Until 10 years ago, the rights to invest in startups were largely confined to accredited investors, high networth individuals (HNIs) and venture capital firms. Startups had no option either but to depend on this “elite group”, as investments always came attached with mentorship and guidance, an essential factor for their growth in the early years.
But these investments always carried a rider as startups required to dilute significant amount of equity, thereby losing their rights to call the shots. This scenario has now changed for the better with the advent of crowdfunding. Today, crowdfunding is one of the best tools for early-stage companies to raise money.
There are different crowdfunding models available in the market. In this interview, Elain Lockman, Co-founder and Director of Ata Plus, sheds light on equity crowdfunding (ECF) and the company’s operations in Malaysia.
Please walk me through the history of crowdfunding. What are the different crowdfunding models? How ECF is different from rewards-based crowdfunding. What are the advantages and disadvantages of both?
Crowdfunding is not a new concept. It has been around even way back when. Among family members or communities where individuals or groups of people contribute to specific causes, projects or business ideas or value propositions.
Previously, the reach was limited to only within the circle of people within specific communities or through word of mouth. However, with the internet, social media and advancements in mobile technologies, the reach is now not only borderless but also to anyone (or entities) who believe in and have a connection with the causes, projects or business ideas or propositions; and who can or want to contribute and support them.
There are four types of crowdfunding:
- Donation crowdfunding allows for pledges where the supporter does not expect to receive anything in return for their contribution (typically for charities, social causes, community projects)
- Rewards crowdfunding allows supporters to receive a product or service in return for their ﬁnancial contribution (work particularly well for consumer goods and other tangible products)
- Equity crowdfunding (ECF) means selling oﬀ a percentage share of a business to a crowd of investors (for entrepreneurs or start-ups seeking an alternative to traditional venture capital and angel investors when looking for a capital infusion to fund their business)
- Debt crowdfunding (Peer to peer lending) means businesses/individuals borrow money from the crowd at an agreed interest rate and pay them back over an agreed period of time (in business, this works best for entrepreneurs who are reluctant to give up equity in their companies and/or do not have access to more traditional types of loan facilities).
Equity and reward crowdfunding are regulated within the legal investment and banking jurisdictions of specific countries, in order to safeguard the interest of investors and lenders.
Equity V/s reward crowdfunding.
- The key difference between the two is that in equity crowdfunding, in exchange for the monetary contribution, the crowd receives shares of the company/business. In some ECF campaigns, there may also be a reward component (products or services) that is packaged with the Investment.
- The risk in ECF is much higher as the businesses that typically fundraise through this channel tend to be startups. Generally, an investor needs to be patient until he/she sees the returns on investment, that is anywhere fro three to five or even 10 years. However, with high risk, an investor may gain much higher return. For eg: If someone had invested US$10,000 in Uber 10 years ago, today that investment would be worth US$110 million.
- ECF allows the average Joe the opportunity to own a share in private limited businesses/startups with big future potential. Prior to ECF, only high net worth individuals/angel investors and VCs had access to these type of companies.
What is Ata Plus? How did the idea and name come about?
Ata Plus is a blockchain-enhanced ECF platform, matching businesses seeking growth and funding with investors interested in building sustainable world-class companies. Licensed by the Securities Commission Malaysia (SC) in June 2015, Ata Plus actively seeks to leverage on technology tools to facilitate and promote transparency and good governance in investing and fundraising. The platform delivers extensive services from qualifying companies to list and marketing their ECF Campaigns, to educating investors on ways to evaluate their investment opportunities.
Ata Plus aims to:
- provide an efficient and innovative channel of fundraising to SMEs and startup businesses
- offer a pool of quality, high potential and legitimate deal flow to the investor community
- operate a transparent and professional ECF platform that balances risk management and compliance through swift processes.
The company was started by three seasoned entrepreneurs — Aimi Aizal Nasharuddin, Kyri Andreou, and myself. We are passionate about entrepreneurs and the belief that they can help change the world for good, create jobs of the future and address many issues that inflict us in the world today. We want to drive financial inclusion using technology. We started this company also as a result from our own frustrations in trying to raise funds and also our experience with early stage investors.
The name Ata means “gift” in Arabic. An investment can be viewed as a gift of sorts from both the perspective of the issuer and investor.
How is Ata Plus different from PitchIN or other similar platforms? Do you offer any products other than ECF?
Ata Plus is a blockchain enhanced ECF online platform, matching businesses seeking growth and funding with investors interested in building sustainable world-class companies. Licensed by the Securities Commission Malaysia (SC) in June 2015, Ata Plus actively seeks to leverage on technology tools to facilitate and promote transparency and good governance in investing and fundraising. The platform delivers extensive services from qualifying companies to list and marketing their ECF Campaigns; to educating investors on ways to evaluate their investment opportunities. Ata Plus aims to:
- Provide an efficient and innovative channel of fundraising to SMEs and start-up businesses
- Offer a pool of quality, high potential and legitimate deal flow to the investor community
- Operate a transparent and professional ECF platform that balances risk management and compliance through swift processes
Aside from ECF, the following would be the future products that will be offered by Ata Plus:
- Reward crowdfunding
- Donation crowdfunding
- Closed secondary exchange
- Crowdfund of funds
Value-added products :
- Alternative nominee structure
- Post-investment investor relations management.
Ata Plus USP:
- Paperless Online end-to-end user experience (issuer & investor) and processes; from registration, application, setting up the campaign, marketing & promotion, listing the campaign, investment, disbursement and post-investment investor relations management.
- Ata Plus is more of a matchmaking platform approach than replicating a VC model, which is a model our competitors seem to adopt.
