Close

19/07/2017

Your Ultimate Guide to Startup Financing in Malaysia

Startup Financing in Malaysia

Ample startup financing sources in Malaysia, yet many hit roadblocks in accessing capitals and support.

Everyone wants to start a startup. It is cool and exciting. However, there’s a huge challenge in running a startup. In fact, nine out of ten startups will fail.

One key factor is the moolah—money, money, money.

Many startups failed to get sufficient finances to pursue their ideas.

In this context, let’s not look at all the other ways a startup may fail (which are many). So in this article, we’ll only focus on the financing aspect of your startup.

It is not just because startup funding is a long-term job for entrepreneurs. Where it is frustrating and irksome. But the lack of knowledge of financial planning and strategizing. Financing strategy is so critical to ensuring sufficient funds for your tumultuous startup journey.

Here’s the lowdown on startup grants and funding in Malaysia.

How Startup Funding Works

Before you seek for capitals, you’ll need to know the different stages and what each of them entails. Most financial aids expect something in return, such as convertible debt or equity, except for grants.

Pre-Seed

One of the earliest funding. Funds used for developing an MVP and building a core management team. Money is somewhat small but sufficient to expand your future funding opportunities.

Seed

A modest amount of capital for your early business processes. You have slightly consistent revenue by this point.

Funding now goes towards refining your product and any necessary marketing activities like market research. You may also be using the funds to develop your product for launching fully.

Early Stage/Series A

At this juncture, your startup is generating substantial revenue. You will potentially use the Series A funding for brand visibility, scaling your startup, and distributing your product/service.

The business risk involved is the highest here.

Later Stage/Series B

By this point, your product is stable in the market. You seek to grow your business to the next level.

Series B funding will help your company to scale up, deal with competitors, and gain a market share. Your goal is not just to break even but also to acquire net profit.

Later Stage/Series C, D, E, F

You’re seeking greater market share, acquisitions, or developing more products and services.

Typically, it’s the last stage of a startup’s growth cycle, right before an IPO.

But some startups go all the way to Series F while some got acquired. Some startups have identified and formed strategic alliances to create better business opportunity.

Regardless, it pretty much depends on your exit strategy.

Startup Funding Cycles

For context, here’s an overview of start-up stages and its correlated startup financing.

Every startup may vary. So this is just a guide using hypothetical startup stages.

startup grants and fundings: startup stages

Financing Methods for Your Startup

One of the primary reasons startups fail is their inability to raise capital. This is why your choice of funding method and strategy is so important.

There are various ways to secure finances for your business needs, and it’s not one size fits all.

Most startups tend to incorporate most, if not all of these methods.

Typically, the estimated number of startups seeking funds are:

  • 25% of startups get money from friends, family, and fools (FFF),
  • 2.5% will get angel funding,
  • 0.25% will get early stage VC funding, and
  • 0.025% will obtain later stage VC funding.

The common types of funding are described below.

Bootstrap

Bootstrap is an overused word in the industry.

But most people misunderstood the meaning. Some would say it’s the opposite of funding.

Bootstrap means using your resources rather than getting external help; meaning it is a type of financing but out of your own pocket.

Sometimes the best way to finance your startup is to do it yourself.

Using your savings means you only have yourself to answer to. You don’t have to worry about external interference. This also gives you larger profit margins.

Most of the time, startups have to bootstrap in the initial stages of their development. And they rely on the success of their product or services to bring in revenues and sustainability.

However, you almost always can’t scale fast enough without financial help from others.

The good:

  • Complete control and authority
  • Less money means more judicious problem-solving ideas
  • Will rely and focus on customers satisfactions more thus helping the business grow
  • Personal growth and stronger brand name

The bad:

  • Slower business growth
  • Unable to concentrate on the product/services with worries on runway
  • Demotivating for team and potentially drive them away
  • Potential debts

Grants

There are two types grants, government and private.

It’s a subsidy for your startups minus the hassle of repayment. But, in exchange, you have to deliver results. As such, many grants are driven by the government in efforts to boost the local startup ecosystem.

Some grants come in the form of coaching, i.e. Cradle’s Coach and Grow Programme, which expects your full participation. Some in accelerators, i.e. MaGIC’s Global Accelerator Program., which requires you to be onsite for a specific amount of time with allowance given.

The good:

  • No repayment
  • Possibly receive large amounts of money
  • Visibility and credibility for your startup
  • Learn and grow faster from industry experts

The bad:

  • Time-consuming research to write the proposal
  • Might have a long wait ahead of you
  • Stiff competition
  • Strict eligibility criteria
  • Strings attached, i.e. you can’t use the funds any way you like
  • Most are short-term grants

Equity Funding

Startups generally have multiple rounds of capital funding as it progresses and develops further.

In an equity funding round, you’ll receive money in exchange for shares of your stock. You could be handing over any percentage of your business depending on your startup valuation.

Where does equity funding come from?

1. Angel Investors.

“Angels are individual rich people,” says Paul Graham.

Could be your rich uncle.

No? Otherwise, you could look for one in an Angels Investor Network.

Angels may provide a one-time investment or recurring injections to support your startup through its killer early stages (the valley of death).

In return for the angel investments, they expect either convertible debt or ownership equity.

