Money goes where it’s wanted, and stays where it’s well treated

A recent posting on the WebCamp KL Facebook group caught my eye, and perhaps underscored the need for me to return to writing after a long hiatus. Fact is, since joining MDeC in March 2011, I’ve had very little spare bandwidth to actually pen something down, even if there was tons of fodder for the mill. A sharing on business funding and entrepreneurship in Malaysia’s perspective.

The FB posting raised the issue of a founder who was moaning about having to cede 20% equity in his startup for what he termed, “a measly RM100,000”. A measly RM100,000, indeed. Something I would have given my left gonad for when I bootstrapped my first company in 1995. Tied together with another posting of an incubation fund proposed by Vishen Lakhiani of MindValley fame, the comments on both postings neatly summed up the state of affairs in Malaysia’s startup scene.

A state of affairs which can be elucidated in one line: it is high on rhetoric and moaning over what could have been instead of taking real steps towards building profitably sustainable companies which are game changers.

At the same time we see a lot of hoopla about entrepreneurship by what I call the Rah Rah Brigade, touting the entrepreneurial spirit as the antidote to all our problems. While such motivation is clearly needed especially in a culture which frowns upon failure, it is not the only panacea.

That comes from a multitude of factors which would lead to a raft of sustainably profitable companies, which are game changers in their own right and who both inspire and spawn other companies to go further. It is from this miasma of innovation that greatness will emerge, and we will then firmly place ourselves on the world map of creative hubs.

More often than not, parallels to what Silicon Valley is and how we missed the boat with MSC Malaysia or such is drawn. Let’s get that out of the way then. Silicon Valley happened because it erupted with the right mix of ingredients at the right timing. It will be nigh impossible to replicate thru human planning and this can be seen in the fact that it has not spontaneously erupted anywhere else in the world either. Let me say that again, there is only one Silicon Valley and people throughout the world flock there with their ideas in search of being the next big thing. Big ups to the denizens of Highway 101 !

Whither the rest of the world then ? What of the factors which would lead to sustainably profitable companies, and what are the roles which need to be played for that to happen ?

Let’s try to address that, starting with the elephant in any entrepreneurial room. The pachyderm which answers to the name Funding. Walter Wriston, former chair and CEO of Citibank/Citicorp, famously said, “Money goes where it is wanted, and stays where it is well treated”. Ask any investment banker who tracks the flow of global funds, and he will tell you the same thing. Funding is only available where it is truly needed, and stays when it is respected.

Applying this to the startup scene means that funds go to where there are truly innovative ideas, and the explosion of wealth generated with that will be retained to energize the next wave of startups, only if the money is respected and the funding cycle fully understood. I’ve long lamented of the lack of angel investors in Malaysia, primarily because we never did have that first wave of dotcom successes which the valley created. However, we are slowly beginning to see individuals pour back the gains they have made from their own startups into new ideas which emerge even if this is far and few between. Nevertheless, these investors still lament the lack of truly innovative ideas from our startup scene.

Long have we said that with the advent of the Internet, we must start thinking global from day one. Little do many startups realise however that this applies to their ideas as well, and that they are competing for funds all over the world. As such the ideas we generate have to be truly innovative in concept, or at the least be one which applies very well regionally. Me-too ideas will be dropped by the wayside, as the recent lament about the lack of Malaysian pitches at DemoAsia showed.

Which segues into valuations of those ideas. Investors are in it for returns, so the best deals which can show future valuations which are healthy will get funded. Future valuations are purely based upon commercial success thru building a sustainably profitable company and this then will provide the clean formula for how much equity is needed to be ceded.

We can quote anecdotes of Apple stock in the 1970s a thousand times, but these are the exceptions and not the norm. Mark Zuckerberg and the Google duo of Brin and Page knocked on many doors and put in a lot of sweat and tears before they were recognized as phenomenal successes. Dreaming about achieving that is admirable, but we need to recognize that the reality of it is funds are invested in order to gain more funds. GroupOn has been a tremendous success in mindshare, but the SEC recently had them rework their profit forecasts multiple times over, slashing their pre-IPO valuation in the process. See the pattern ?

The goal for a startup is to turn a sustainable profit, which will then provide the fillip in valuation and wealth creation for its founders and investors. My former chairman drilled this into me stating that a company has to enhance shareholder and customer value. And turning a sustainable profit is just a simple matter of building and selling an innovative product which customers will pay for, no matter what the business model employed.

And this is the primary role founders and entreprenuers should play. Generate the innovative ideas, concepts and products needed to build sustainable companies. Plain and simple. Iterate and pivot as many times as necessary until the holy grail is found, but do not stop nor be disillusioned until its done. At the same time, be realistic and aware of the roles the other stakeholders play as well, roles I will expand on in the coming weeks in subsequent articles.

Everyone has to play their part in this stage, before the works of Shakespeare can be produced. Before we can claim ourselves that spot on the world map of creative hubs.

Before we can truly say we have arrived.

This article was originally published by Dinesh Nair over at his Facebook notes. Dinesh is a technologist, investor and biker.