This article first appeared in Personal Wealth, The Edge Malaysia Weekly on February 3, 2020 - February 9, 2020

Equity crowdfunding (ECF) has been gaining traction in Malaysia over the last few years. This asset class has attracted investments because it gives the average retail investor access to private companies.

Players have a positive outlook on the industry as more exits are expected to take place. However, the returns investors can look forward to will depend on how consistent ECF issuers are in delivering strong exits.

To this end, those looking to maximise their chances of a positive ECF exit are advised to invest via platforms that boast strong curation capabilities, says CrowdPlus.asia founder and CEO Max Teh. Platforms that curate and filter investment opportunities would be able to introduce better quality and more sustainable issuers to the market.

Teh tells Personal Wealth that broadly, there are two categories of ECF platforms — those that curate deals and those that do not. “An example of the latter would be a platform that simply follows regulations to the letter: they get issuers to come on board, adhere to the relevant disclosure requirements and list them on their platforms.”

As long as issuers satisfy the basic requirements set out the regulator, the ECF platform operator will allow them to be listed on its platform. There is very little to no curation that takes place.

Teh has reservations about the long-term prospects of this catch-all strategy. “I don’t think these kinds of ECF platforms will be particularly strong with returns. Given that these platforms list all qualifying issuers, the rate of returns and exits will not improve too much over time, and neither will the rate of successful exits for ECF investors,” he says.

The other category of ECF platforms comprises those whose deals are heavily curated, says Teh. “As a result, ECF platform operators that curate deals at a consistently high standard will be able to provide a comparatively better investment experience. Over time, they will be more likely to produce higher quality issuers. And these issuers will be more likely to produce successful exits and positive returns for investors.”

CrowdPlus.asia is one such platform. Its curation involves discarding what its internal methodology perceives to be poor-quality issuers. “This methodology tends to be defined individual platform operators and the process takes place above and beyond the basic qualifying requirements. On this basis, out of 100 qualifying issuers, we may end up publishing just 10 of those deals on our platform,” he says.

Teh, who is also a venture capitalist and runs Netrove Ventures Group, says CrowdPlus.asia’s curation methodology is derived from his own venture capital investing and curation strategies. “CrowdPlus runs a similar due diligence and selection methodology to that of Netrove. I think that is a key advantage we have over most other ECF platforms in the market. We already have a ‘semi-venture capital’ curation methodology that has been perfected with Netrove over the last 20 years.”

Other platforms that curate investment opportunities include pitchIN and Ata Plus.

Despite being a relatively young asset class, ECF is already attracting a diverse set of issuers which, in turn, draws in investors with diverse investment objectives. From an investor’s perspective, Ata Plus Sdn Bhd co-founder Kyri Andreou believes that the asset class will eventually be dominated millennial investors.

“We think millennials have a tendency to form strong connections with brands they identify with. Going forward, investing in these brands as ECF investors will allow millennials to feel a sense of ownership and connection, particularly if they happen to discover a brand very early on in its business life cycle,” he says.

“As ECF investors, millennials will have the opportunity to directly engage with the leadership team of those businesses, as opposed to being just another investor in the stock market. They do gain a stake in certain brands investing in the traditional stock market. But for the most part, they tend to be disregarded the company.”

Meanwhile, issuers are becoming more diverse, theregiving more options to investors, depending on their investment objectives. According to pitchIN co-founder and chief strategy officer Kashminder Singh, while most ECF deals tend to be technology start-ups that are in the growth stage, more traditional bricks-and-mortar businesses are now using ECF platforms to raise funds. These businesses are in a position to provide investors with steady dividends.

“Growth-stage technology start-ups do not offer immediate dividends as they are focused on ploughing revenues back into the company. The expected returns of companies like these are in the sharp increases in valuation at the point of acquisition, public listing or via a secondary market that pitchIN will launch soon,” he says.

“However, as news about ECF continues to spread through the small business community, we have seen more traditional, already-profitable businesses listing on our platforms. Companies such as these are able to promise investors dividends.”

As a result, Kashminder sees more exits taking place over the next two years or so, further validating ECF as an asset class. “In fact, we recently had our first successful exit,” he says.

According to the company’s press statement, one of its issuers — MyCash Online Sdn Bhd — returned 44.2% to investors in October last year, after the company accepted a buyout offer from a venture capital firm.

More information and analysis needed

Andreou says there is currently a dearth of research and documentation on the industry similar to the kind of analysis that exists for public-listed firms for investors to look at. “Now that retail investors can invest in start-ups [via ECF], I think the lack of supporting research and analysis has been brought into sharp focus. To some extent, I think this is a gap ECF providers will have to try and plug.

“We know there is a definitive reporting standard for issuers to adhere to. To get listed, you have to provide a lot of financial documents and your business plan. If the issuer has been in business for longer than a year, then it would also need to provide a history of its revenue and audited accounts.

