Time to dig in as venture capital investments dry up
Technopreneurs have to start accepting the fact that venture capital funds are going to be hard to find for a much longer period of time than previously expected. The current scenario of poor economic fundamentals as well as the War on Terrorism has created a very poor investment climate and the additional uncertainty of technology investments has all but scared most venture capital funds and investors away from this region.
Recently the Softbank Emerging Markets Fund (SBEM), a joint investment fund between Softbank Corporation and International Finance Corporation of the World Bank shut its doors permanently. SBEM, which was started in deep controversy because of the involvement of the World Bank in risky investments, was supposed to draw on the US$200mil fund to invest in ICT start-ups in the emerging markets covering South Asia, Eastern Europe, Africa, Middle East and Latin America. It had an office in Kuala Lumpur but has not disclosed if it has indeed made any investments in Malaysia.
It is clear that poor sentiments have not only affected Technopreneurs but also the financiers themselves. It is ironic that the very same investors who used to question the survivability of their potential investments go belly-up themselves.
SBEM is not the only casualty though the first one in Malaysia. Many American and European Venture firms have also shut down due to inappropriate losses in their investments or because they themselves could not secure investors for their funds. Raising investment funds at this time is extremely difficult.
Many existing funds globally are also battling huge losses in investments with the tremendous dips in valuations of technology companies. The inability to list moderately viable investments and difficulty in securing additional rounds of funding are also forcing their investee companies underwater. These are tough times for Venture Capitalists.
On a recent trip to the US, I attended a Venture Capital showcase where two companies were pitching for funds. I was surprised that the amount of funds that they were pitching for were small (USD 1.5 – 5 mil), in exchange for up to 30% of the company. What is even more surprising is that although there were many investors in the room, almost 80 by my estimation, most were Angel investors. In private discussions many were only there out of curiosity and would only invest if the investment was far less risky and the terms exceptionally good.
Many Investors also indicate that they are pulling investments out of Emerging Markets due to higher risks and instead consolidating their focus on either the American or European markets. Some funds have even returned their investors’ money as they are unable to invest them successfully due to poor market sentiments.
In terms of favoured investments, it seems that VCs (Venture Capitalists) are still looking for the Holy Grail though they are more cautious. I have heard the term “Disruptive Technologies” mentioned several times in discussions with Investors although many of them are not exactly clear what these technologies are. It just happens to be the favourite “buzz word” of investors currently as were B2C and B2B previously. Gone are the earlier 2001 favourites of Networking Technology and Photonics.
What does this mean to the Malaysian Technopreneur?
Malaysia got into the act fairly late and by the time we were ready for investors, the NASDAQ crash had badly affected sentiments and investors were starting to consolidate. Thus we missed the first boat.
Now, with the Americans more focused on the war against terrorism than on the economy and with industry after industry falling like tenpins starting with the Airline and Tourism industry, the global economy is heading for a long and painful correction. All earlier optimistic forecasts for recovery in 2002 will need to be reviewed. In a state of war, it is difficult to predict anything and economic forecasts are especially difficult.
The American public has been badly affected by the psychological fears brought on by terrorism and especially this new fear of biological and chemical warfare - anthrax, Ebola virus and sarin gas attacks. This has induced VCs to invest money in security companies and Biometrics technology is getting a lot of attention and funds.
The US economy has been held up by positive consumer sentiment but that is quickly waning. Unless the Corporations start reinvesting in technology and industry, the economy is going to slide into a deeper recession. The American economy unlike Malaysia’s is dependent on firstly the consumer and secondly the corporate sector.
The role of the US Government is minimal and even their finances are dangerously low, thus stifling what they can do. The USD 100 billion proposed injection into the economy may help, provided it is implemented fast before the economy falls too deep into recession, but bureaucratic red tape is expected to delay this. The Federal Reserve has cut interest rates to levels so low at 2.5% that unless the public starts reacting quickly, even low interest rates may not have much effect on the economy. There is still hope but it is good to be prepared for the worst.
Thus Technopreneurs here have much to think about. The American market for technology is flat at best and Europe is sliding. Many Asian economies including Singapore and Taiwan are already in recession. Fortunately for Malaysia we are fairly well insulated and being more diversified with commodities and oil and gas we are in a better position than Singapore, Taiwan or even Korea.
Our economy is also more driven by Government action and Government pump priming will have more effect here than in America or Europe. Our Technopreneurs should therefore focus their efforts on business opportunities in Malaysia and educate Malaysian corporations on the need for technology to compete better in these difficult times. Exporting their services overseas will be especially difficult as even the Indian companies, the experts at technology service exports, are going through a difficult time currently.
It is also an opportune time with Budget 2002 around the corner for the Government to adopt a long-term strategy to counter a global recession. It has done well in the past and there is every reason to expect a good budget although we hope that the Finance Minister (and Prime Minister) will seriously consider the plight of Technopreneurs and ensure that there are enough goodies for the New Economy as well.
As for the search for funds, Technopreneurs should not be too optimistic and should try and build a business that is not dependent on Venture Capital. Prior to 1995 no business was built with such investors in mind and many have been successful. There is no reason why that is not applicable to the New Economy.
Finally, don’t write off VCs. Use this time as an opportunity to get to know them better on a personal basis. Invite them to your office and introduce them to your business. Make them your friends. Then when you are ready, they will be more willing to invest because they know you and your business. Ultimately, relationships still matter in the New Economy.
