make these entities lean but good businesses in an unforgiving environment. "Most of the funding goes into existing companies," Ashby says.

Safety in numbers

Another trend in evidence now due to a harsher climate, is that VCs would rather not go in alone in a funding; they are more likely to go into the market with an average of three investors instead of one lead investor. Entrepreneurs also face a lot of uncertainty as VCs may actually be "window shopping" and not really keen on doling out funds. Hence any budding entrepreneur needs to be tenacious and keep plugging their ideas to the money men.

Ashby stresses entrepreneurs have a higher probability of getting more than their foot in the door, if they keep the whole pitch simple. "They need to have a simple organizational structure, keep their business plans simple ¡K in other words, don't go into micro details which may invite more questions," he says. But being simple does not mean skimping on the value propositions of a venture; they must have realistic assumptions, a good profit projection and a clear idea on how the business plans to utilize funds.

Venture capital is a prized asset with so many players scrambling for a steadily shrinking pile of money. In Malaysia, the fever seems to have cooled off considerably; this is not surprising due to the relatively low Internet penetration rates, with only about 1.89 million Internet users in the country by the end of 2000, according to International Data Corporation (IDC) figures. But all is not lost yet. There are many areas of business still untapped, especially in the small and medium enterprises (SME) sector where there are ample opportunities for the local entrepreneur to use technology. It's not going to be an easy ride but a pot of gold awaits those who stay to fight the good fight.