- Screening vs due diligence: Whilst Ata Plus is obliged to fulfil the compliance requirements of the SC for those companies who intend to list their ECF Campaigns on our platform, do bear in mind that Ata Plus is just an online match-making platform, between companies who are seeking funds with investors who are looking at investing in businesses. Ata Plus has employed an objective way of screening the companies who have applied to list their campaigns on our platform. Once we have received their application forms and all the required documentation, we shall review the information submitted and assess the completeness, coherence and full disclosure of the information.
What is crowdfund of funds? When are you launching it?
In Malaysia, a licensed ECF operator is allowed to list the prospectus of a crowdfunding campaign for a registered microfund managed by a licensed fund manager. The microfund must be registered by and the fund manager must be licensed by the SC, respectively. A portion of the fund can be raised on an ECF platform.
The purpose of the crowdfunding campaign is to give the opportunity for the “crowd” to invest in a fund (vis a vis in private limited businesses/SMEs/startups). Currently, only sophisticated and angel investors are allowed to participate in a crowdfunding of funds ECF fundraising campaign.
What are the advantages of being a blockchain-enabled ECF platform?
The key advantage of a blockchain-enabled ECF platform as core disintermediation feature. This facilitates a true P2P exchange of value that is immutable and time-stamped as well as being a trust protocol. It is also an enabler for a true digital performance: it saves time and money, and aids inclusion from both an issuer point of view (making small fund raises cost-effective) as well as an investor (allowing for smaller investment amounts, even down to RM1).
Do you accept proposals only from tech startups, or do you also work with companies in non-tech industries as well? What are the criteria to launch a campaign?
We are open to work with businesses from all sectors, be it tech or non-tech. The key criteria is as per stipulated within the ECF guidelines issued by the SC.
Are corporates also allowed to participate in ECF campaigns? How are they benefitting from these investments? Can a foreigner fund in a project?
Yes, individuals as well as corporates are allowed to participate in ECF campaigns. All of them can benefit through the investment gains once they exit from the investments – can be through IPO, M&A/trade sale, dividends or closed secondary exchange (once it’s made available). For individuals who are registered with the Malaysian Business Angels Network, they can gain special incentives from tech investments, from the Government of Malaysia.
Yes, foreign citizens and corporates are also allowed to take part in ECF campaigns on Ata Plus.
What is a closed secondary exchange, and how it works?
A secondary market is an exchange where investors can trade securities. In ECF, a secondary market or exchange refers to a closed marketplace where investors can buy and/or sell shares to and from other investors in privately-held companies that have previously successfully raised funds through equity crowdfunding.
For an equity crowdfunding market to thrive, it needs to have an active participation from the crowd i.e. the investor Community. Currently, an element of ECF that may be unattractive to investors may be the fact that the period by which the investors are required to hold their shares in the ECF issuer, i.e. until it goes for IPO or it is acquired. Therefore, it would be attractive to ECF investors if there is a way for them to either exit or make some upside in the medium term.
What measures have you employed to screen startups and investors to prevent possible frauds/swindling/siphoning?
For potential issuers, we will conduct the statutory screening, as well as legal and credit screening. For investors, we have the Know-Your-Customer and Anti Money Laundering Act screening.
How many startups have raised money through Ata Plus so far? Do you have any successful exits yet?
We have no successful exits to our name yet.
What if a company fails to raise the targeted amount in a specified timeframe?
For ECF, if a company fails to raise the minimum targeted amount in a specified timeframe, the committed investments are refunded to the investors.
Do you also allow foreign startups to launch campaigns on Ata Plus? Is the process different for them?
The only way for foreign startups to launch campaigns on Ata Plus (or a Malaysian licenced ECF platform) is to register in Malaysia. The same process applies.
In other parts of the world, traditional VC investments and rewards-based crowdfunding are more popular, whereas in Malaysia ECF is more prevalent. What are the reasons for this? Is it because there is a shortage of traditional PE/VCs/crowdfunding sites in the country?
This could possibly due to the conservative nature of the VCs/PEs in Malaysia. Also the lack of options and limited pool of angel investors. Malaysian entrepreneurs have been very quick to recognise the tremendous value of ECFs.
For reward crowdfunding, you need the network effect. Hence, the dominance of Kickstarter and Indiegogo, so much so that even Malaysian entrepreneurs use them. Companies, in general, recognise the value of the crowd in a P2P digital world.
Why do you feel VCs in Malaysia are conservative?
It may be the overall business culture in Malaysia, especially in the financial sector. For example, if you look at the top publicly-listed companies in the US, they tend to be less tangible and more intangible asset-based, hence the dominance of tech companies like Apple, Alphabet, Amazon, Facebook rather than Exxon Mobil, Boeing, Ford, GE, or a property-based entity.
The key management of VCs in the US come from a broader range of industries, like technology, marketing etc., and most of the founders/key management team were entrepreneurs themselves, who started out their businesses, grew the companies and sold them. In Malaysia, most of the key executives of the VCs are run are from either finance/banking or accounting backgrounds — they are by nature generally highly risk averse.
How serious is the Malaysian government about the crowdfunding industry? Is it highly regulated?
We feel that the question should be how serious is the government about entrepreneurs. If they acknowledge the key role entrepreneurs play in a dynamic economy, then ECF would be recognised as an important component in that ecosystem. The fact that Malaysia is the first regulated market for ECF in Asia, speaks volumes.
Crowdfunding is not highly regulated, but well-regulated, which allows for continuous innovation through partnership from the ECF players and the regulator.
Where do you see the equity crowdfunding industry in Southeast Asia five years down the line?
We see more cross-border ECF issuers, whether through joint ventures or strategic partnerships, as businesses becomes more regional and markets consolidate. Through efficiencies, ease of fundraising, disintermediation, lower costs, as well as offering considerable marketing visibility, crowdfunding may well become the funding vehicle of choice for the region’s huge army of SMEs.