Of Angels and Unicorns


IN BUDGET 2019 the federal government introduced an annual RM20mil tax exemption incentive per company for investments in venture capital funds, or for angel investors over a five-year period. Budget 2020 further extended the qualifying investment period for venture capitalists until the end of 2026, and for angel investors who invest in companies in the form of ordinary shares, the tax exemption application period has been extended to the end of 2023. The government introduced this slew of forward-thinking measures and incentives to encourage entrepreneurism and innovation to create intellectual property and hopefully, find unicorns with market valuations in excess of a billion.

So, what is angel investing? The term “angel” as it is used in this context originated from Broadway theatre, where affluent individuals sponsored theatrical productions, and through such patronage the arts scene flourished. In 1978 Professor William Wetzel of University of New Hampshire coined the term “angel investing” to describe high net worth investors who provide seed capital to support entrepreneurial ventures. Angel investors are typically successful serial entrepreneurs or retired senior corporate executives who have their own money to fund pioneering projects that have a hard time taking off due to their inherently high risks.

Declining Yields and Access to Capital

As yields for traditional investment instruments continue to decline, and in some countries where the negative interest rate environment is coupled with high market uncertainties, investors that are seeking higher returns respond to the greater pressure in making trade-offs by taking on higher risks. Many asset classes have become overvalued and yields are low. In fact, some banks are charging people for putting cash deposits in the bank. Hence, some investors are actively allocating a small portion of their portfolio to diversify into angel investing and get into a start-up early when the cheque size is small, and bet on a potentially higher risk-reward ratio.

In the age of robots and artificial intelligence, owners of firms and capital are tilting the labour equation in their favour through more automation. This also means that a university degree is no longer as good a guarantee as before for employment, so graduates are more willing to dabble in new technology ventures to find the next big thing. Angel investors are in a position to provide access to capital for talents who are willing to start up a new business idea.

Angel investor Dirk Wolter, who has stakes in Singapore ventures such as RedMart and MyRepublic, describes his motivation beyond seeking financial returns as an opportunity for “intellectual engagement” with young bright minds and to keep abreast with industry developments. For serial entrepreneur Albrecht Buchner, angel investing is his way of “giving back by mentoring” young business talents. Start-ups go through several rounds of funding before they finally become a profitable and sustainable business. The sequence of funding typically starts with friends, family and fools (FFF), hopefully wise ones. This is followed by angel investors, start-up accelerators, venture capitalist series A to C, and sometimes, private equity before a trade sale to a bigger company or through a stock market initial public offering (IPO). Each wave of raising capital is a potential exit point for investors in earlier rounds to cash out, and the stakes get higher as valuations grow and the business model becomes more proven.

Most start-ups do not survive the “valley of death”, the trough where they do not gain the market traction to become revenue positive. The casualty rates are high for start-ups, nine out of 10 fail. For an angel investor, it is like a roulette game based on the law of large numbers, spreading small bets across multiple ventures, a “spray and pray” that one of the ventures becomes a unicorn or more of them exit positively, rather than crash and burn. The time horizon for such typical investments ranges from five to 10 years, but patience does get rewarded handsomely with average returns of 20% or more, according to the American Angel Capital Association.

In Malaysia individuals interested to invest in early stage start-ups have to be registered and accredited by the Malaysian Business Angel Network (MBAN), before they qualify to apply for the tax benefits from the Angel Tax Incentive Office, a unit under Cradle Fund.

Bet on the Jockey, Not the Horse

When asked how they source and select ventures to invest in, many angel investors say that unicorns are rare, so ideas must be feasible and, more importantly, solve market problems and needs. On the level playing field of the internet age where most people have equal access to information and knowledge, ideas are abundant; the acid test is whether the person has the motivation, discipline and mindset to take action and execute a well-thought out plan. For an angel investor to put money into a start-up, the relationship must go beyond the transaction and be based on trust in the founder’s personal integrity. The founder in turn must have the acumen and ability to course correct and rally his team to deliver. It is better to have a basic idea with the right founder than a brilliant idea with a wrong leader, a good jockey can ride a fair horse and still win the race. Apart from the idea and the founder’s character, the targeted market must also be significant for potential growth, and the demand should not be bounded by geography or be too localised.

Each wave of raising capital is a potential exit point for investors in earlier rounds to cash out, and the stakes get higher as valuations grow and the business model becomes more proven.

While it is encouraging that there is higher awareness among the investing community and more tax incentives being offered by the government, Malaysia is still in the infant stages especially in building a robust ecosystem. Leading start-up investor Stanley Chong, a partner of Ingenious Haus Group, highlights three challenges. Firstly, most of the ventures in Malaysia are not in deep technology research; this is perhaps due to a lack of collaboration between industry and universities, hence the ventures do not create an economic moat against competition, and instead becomes easily replicated. Secondly, the education system is still not geared towards creative problem solving and deep technology skills; for that reason, the talent pool remains shallow. And lastly, while we may have provided the catalyst for early-stage funding, startups such as Grab and Carsome seeking a boost to the next market level tend to go abroad in search of venture capital with deeper pockets, either from neighbouring or more mature capital markets, denying the country from reaping the rewards on the early nurturing.

Despite the high risks, angel investing can be a lucrative asset class, but it is a numbers game and has to be approached professionally and intelligently over a time horizon of five to 10 years, allocating consistently small stakes in a broad portfolio of at least 20 companies. Start-ups that eventually mature into SMEs or become the rare unicorns present the best hope for economic growth and employment, and so far, government policies have been encouraging and forward-looking.

Tony Yeoh was previously regional CTO of an international branded company, and an Associate Faculty of a Singaporean university.


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