Angel investors tend to offer more favourable terms because their focus lies in helping startups pave a path for themselves. The amount they invest is flexible.

It could be a moderate amount to get the ball rolling, or it could be a more substantial figure. Typically, they range from US $25,000 to $100,000.

2. Venture Capitalists (VC)

Venture capital is a type of private equity. The fund is managed by fund managers of VC firms where they evaluate, provide and manage resources for startups that show high growth potential. Consequently, these funding companies invest in exchange for an ownership stake.

Commonly, seed-to-early-stage investors expect substantial decision-making power because they are taking higher risks in your idea.

The following are the general types of venture capitalists.

Micro VCs

Micro venture capitals emerged due to the funding gap between Angel and traditional VC. With relatively smaller fund size, angels invest in pre-seed startups.

Typically, micro capitals range from US $250,000 to $500,000.

Seed Funding Firms/Early Stage VCs

Money, given to startups at the beginning of operations or launch, and yet to reach commercialization and sales, is called seed funding.

For seed, fundings range from US $500,000 to $2,000,000.

Later Stage VCs

These VCs pump in more moolah. And typically offered to startups at commercialization, sales and growth, before IPO.

The estimated funding could range from US $2,000,000 to $10,000,000.

3. Equity Crowdfunding

A mention of crowdfunding would lead your thoughts to Kickstarter. It means taking a small amount of money from a large number of people. Usually done over the Internet. There are a few available in Malaysia.

The good:

  • Opportunity to get funds if all else fail
  • Do not need to give up a significant amount of equity (depends on the platform)
  • Online popularity or branding
  • Freedom to set own commitments

The bad:

  • Higher chance of failure due to potentially easy money, less focus on business plan
  • Risks of fraud on an unreliable platform
  • Works better for consumer products (not B2B)
  • Hard to set expectations

Types of Funding and Use of Funds

startup grants and fundings: funding types and purpose

What Startup Grants and Funding Options are available in Malaysia?

There are a fair amount of startup grants and funding sources in Malaysia. Shown below are some of the options.

Startup Grants and Funding Options

For grants as a financing option, we want to highlight Cradle Fund particularly. They are one of the most trustable grants and funding organisation. In the first quarter of 2017, their programmes underwent changes. Thus, we decided to bring it up here for you.

Cradle Fund

Formed by the Ministry of Finance (MOF) in 2003, Cradle Fund aims to fund the best and brightest tech startups in Malaysia.

To date, they have funded over 700 Malaysian tech startups.

Cradle’s impressive achievements and high commercialisation rate make them a legitimate and credible source of funding.

Cradle Investment Programme 300 (CIP300)

  • Funding Stage: Pre-seed
  • Objective: Provide a conditional grant and value-added assistance up to RM 300,000 to kick start innovative technology-based business ventures
  • For more info: Cradle CIP300

Direct Equity 800 (DEQ800)

  • Funding Stage: Seed
  • Objective: Provide funding to local early stage high potential tech startups
  • What they offer: Equity investment up to RM 800,000
  • For more info: Cradle DEQ800

Other Options:

Enterprise Innovation Fund (EIF)

Funded by MOSTI (Ministry of Science, Technology and Innovation) with an objective to encourage participation of micro-businesses and individuals. Also, they aim to promote technological innovation of new or existing products or services.

EIF offers the following over the duration of 12 months.

  • Up to RM 50,000 for individuals or sole proprietors
  • Up to RM 500,000 for micro or small companies

Soft Loan Scheme for Services Sector (SLSSS)

Funded by MIDF (Malaysian Industrial Development Finance Berhad)

Their objective is to provide financial assistance to new startups through loan up to RM 5 million with 5% interest (for non-SMEs).

The Golden Question:

Which is the better funding option for my startup?

Planning your startup capital is an intricate matter. You should ask yourself these questions.

  • What do you truly need? Is it money, coaching, network, branding or all?
  • Which party can provide you with the right type of assistance, funding or network?
  • Which venture capitalist has the best experience to scale my business?
  • What are the venture capitalists portfolio and accomplishments?

To make things easier, check out this guideline to plan your startup funding strategy.

Startup Financing Strategy

Remember: Raise for the right reason!

We hope this article has helped you in planning your startup financing strategy. Tell us your fund raising experience by leaving your comments below. Share with others your tactics.

Here’s the full infographic for your reference below.

4 Comments on “Your Ultimate Guide to Startup Financing in Malaysia

Neal Tee
21/07/2017 at 12:08 pm

Hi Shuant, this is Neal.
Your article is very helpful! I have been running a startup too, a service marketplace mobile app.
Feel free can exchange some ideas and maybe, I can learn something more from you!

Reply
Shuant Goh
21/07/2017 at 10:41 pm

Hi, Neal. I’m glad the article helped you. We strategically design this article for people like you, who needs a comprehensive guide to startup financing. However, do note that besides financing, there are many other tactics to ensure your startup stays afloat. Good luck and feel free to email me anytime. Would love to hear from you too.

Reply
deepak
21/07/2017 at 6:02 pm

Explicit well drafted

Reply
Shuant Goh
21/07/2017 at 10:42 pm

Thanks, Deepak. Feel free to share with whoever you think may need it.

Reply

Leave a Reply

Your email address will not be published. Required fields are marked *