Despite having the word ‘debt’ in its name, the Malaysia Debt Ventures Berhad is actually here to help ICT players grow
Malaysia is not short on initiatives involving the Information and Communications Technology (ICT) sector, where a dedicated programme – the Multimedia Super Corridor (MSC Malaysia) – was launched in 1996 to accelerate the growth of the country into a developed nation through initiatives by the Multimedia Development Corporation (MDeC). Since the programme’s inception, we have seen the sector growing leaps and bounds. A continuous increase in the number of ICT players in the market is a testament of the country’s push towards these goals. While the industry is one that is thriving, it is not without its own trials and tribulations. From the very beginning, the government had awarded contracts to companies for projects under the seven flagship applications of ICT. At the time, it was difficult to secure funding from existing financial institutions because ICT was in its early stages – banks were more comfortable with traditional sectors such as agriculture, hotels, manufacturing and shipping. Therefore, access to conventional funding schemes was limited for the ICT players. “It’s ironic that people should say that the ICT sector is thriving; banks used to fear and avoid issuing loans to such companies,” says Datuk Md. Zubir Ansori Yahaya, Managing Director & Chief Executive Officer of Malaysia Debt Ventures Berhad (MDV) reminiscing on the early ICT days. “They (banks) were still focusing on the agriculture sector when MSC Malaysia was launched. It then moved towards the industrial sector and later on, ICT. Banks have always lagged in terms of trying to appreciate the kind of sectors they have to fund, especially when the sectors are new.” True, there are programmes that delegate grants to deserving businesses, such as from the Cradle Fund, but what happens when these businesses would like to grow their footprint even further? Business Today sits down with Md. Zubir to further delve into the many reasons why conventional banking may not be the best route for technopreneurs, and how MDV can help fill this obvious gap in ICT financing.
According to Md. Zubir, the whole financing eco-system of Malaysia already comes in a complete package, where we have agencies and corporations helping businesses from all sectors. Specifically in the ICT sector, companies can apply for grants from the Ministry of Science, Technology and Innovation (MOSTI) if the company wants to do Research & Design (R&D) or technology acquisitions. Should you be a start-up with young, vibrant IT guys, you can even apply for seeding funds – a form of grant – from the Cradle Fund. “If you are at an early stage or a start-up and want to develop some new products, lending is not the best option. Grants are more important for these businesses,” says Md. Zubir. “As the company develops to a stage where people can see the opportunities and potential of the business, this is where venture capitals (VCs) like Malaysia Venture Capital (MAVCAP) comes in.” He further explains that there are virtually close to 50 VCs operating in Malaysia (the exhaustive list can be found on the Malaysia Venture Capital Association’s website), with a number of them inactive. In fact, Md. Zubir believes that VCs are good for businesses as funding comes in the form of equity. From there on, once a business can reach the stage of commercialisation and see potential revenue coming in, this is when they supposedly approach banks for financial assistance. “However at this stage, banks may not be ready to fund them. As I said, banks will very likely fund strong companies. MDV is positioned ‘after VCs’ and ‘before banks are ready to finance’ – this is our sweet spot,” he shares.
COMPLEMENTING THE ECO-SYSTEM
There is no denying that the funding eco-system in Malaysia, especially the one provided by MDV, is essentially complete. The questions now remains to be “how good is the product you have?” and “what stage are you in now that qualifies you for funding?” The growth cycle for technology companies is very steep, where a large number of them do no survive and pass the ‘valley of death’. “The S-curve growth for ICT players is a natural filtering system for the sector. If the product is not good or you just have an idea but do not expand on it, you will not survive,” opines Md. Zubir. He shares: “The ones that pass the ‘valley of death’ are very little. Out of 100 companies, maybe only 10% passes it. Most times, the excess 90% are the ones complaining that there are no funding.”
MDV’S DUE DILIGENCE
For many conventional banking institutions, the ICT sector is one that is of high risk: Md. Zubir explains that “banks cannot see what they are funding, as most of the assets are intangible.” Therefore, the resounding call to have a specialised, niche financier to help the ICT sector grow could not have been louder at the time. It was not until six years after the launch of MSC Malaysia that MDV came into the market, as a wholly-owned company by the Ministry of Finance Inc., to help the government spur the sector’s growth in the country. “We could not afford to follow the same processes adopted by traditional banks because they depended a lot on hard collaterals and tangible assets, such as equities, strong balance sheets and track record,” opines Md. Zubir. “In fact, we needed to be different, so MDV focuses on the strength or viability of the company’s projects. That’s why during our due diligence, we focus on five factors before approving a business, namely factors on management, technical, finance, legal and collateral packaging.”
The biggest asset of an IT company is the people running it. A recurring trend in the sector is the fact that a majority of talent working with strong ICT companies are very young and have a lot of creative ideas. Unfortunately, in the eyes of financial institutions, they do not have strong collaterals. Shares Md. Zubir: “For MDV, we look at the strength of the people involved in the company. It doesn’t matter if you are a fresh graduate or have been in the industry for a long time; as long as you have a solid business acumen. That said, the longer a company has experience in IT or its related projects, the better the score (MDV’s valuation) they will receive.”
