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Can equity crowd funding and angel investing co-exist?

By Razif Abdul Aziz

 

As ECFs and angel investors both come up with the funds , clearly entrepreneurs will be the clear winners. — 123rf.com

As ECFs and angel investors both come up with the funds , clearly entrepreneurs will be the clear winners.

 

It’s quite possible, considering how ECFs present angels a safe and convenient platform to start their investments.

LAST February, the Securities Commission (SC) released the Guidelines on Regulation of Markets under Section 34 of the Capital Markets and Services Act 2007, resulting in the birth of equity crowd funding (ECF) in Malaysia.

In addition, the SC also announced six ECF platforms authorised to operate in this promising new space, namely FundedByMe (Alix Global), Ata Plus, Crowdo, Eureeca, PitchIn and Crowdplus.

Following hot on the heels of the introduction of angel investing in 2012, ECFs present start-ups and small enterprises with another funding option beyond that of friends and family, angel investors, venture capitalists and Government grants. Its introduction is significant in that the expectation of continued Government support for early stage funding, while still strong, is unlikely to continue indefinitely. The introduction of options such as ECF as the market matures, widens the options available and allows entrepreneurs to match their fund raise requirements according to the relative virtues of each option.

The primary benefit of ECF is that it gives startups the access to capital they would normally not have access to due to their lack of a track record and/or revenues, which are traditionally required by conventional funding methods.

In a nutshell, ECFs allow start-ups to obtain small equity investments from a large number of investors, or by the so-called “crowd”, with the entire process facilitated over an online platform.

Some have described ECFs as “democratising” the capital raising process, allowing access to a space that is normally preserved for the larger and more established companies. In the words of a now-familiar tagline — “now everybody can raise capital”.

Presently, those permitted to invest on an ECF platform are retail, sophisticated and angel investors. Retail investors are limited to investment amounts of RM5,000 up to a maximum amount not exceeding RM50,000 in a year. Angel investors meanwhile, are allowed up to a maximum of RM500,000 in a year while sophisticated investors have no limitation imposed.

In some ways, ECFs present similar opportunities to that of angel investing. They are both dilutive in nature whereby funding is provided in return for an equity stake, relevant in the early stages of a startup’s development, and the amounts raised are relatively small.

If they present similar opportunities, the million dollar question would be – wouldn’t one displace the other? Trawling the Internet, you will be greeted by loads of articles examining how ECF may ultimately displace angel investing and/or venture capital. While I do not profess to be an expert in this space (least of all in venture capital), I feel that angel investing and ECF can co-exist, and are in fact, complementary.

I make this conclusion subject to a few caveats. Firstly, unlike in more mature markets such as the United States and Europe, angel investing and ECFs here have been introduced at relatively the same time. In the markets above, angel investing has had time to grow and mature before the advent of ECF.

Here, we have the unusual privilege of experiencing both at the same time. Secondly, these are early days and only time will tell which method will gain over the other. Finally, my view is Malaysia-specific, given the characteristics of the market as we know it today.

Angel investing and ECFs are complementary, based on the premise that ECFs present an easy and convenient way for angel investors to get their “feet wet”. Given that a large number of angels in Malaysia today are new to the space, ECFs present them a safe and convenient platform to start their investments.

Additionally, they have the support of the ECFs machinery, which includes access to the start-up’s disclosure documents covering key information such as business plan and financial information. Much of the heavy lifting has been done by the ECF operators. This allows the angel investors to focus only on the investment decision itself.

Beyond just convenience, it also helps towards building confidence. The angel investors get familiar with the investing process which prepares them for the time when they are able to “go solo” in a more conventional angel investing scene.

Another reason is deal flow management which ECFs aggregate deal flow for their investors. It’s practically a given that every ECF operator will identify, select, curate and, to some extent, prepare worthy startups for issuance on their platforms as nobody wants a dud.

Every startup they showcase would have gone through some selection process to ensure a successful fund raise. Angel investors, therefore, have another credible deal flow source they can tap on, saving them time and effort.

For angels who are inclined to avail themselves to the angel tax incentive offered by the Government, ECF platforms provide a seamless process that help them prepare for the same. In fact, many of the requirements governing angel investors investing in ECF platforms already take into consideration the tax incentives requirements. A major plus for an angel investor.

ECFs also do a lot of investor events that are designed not only to showcase prospective issuers, but also create awareness and build “capacity” amongst investors, angels, retail investors and institutions alike which gives additional networking opportunities. With free movement between the 6 ECF platforms allowed, angel investors to be spoilt for choice in this respect.

Given the foregoing, it’s not hard to see the complementary role ECFs could play in the development of the angel investing space in Malaysia. It is possible (and I am hopeful) that ECFs become fertile recruitment ground for new angel investors. From the ECFs perspective, angel investors are expected to play an anchor role (together with sophisticated investors), especially in the early days as there is an expected lag in the buildup of the critical mass of retail investors as ECF is introduced to the market.

The Malaysian Business Angel Network (MBAN), the official trade association representing angel investors in Malaysia, has taken the position to advocate the introduction of ECFs as a positive compliment to angel investing as a whole and actively supports all six ECF platforms in its activities.

While the jury is still out on how the landscape will eventually develop, clearly entrepreneurs will be the winners. It is my sincere hope that we will continue to write our own story in terms of how the startup eco-system here in Malaysia develops, charting our own course and writing our own success stories that are unique to Malaysia and Asean.

 

razif

Razif Abdul Aziz is Chief Operations Officer of Cradle Fund Sdn Bhd and Executive Director of the Malaysian Business Angel Network (MBAN).

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