Capital funding and cashflows are essentially the lifeline of all businesses, but even more so for small- and medium-sized enterprises (SMEs) which often experience “cash crunch” when it comes to capital for growth and diversification, especially in times of economic uncertainty.
Here comes the fun part – external funding. Investors usually place a price tag on a business before committing funds for investment. But the big question is, how do business owners know just how much their business is worth (or potentially worth)?
The recent announcement by the Securities Commission Malaysia that total committed funds as at end-December 2021 for the Malaysian private equity (PE) and venture capital (VC) industry stood at RM9.65 billion and RM5.18 billion, respectively (versus a value of RM5.99 billion for both PE and VC back in end-2019), signals a change brewing in our local private investment landscape.
While the value of committed capital has increased by more than three folds since 2019, local SMEs have often asked “What does it takes for our business to be accorded with high valuations more often enjoyed by “younger” start-ups, despite having a longer (and thus proven) operating track record?”.
Without getting into the technicalities of private investment deal structuring (which partially addresses how these valuations are supported), we would like to share some of the most common recurring questions typically posed by potential investors and provide insights as to the rationale behind these questions before valuation comes in:
How scalable is your business?
This is probably one of the most important questions and yet one that is most widely misunderstood. In an ideal situation, a business owner would have to demonstrate to investors that the capital injection they are seeking is akin to fuel being deployed into a rocket engine with declining (or preferably zero) additional marginal cost.
In layperson terms, an investor will expect that the additional capital provided will deliver significant returns in a pre-determined timeframe, with minimal additional cost outlay in subsequent years.
This helps to explain why businesses (usually tech-based start-ups) focusing on technology-as-an-enabler and software-as-a-platform are deemed suitable for investments, as theoretically, less maintenance or additional cost outlay is needed once a software or technology is launched and is scalable across many different jurisdictions, concurrently.
What happens to a business operating in a high-growth sector, but takes up sizeable working capital (commonly known as the “burn rate”) to survive and thrive, especially at the expansionary stage? Well, if the business could demonstrate that it has both a highly recurrent and “sticky” operating model, it might still fit the investment requirement of most investors in the growth investments space.
Where do you see your business heading, years down the road?
While it may, arguably, sound abstract and subjective on the part of the business owner – this is a crucial question that paints a picture of how you map the growth of your business every step of the way (with reasonable assumptions in place, of course). In doing so, you may be able to shed light on the quantum of capital required to get there, as well as how investors could engineer an exit from their investment over time.
Having an envisioned road map of your business and the expected capital required will allow potential investors to consider the feasibility of investing in your company and the ingredients required for your business to succeed.
What is the addressable market share of your business?
The addressable market share determines the “full potential” of a business within a specific jurisdiction and is often viewed in conjunction with a host of other factors, including population size, per capital income and its rate of growth in a given period.
Investors generally have a preference for businesses with larger (or potentially larger) addressable market, as it allows sufficient space for growth and innovation to take place. Nonetheless, investors are also equally interested in other factors related to the operating environment that may influence how well the business may run, such as the level of domestic competition, language proficiency (local and international languages), availability of talent, education standard, as well as the cost and ease of doing business.
All these factors combined put Malaysia-based businesses in the positive zone for investors who are looking for an all-round, holistic package when it comes to private investing. We note that on a general basis, private investors are getting healthy returns and growth from their investment in well-managed businesses in Malaysia.
OSK Ventures International Bhd is a Malaysia based investor with more than 20 years of investment track record. We support our exceptional founders on their journey with timely capital and put your business on a value-added platform.
Let’s keep the conversation going and contact us to find out if your business is ready for accelerated growth.
OSK Venture has launched a new venture capital investment fund that invests in fast-growing companies and scalable businesses engaged in high-demand sectors. If you’re keen to be part of our success story as an investor, please reach out to us today.
Have more questions? Get in touch with us:
Jimmy Tham
Investment
T : 03-2161 7233
E : contact@oskvi.com