According to the affable MD/CEO of MDV, the corporation is not interested in funding “sunset” technologies, as it would like to look into helping those who are strong in innovation. “Being able to keep up with the trends is important – we want technologies that are up-to-date. Similarly in the new ICT areas such as green technology; take biomass for example. If it’s just about burning waste, there is not much innovation to it and neither is it very efficient,” says Md. Zubir. In essence, all the projects or companies backed by MDV needs to have scalability with future opportunities as it “would like to also fund advance technologies that are not yet available in Malaysia.” Relating back to the people element of its scoring system, the companies should also have strong knowledge and know-how to carry out these projects. “If you are coming to propose that we fund you, we would very much like to see if the company is capable of doing the job. We want to see what is in your portfolio as well,” he adds.
Of course, before approving a business for funding, MDV will need to examine its current cash flow and whether the business’ offering is viable in the market. In a number of cases, despite having a huge market, Md. Zubir relays that penetrating into it is another ball game altogether. That said, small businesses should not shy away from seeking financial assistance from MDV. “You can still be a start-up and apply to MDV, as long as you can demonstrate that you have projects under your belt. In fact, we welcome small companies. That is why we have a special package called the Small Contract Financing for loans from RM250,000 right up to RM2 million (mn),” says Md. Zubir. “This scheme is really popular with smaller companies with small contracts, and they need financing.”
On the legal front, MDV will help businesses inspect the kind of contracts received. “If you have a contract, we want to know whether the contract is legitimate and if they are good for the company’s growth,” he explains.
When most companies approach banks, the latter will check on the company first. In MDV’s case, it will do its own “background check” based on projects and package them into soft collaterals, including personal/
corporate guarantees, ventures and assignment of proceeds. Md. Zubir shares: “To this end, we control their transactions and receipts as this is one of the characteristics of a venture company. As a venture debt business, while we fund a company at a very early stage, we also control the expenses and proceeds. The balance, we refund to them. It’s a cash flow financing, even your drawdowns and proceeds are based on your milestones.”
MDV’S SUCCESS STORY
With all the right criteria in place, where businesses that have successfully navigated through the growth curve, will find that there are people who are willing to fund your success. “The sentiment is true for MDV. We
have many clients that have ‘graduated’. They took on our scheme for the first phase; and now moving to their second and third, they are now ready to approach conventional banks. It goes to show that these companies are now strong enough to be eligible for bank loans,” says Md. Zubir. Having said that, there are many companies that still come back to MDV as they’ve enjoyed the many benefits provided – some even come back more than a dozen times despite the higher interest rates. The secret? MDV has many success stories under its belt, where it has grown small businesses to big corporations that boast of 25 times turnover compared to when they started. In fact, many of them feel comfortable in continuing the relationship with MDV. He concludes: “We have no qualms about it (financing both one-off and repeat clients). It is in our mandate to provide such a service or platform to the thriving ICT players in Malaysia.” This is surely a testimony of MDV’s success as many clients, new and old, continue to knock on its door.
MDV’S RM200MN INTELLECTUAL PROPERTY FINANCING SCHEME A GAME CHANGER FOR SMES
Following the disbursement of RM6.35bn in financing to more than 450 companies, in which 75% of them are SMEs, MDV is now moving forward by allocating RM200mn for Intellectual Property Financing Scheme (IPFS), to support the nation’s technology outline and increase Malaysian technology companies’ prospect of success. Chairman of MDV, Tan Sri Zarinah Anwar says: “The scheme will be of particular assistance to younger and smaller technology companies, especially SMEs for whom Intellectual Property (IP) is typically their most valuable asset. They can now monetise their valuable IP by utilising it as collateral to secure up to RM10mn in financing from MDV.” Md. Zubir adds: “The IPFS will be a strategic game changer for SMEs in managing and validating their knowledge assets that will be one of the key initiatives towards Malaysia as a high income nation as well as raising the bar in the Global Innovation index. MDV is honoured to be entrusted by the Government to spearhead these initiatives which I believe to be another first in the country.”
To date, it has received over 22 active applicants for financing more than RM100mn and three of them (RM18.7mn) has been approved – KRU Malaysia Sdn Bhd, Datamicron Sdn Bhd and Info Connect Sdn Bhd, with a total IP value of over RM70mn. Leveraging on MDV’s strength as an innovative technology financier, the key features of the IPFS are:
• Financing up to RM10mn or 80% of
valued IP, whichever is lower
• Five years financing tenure (inclusive of a grace period of up to 12 months)
• An annual interest rebate of 2%
• 50% financing principle guarantee from
the government In addition, for the first 20 applicants under the scheme, the government will also bear the cost during the valuation of applicant’s IP rights (IPRs). The IPFS is applicable for all MDV financing products subject to the candidate having ownership of registered and valued IP and meet the organisation’s product criteria. MDV targets to finance 30 to 60 companies with IPRs, with an IPR value of at least RM250mn, utilising the complete allocation of RM200mn by the end of 2014