It can be difficult for individual investors to access late-stage investments into start-ups. Venture capitalists (VC), institutional or corporate investors tend to deploy millions of dollars at a time into these start-ups, leaving those without a huge war chest shut out.
Equity crowdfunding platform (ECF) Fundnel’s collaboration with local VC Emissary Capital is set to change that. In mid-March, Fundnel launched Malaysia’s first VC microfund for its ECF investors, allowing them to tap into Emissary Capital’s Growth Fund I investments.
The VC’s Growth Fund I invests in late-stage and pre-IPO (initial public offering) start-ups in Southeast Asia. Over half of the RM200 million fund has already been deployed into four start-ups: Malaysia’s first unicorn Carsome, co-working space Common Ground, Singapore-based transport booking platform Easybook and Malaysia-based digital engagement platform B Infinite.
An additional RM10 million will be raised through the VC microfund, and the minimum investment amount is set at RM10,000. The ECF investors will gain access to the four existing investments and other start-ups that Emissary eventually invests in.
“This is the first ECF VC microfund in Malaysia. I think the investing world is gravitating toward this kind of microfunding channel. For us to do it here, when the model is already proven in places like the United States and Europe, is very unique,” says Juhn Teo, managing partner and co-founder of Emissary Capital.
“I think there’s also a great appetite in the market for the investments we are looking at, which are companies at the pre-IPO stage. Many angel and sophisticated investors would like to have access to these deals, but these companies attract larger-ticket sizes of capital. So, these investors might not have visibility or access to these deals.”
The microfund structure also enables investors to access a portfolio of deals instead of individual start-ups. This could dilute the risks that the ECF investors face.
“Because this is done in a fund format, the risk is portfolio (based). Mathematically, it’s less risky because you’re not just relying on one investment. And you’re not doing the evaluation on your own but working with a team with a significant amount of experience,” says Erman Akinci, managing partner and co-founder of Emissary Capital.
Teo and Akinci co-founded the co-working space Common Ground prior to starting Emissary. Teo is a serial entrepreneur and was previously CEO of Tower Real Estate Investment Trust, while Akinci was director of business development at Catcha Group.
From another perspective, since Emissary invests in late-stage start-ups, the risks that its ECF investors face could be lower than those who invest in earlier-stage start-ups through ECF platforms in their own capacity.
“Emissary invests in mature-stage businesses with a long track record of performance and profitability. All our investments have geographical diversity. They’re looking at some form of exit or IPO within 24 to 36 months. If you compare it to some aspects of start-ups on ECF platforms (in general), it’s definitely going to be less risky than start-ups in the seed up to Series B stages on an average basis,” says Teo.
Investors in the ECF microfund will not be at a disadvantage compared with the VC’s investors, the duo emphasises. The only difference is that the former have to put their capital in a trust.
An added benefit for the ECF investors is that they can enjoy the value of the start-ups that have already been realised. “As part of the agreement with Fundnel, we’re not penalising them for coming in late [by charging them higher fees], which a lot of (VC) funds normally do,” says Akinci.
There is also visibility on the performance of the portfolio companies. “One of our investments — Carsome — is on track for IPO later this year. The returns would be distributed to investors, so there’s probably a very high chance that there would be cash returns later in 2022,” adds Teo.
The Emissary strategy
Teo and Akinci founded Emissary in early 2021 to take advantage of Penjana Kapital, through which the Malaysian government will match on a 1:1 basis funds raised by VC fund managers. After founding Common Ground, they had wanted to get back into investing and saw this as a good opportunity. They raised half of the funds from private investors, family offices, sophisticated investors and fund of funds.
Emissary’s investing strategy lies very much in the duo’s bullishness on Southeast Asia. The region has been growing rapidly and the earning power of individuals is rising, which drives consumerism, says Akinci.
“The growth in consumption in Southeast Asia is going to go through the roof. But the mid-and-growth-market stages of investing are deeply underserved. In the private markets, a lot of capital is deployed in the early stage, where cheque sizes are in (the range of) US$1 million or US$2 million. Meanwhile, institutional investors won’t spend anything less than US$30 million. So, there’s this window in the middle where there is less capital available, and we think it’s really exciting to focus there.”
The public markets have also become more mature and there is now a broader spectrum of exit possibilities, he adds.
Emissary employs an active management strategy, so the fund will most likely invest in no more than 10 start-ups. The exit timeline is two to three years, and the expected internal rate of return is 30%, according to Akinci and Teo.
“To do this effectively, we cannot be fully passive. If you’re just going to cut (the start-ups) a cheque and hope for the best, your success rate is going to be much lower than if you assist these companies to achieve the outcome they’re looking for. That’s one of our core investment strategies,” says Akinci.
The VC is now putting together a second fund. “We’ll be looking for a much larger fund deployment into different types of opportunities across the region. I think there has been a huge demand for ESG investments in this part of the world, which we feel is underserved. That’s one theme that we would like to try and get a lead on,” says Teo.