“We then provide issuers with a dashboard on the platform, from which they can disseminate information to their investors. It is usually quite structured and in the form of a newsletter. We are constantly trying to improve on this process to make it easier for issuers to provide more information and conduct more reporting, especially to their investors.”

pitchIN’s Kashminder echoes this point. “Companies that have raised funds via ECF tend to be fairly early in their growth story. And typically at this point, detailed financial reports, company updates and other corporate matters would be seen as secondary considerations,” he says.

“Historically, at the early stage, major shareholders tend to be on the founding team, and perhaps a financial backer. But issuers have to convince investors that the company has the potential to make money for them.”

Andreou believes the lack of supporting research into and analysis on issuers will become even more acute if the Securities Commission Malaysia approves a secondary market for the trading of ECF shares. “In the future, companies that list on a secondary market, which we want to develop for Ata Plus, would need to provide investors with periodic updates.”

Outlook and advice

Teh and Kashminder are bullish on the growth of ECF as an asset class in Malaysia. Teh, whose CrowdPlus platform currently commands about one quarter of the local ECF market share, has seen a healthy pipeline of issuers approaching the platform over the last six months. “The sheer volume of potential new issuers is encouraging because that ultimately translates into more prospects for ECF investors to choose from.”

Taking a three to five-year view, he is targeting exits for 20% to 40% of all issuers on the platform. “Right now, our exit rates are hovering just below 10%,” he says.

Kashminder expects investors to see some exits over the next two years that will validate the viability of ECF. “Company valuations have gone up and we are expecting more exits in the future. Furthermore, the secondary market will kick in and that will provide validation for ECF as investors will have another avenue to realise some gains,” he says.

Kashminder advises investors to pick the correct ECF platform to invest with. “Take note of those platforms that curate deals and those that do not. Each category offers different products. In addition, investors should gradually build trust in the platforms they eventually invest with. Start with small amounts, just to familiarise yourself with how the platform works and the kinds of deals that are available on the platform.”

He also suggests that investors employ ECF as part of a balanced investing strategy. Investors should remain invested for the long term and, most importantly, spread their investments over a few ECF deals. “Also, slowdowns are a good time to look for hidden gems because only tough companies tend to do well during a slowdown,” he adds.

Ata Plus’ Elain Lockman believes that more needs to be done ECF platform operators to improve awareness of the asset class among the investing public. In fact, she calls on operators to band together and reach out to the public in a more systematic manner.

“In addition to all of us collectively running marketing and advertising campaigns, I think the very language we use to describe ECF needs to be more relatable to the general public. This, of course, is quite a challenge because we need to figure out how to attract the general public without compromising on or diluting the fundamental definitions and characteristics of ECF,” she says.

“Suppose I want to promote ECF to a largely Bahasa Melayu-speaking crowd, the term ‘Pelaburan asset berasaskan ekuiti’ actually sounds really awkward and quite foreign to a native speaker. This is an example of the little things that we need to improve on to make the asset class more accessible to the general public.”

Democratising equity investing

The equity crowdfunding (ECF) industry in its current iteration is only about seven years old. all accounts, it is a very young asset class, according to CrowdPlus.asia founder and CEO Max Teh.

“From the perspective of investors, ECF has given them a new asset class to play with. Previously, the only way they could reliably invest in a private company was if their social circle already comprised entrepreneurs and financiers. In my opinion, many retail investors lack such a network,” he says.

“Beyond this, the only other realistic investment option is to access listed companies on stock markets. Having said that, it is important to understand that with ECF, retail investors now have access to early-stage companies, which is clearly a high-risk, high-reward game.”

Risk notwithstanding, the asset class was met with a lot of suspicion in the first few years of its entry into Malaysia. “Because we probably had too many bad actors outside the ECF ecosystem in the past, we had to field lot of questions on whether ECF was some kind of money game,” says Teh.

“However, I saw this as a sign that Malaysian investors were no longer taken in schemes that sounded too good to be true. This could only be a good thing for us. And true enough, over the last three years, we have seen a lot of investors get into ECF.”

He noticed that, and large, investors were committing relatively larger sums to the asset class. Recently, he observed that investors tended to invest upwards of RM5,000 in ECF issuers. In fact, more of them have invested RM10,000 to RM50,000 in the last three years.

Although Teh is tracking the growing investment ticket sizes on his platform, he says the asset class has yet to hit critical mass in Malaysia. “I would not say that ECF has gone mainstream just yet. We are still trying to find our place in the broader funding ecosystem. And this is true even for Malaysia, where ECF is just a drop in the ocean,” he says.

“I see the asset class coming of age in the next three years or so. then, I believe we will have made a large enough dent in the funding ecosystem to be able to call ECF a mainstream investment opportunity.”

Nonetheless, Teh has a good reason to be optimistic about the ECF industry’s long-term prospects. Official data suggests healthy growth over the last four years.

In August last year, Securities Commission Malaysia chairman Datuk Syed Zaid Albar announced that local ECF and peer-to-peer financing platforms had collectively raised RM432 million as at June 2019. The funds, raised since 2015, benefited more than 1,200 small businesses while the financing campaigns attracted more than 12,000 investors, the majority of whom were young, local retail investors.

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