Brighter future for venture capital firms
MANY venture capital industry players expect a brighter outlook for the industry in 2003 compared with the previous years, foreseeing more quality business plans and deals taking place despite the current weak economy.
Banyan Ventures Sdn Bhd investment director Wong Tze Kai said that although the number of deals would pretty much be the same as last year, they would be better quality wise than the previous years.’
“The current state of the economy is almost the same as in 2002. So on the funding aspect, we don’t actually foresee the number of deals and plans increasing this year except there will most likely be a rise in good quality plans and ventures,” Wong told StarBiz in an interview.
For instance, he said, were the RM1bil allocation for non-information and communications technology (ICT) projects as announced in Budget 2003 as well as the earlier RM500mil government committed fund to Malaysia Venture Capital Management Bhd (MAVCAP).
MAVCAP, a wholly-owned subsidiary of Minister of Finance Inc, was incorporated in 2001 to provide an alternative source of high risk financing in ICT and high growth sectors for start-up, seed capital and early stage companies.
To date, MAVCAP has approved about RM80mil for various investment programmes comprising seed, agency and direct ventures.
Malaysia Debt Ventures Bhd (MDV) managing director and chief executive officer Jiro Suzuki supported the association’s views, saying there were ample funds currently available for venture capital companies to tap into.
Suzuki said this was because the government understood the importance of the type of funds to be made available to technopreneurs.
MDV is a debt financier and development facilitator for ICT companies and also offers venture capital services. It has a total ICT fund size of US$420mil (RM1.6bil).
According to Suzuki, the company to date has approved RM240mil worth of loans to 13 ICT-based companies.
In 2001, there were about 41 venture capital companies with about 95 professionals who collectively managed a capital of about RM3.08bil. A total of RM951mil new funds were raised in 2001 (of which MAVCAP accounted for RM500mil).
New venture capital investments for that year stood at RM246mil. The main sectors financed for the same period were information technology, manufacturing (light) and electronics.
Asgari said the venture capital industry was one of the main drivers of economic growth in recent times. For example, the industry created about 4.3 million and 2.7 million jobs in the United States and Britain respectively in 2001, and annual revenue of the US venture capital industry was about US$736bil.
He pointed out that although the industry had great potential for growth, unfortunately it was facing some obstacles, namely in the areas of tax incentives, pension and insurance funds and matters relating to outsourcing of government’s funds.
“The current tax incentive structures, namely tax exemption and tax deductions applicable to a venture capital company, are too stringent and impractical. One of the major issues is the denominator in the 70:30 ratio between local and foreign investments that determines the eligibility for an exemption.
“The ratio includes cash, which constantly fluctuates, hence making the 70% typically unattainable. Another thing, to qualify as a venture capital company and enjoy tax exemption, 70% of the company’s investments must be deemed in promoted industries and start-ups, another difficult task for a venture company to achieve,” he stressed.
Consistent with the need to nurture more venture capitalists, Ma- laysian Venture Capital Association’s Stephens said it would like to recommend that the government grant pioneer status or full-tax exemption on all income to venture capital fund management companies for 10 to 15 years.
Pension funds and insurance funds should be allowed to be invested in the venture capital industry as is the case in more developed economies.
Currently, there is very little participation by pension and insurance funds, mainly due to policy restriction on “admitted asset” class and lack of familiarity in venture capital investment on the part of fund managers.
Therefore, investments in venture capital funds should be included as an admitted asset class, he explained.
To ensure that the government’s objective of providing long-term capital is met as soon as possible, the association said the government allocations, for example, the RM1bil (allocation for non-ICT projects as announced in Budget 2003) should be outsourced to many more registered venture capital companies.
Wong stressed that whatever funds or monies allocated for the venture capital industry should be implemented and executed in a swift and effective manner.
According to Wong, the monies should go to the well-suited parties and it should be “used to attract more smart money, good talent in terms of start-ups and venture capital professionals, expertise and deeper network” which is an essential ingredient for the development of good venture capital companies.
Similar views are also shared by Suzuki. According to him, many technopreneurs lack ICT expertise and do not know how to approach venture capitalists for financing.
Suzuki said the venture capital industry was still in its infancy stage and therefore needed the expertise, and this could be done by bringing in more seasoned foreign and experienced venture capital players into the local market.