17 October 2001
Recently the Softbank Emerging Markets Fund (SBEM), a joint investment fund between Softbank Corporation and International Finance Corporation of the World Bank shut its doors permanently. SBEM, which was started in deep controversy because of the involvement of the World Bank in risky investments, was supposed to draw on the US$200mil fund to invest in ICT start-ups in the emerging markets covering South Asia, Eastern Europe, Africa, Middle East and Latin America. It had an office in Kuala Lumpur but has not disclosed if it has indeed made any investments in Malaysia.
It is clear that poor sentiments have not only affected Technopreneurs but also the financiers themselves. It is ironic that the very same investors who used to question the survivability of their potential investments go belly-up themselves.
SBEM is not the only casualty though the first one in Malaysia. Many American and European Venture firms have also shut down due to inappropriate losses in their investments or because they themselves could not secure investors for their funds. Raising investment funds at this time is extremely difficult.
Many existing funds globally are also battling huge losses in investments with the tremendous dips in valuations of technology companies. The inability to list moderately viable investments and difficulty in securing additional rounds of funding are also forcing their investee companies underwater. These are tough times for Venture Capitalists.
On a recent trip to the US, I attended a Venture Capital showcase where two companies were pitching for funds. I was surprised that the amount of funds that they were pitching for were small (USD 1.5 – 5 mil), in exchange for up to 30% of the company. What is even more surprising is that although there were many investors in the room, almost 80 by my estimation, most were Angel investors. In private discussions many were only there out of curiosity and would only invest if the investment was far less risky and the terms exceptionally good.
Many Investors also indicate that they are pulling investments out of Emerging Markets due to higher risks and instead consolidating their focus on either the American or European markets. Some funds have even returned their investors’ money as they are unable to invest them successfully due to poor market sentiments.
In terms of favoured investments, it seems that VCs (Venture Capitalists) are still looking for the Holy Grail though they are more cautious. I have heard the term “Disruptive Technologies” mentioned several times in discussions with Investors although many of them are not exactly clear what these technologies are. It just happens to be the favourite “buzz word” of investors currently as were B2C and B2B previously. Gone are the earlier 2001 favourites of Networking Technology and Photonics.
What does this mean to the Malaysian Technopreneur?
Malaysia got into the act fairly late and by the time we were ready for investors, the NASDAQ crash had badly affected sentiments and investors were starting to consolidate. Thus we missed the first boat.
Now, with the Americans more focused on the war against terrorism than on the economy and with industry after industry falling like tenpins starting with the Airline and Tourism industry, the global economy is heading for a long and painful correction. All earlier optimistic forecasts for recovery in 2002 will need to be reviewed. In a state of war, it is difficult to predict anything and economic forecasts are especially difficult.
The American public has been badly affected by the psychological fears brought on by terrorism and especially this new fear of biological and chemical warfare - anthrax, Ebola virus and sarin gas attacks. This has induced VCs to invest money in security companies and Biometrics technology is getting a lot of attention and funds.
The US economy has been held up by positive consumer sentiment but that is quickly waning. Unless the Corporations start reinvesting in technology and industry, the economy is going to slide into a deeper recession. The American economy unlike Malaysia’s is dependent on firstly the consumer and secondly the corporate sector.
The role of the US Government is minimal and even their finances are dangerously low, thus stifling what they can do. The USD 100 billion proposed injection into the economy may help, provided it is implemented fast before the economy falls too deep into recession, but bureaucratic red tape is expected to delay this. The Federal Reserve has cut interest rates to levels so low at 2.5% that unless the public starts reacting quickly, even low interest rates may not have much effect on the economy. There is still hope but it is good to be prepared for the worst.
Thus Technopreneurs here have much to think about. The American market for technology is flat at best and Europe is sliding. Many Asian economies including Singapore and Taiwan are already in recession. Fortunately for Malaysia we are fairly well insulated and being more diversified with commodities and oil and gas we are in a better position than Singapore, Taiwan or even Korea.
Our economy is also more driven by Government action and Government pump priming will have more effect here than in America or Europe. Our Technopreneurs should therefore focus their efforts on business opportunities in Malaysia and educate Malaysian corporations on the need for technology to compete better in these difficult times. Exporting their services overseas will be especially difficult as even the Indian companies, the experts at technology service exports, are going through a difficult time currently.
It is also an opportune time with Budget 2002 around the corner for the Government to adopt a long-term strategy to counter a global recession. It has done well in the past and there is every reason to expect a good budget although we hope that the Finance Minister (and Prime Minister) will seriously consider the plight of Technopreneurs and ensure that there are enough goodies for the New Economy as well.
As for the search for funds, Technopreneurs should not be too optimistic and should try and build a business that is not dependent on Venture Capital. Prior to 1995 no business was built with such investors in mind and many have been successful. There is no reason why that is not applicable to the New Economy.
Finally, don’t write off VCs. Use this time as an opportunity to get to know them better on a personal basis. Invite them to your office and introduce them to your business. Make them your friends. Then when you are ready, they will be more willing to invest because they know you and your business. Ultimately, relationships still matter in the New Economy.
17 October 2001
posted by Dr. Siva at 11:09 PM
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