Venture capital is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions. Startup companies with a potential to grow need a certain amount of investment. Wealthy investors like to invest their capital in such businesses with a long-term growth perspective. This capital is known as venture capital and the investors are called venture capitalists.

Venture capitalists make money in 2 ways: carried interest on their fund’s return and a fee for managing a fund’s capital. Once an investor has returned their investor’s capital, they begin to earn carried interest on the returns in excess of their fund size.

Read about: Start Your Own Venture Capital Firm

Primary Concerns

Limited funding is a crucial concern for the Malaysian VCs. The government is the principal source of funding for VCs in Malaysia. More than 50% of funds are sourced from government organisations. Most of these VCs invest in the after levels of business like mezzanine, expansion/growth and pre-IPO. On the other hand, VCs funded by corporations, banks, and private individuals are inclined to invest in the starting levels of the business like the seed and start up. As majority of the VC funds are sourced from the government, most of the investee organisations are at their subsequent levels.

Bigger investment in the subsequent levels of business is a sign of risk aversion of the VCs in Malaysia. Organisations at subsequent levels have better potential with assured markets for their products with greater probability of going public. By opting for these organisations, the possibility of getting big returns on their investment is larger. One of the causes for the risk aversion of these VCs is that they have to inform their investors the developments of their investee organisations on a daily basis. As investors generally have great expectations on their investment, VCs would attempt to refrain from informing poor investment outcomes to their investors.

At Venture Capital Fund Level

Inability to Attain First Closing Date

If the interpretation of the First Closing Date is not fairly comprehensive to entail the situations where the minimum fund size isn’t attained prior to the particular date or in the particular duration, fund manager must seek for other provision in the document administering the fund (for instance, Limited Partnership Agreement or Constitution) which permits for the First Closing Date to be prolonged. In most cases, the fund manager is required to acquire the approval of either the investors or the governing authorities of the fund to prolong the First Closing Date.

Limitation on Capital Call

Hard copy delivery of the capital call notice is not necessarily feasible or will be postponed in the Movement Control Order (MCO) or lockdown period. Therefore, if it is permitted by the document administering the fund, capital call notice must, in the course of MCO period, be sent via email.

Incompetency to Carry Out Capital Call

The MCO and the ongoing global crisis might lead to postponement or default on the investors’ part to make payment in regard to capital call. This is particularly true for investors with great level of bureaucracy. To refrain from penalty or other situations of default on calls, the investors can mutually discuss with the fund manager of the reason of delay and request the fund manager’s agreement to increase the duration of the notice period, if the same is permitted by the fund document.

Commitment and Divestment Duration Extension

More time can be needed by the fund manager to get fresh agreements and to divest its existing investments. Some agreements in the passage can also require to be reviewed owing to the modifications in projections. Usually, the consent of either the investors or the governing authorities of the fund are required for the commitment period or the divestment period to be increased.

Constraints for Meetings

Provisions permitting meetings to be executed via telephone and video conference are standard in the documents governing fund these days. However, some might be comfortable for a physical face to face meeting, the MCO will render such meeting not feasible. For the fund to maintain its transactions, all parties should take into account holding their meetings, comprising the meetings of the investment committee, through telephone or video conference, if the same is permitted by the document administering the fund.

At Venture Capital Investment Level

Inability to Meet the Requirements Precedent

Some of the requirements precedent to the investment agreement which, among others, connect with the consents of the authorities and financial institutions might not be able to be completed owing to the MCO. If the investment agreement does not hold force majeure clause, based on the terms of the investment agreement, the parties may request or mutually agree for extension of the conditions precedent period.

Read about: Setting Up a Private Fund in Labuan

Confinements for Closing

Closing can to a particular degree, be impacted as the MCO in which shares cannot be assigned and the investment amount cannot be disbursed. Moreover, if the investment agreement does not include force majeure clause, the parties can be based on the terms of the investment agreement, request or mutually agree for extension of the relevant period.

Future of Venture Capital in Malaysia

The sector remains to captivate highly important inflows both locally and regionally. The latest failures although of recent various multi-billion-dollar players may also have an effect on the worth of start-ups developing ahead. The players in the industry reckon that the drive by VCs for over the top valuations in investee organisations cannot be viable developing ahead because of the funding round. The start-ups are now a lot tougher under the pressure to perform and deliver impractical returns to the future investors. Researchers have also highlighted the improvement of investing in organisations which have evidently paved way for increased gains. A significant emphasis is being put towards the requirements for portfolio organisations and VCs to develop sustainable ventures for the present and the future investors too. Family-based venture capital funds have also been growing within Southeast Asia due to many of the large businesses in the region being executed by the founding families. These families have acknowledged the requirement for innovation in their essential businesses via an integration of setting aside funds for young stage investments and start-up accelerators too.

Labuan Private Fund

Labuan jurisdiction is one of the most preferred locations for foreign investors when it comes to generating funds or become a venture capital, particularly if target is in the Asia Pacific region. One must take into account the utilisation of a Labuan Mutual Fund or Private fund specifically for funds generated via crowd-funding rather than splitting the investors by equity. To understand about the prospects and true potential of a Labuan Private Fund, especially in the long-term, get in touch with the QX trust team of consultants at CONTACT US or consultant@qx-trust.com.

Read about: Labuan Private Fund