Startups, books and beyond Malaysia

More venture builders in Malaysia?

Many people don’t seem to know what is a venture builder. Well, firstly, a venture builder is not an accelerator. A venture builder is a place that uses shared resources to grow several startups together under one roof. The venture builder is run by a group of people with the expertise and network to incubate and grow their startups. Some of the notable examples in Malaysia are 1337 Ventures, True Happiness Capital, VLT Labs (recently acquired by Mckinsey), and recently LaunchPad which began last year.

Running a venture builder is a lot of hard work. Unlike a typical venture capital firm, you can’t run a venture builder with just a couple of guys. You need a dedicated team to operate and monitor your startups. You need to give all the support that a startup needs to grow (which pretty much can be anything depending on the problem that the startup is trying to solve). As a venture builder, you may have to deal with a lot of startups at the same time including maintaining a good technical team in your ecosystem like app developer, content writers, and other guys that you may need to support your startups.

Recently I went to the launch of PixelPlay Ventures in Bukit Bintang. PixelPlay Ventures aims to be a new venture builder to capitalize on growing Shariah businesses. The startups that they’re looking for are those seeking seed investments ( anywhere from RM10,000 to RM100,000). Compared to a normal venture capital firm, a venture builder will incubate the startup and monitor its investments in-house. The leadership looks pretty solid as it’s a combination of people who have worked with startups and even listed entities. I found out later that PixelPlay has been around for quite some time as well mainly for its entertainment business. The entertainment division is led by a well-renowned actor Bront Palarae (who happens to hail from Kedah like me!). I understand that their first cohort is starting sometime in July this year. You can find out more by going to PixelPlay Ventures website here.

It seems that venture builders are attractive targets for strategic acquisitions. One notable example is the entry of Mountain Partners,  a Swiss-based incubator company in Malaysia through the acquisition of Qeerad.  Another recent example is the acquisition of VLT Labs by McKinsey & Co. The acquisition is just timely and looks like a perfect fit for McKinsey as it allows the company to offer better digital solutions for their established clientele.

In my law practice,  it is normal to find recurring issues affecting compliance issues as they are busy selling their products and growing traction. To run a good venture builder, it will be crucial to incorporate shared services solutions that will resolve all these compliance issues such as dealing with payroll, accounting, tax and secretarial stuff.  If a venture builder can tackle these issues, the startup would definitely have a higher chance of getting funded as the due diligence process may be potentially smoother.

As an entrepreneur, you might be asking whether joining venture builder is a good idea for you? Well, it depends.  As a startup, you need to find out whether the venture builder you’re planning to apply really understands your business and ultimately your vision. You don’t want to end up in a scenario where your business is ‘usurped’ by the venture builder which may cause a big problem for you in the future. Another important aspect is autonomy. Many entrepreneurs leave their high paying jobs to start a  business so that they have more freedom to do stuff. Being part of a venture builder means that you will still be bound by a hierarchy of supervision. There will be certain milestones so that you need to comply to continue getting funded. In other words, you won’t get the full amount as the money will be disbursed based on certain conditions. Seasoned entrepreneurs who have exited their startups may have the resources and network of investors may do it themselves. So, joining a venture builder may not really be for everyone.

So you want to do an ICO? Well, follow the rules

It looks like everybody wants to do an ICO nowadays. ICO or initial coin offering is a scenario where a company raises funds by issuing tokens to investors.

There are a lot of guides on the internet that you may find so I really don’t want to bore people with how to do an ICO. In this post, I just want to share some of my concerns surrounding many people who seem to believe that doing an ICO is “easy”.

Before we go further, let’s look at an ordinary initial public offering (IPO). In an IPO scenario, a company is allowed to list for the first time on the stock exchange. Before that is done, the company must go through regulated due diligence exercise where a set of experts will be engaged to make sure that all the listing requirements have been satisfied. A typical IPO in Bursa Malaysia may cost anywhere between RM2-3 million (probably more, depending on the type of company and the service providers that the company is required to engage).  An ICO, on the other hand, is unregulated. In other words, there are certain conventions and precedents which have been done by other successful ICOs which you may or may not follow. One of the examples is to publish a white paper. A white paper is like an academic paper that sets out why you’re doing an ICO and what are you planning to do with the proceeds that you raise from the offering. It does sound nice and wonderful but many people don’t know that there’s no law governing the contents of the white paper. Any promoter may just put anything

Another thing that people don’t tell you is that you need to engage a myriad of service providers to help you get your ICO off the ground. To illustrate, one of the biggest costs is actually legal fees for solicitors. The solicitors will depend on the choice of domicile or jurisdiction upon which you intend to place your ICO. Say, if you plan to do your ICO in Singapore, you need to engage a Singapore lawyer to advise you on the vehicle formation.  You will need to spend around USD40,000 to USD60,000 to get the structure up and running. On top of that, you also have to pay service providers to assist you in the Know Your Customer (KYC) / Anti Money Laundering (AML) solutions and PR/marketing guys to handle your ICO community. It may be possible for an ICO to cost more than an actual IPO.

Given the ambiguity of the ICO fundraising, this opens up huge opportunity for scammers to exploit. More often than not, you will see most of the ICOs as a ‘hit and run’ game. It’s a huge scam that is permeating the ICO scene.

As an investor, you should really be careful whether to invest in an ICO. There are a lot of scams out there and you should really be careful when deciding whether to invest in an ICO. It is heartening that the Securities Commission of Malaysia (SC), a capital market regulator is taking active actions against people launching ICOs. Most of the time, the so-called ICO is actually an multi-level marketing (MLM) scheme. If you got into the “game” early, you may reap huge benefits but you just don’t know when the “show” is going to end! The worst case is if it’s a “hit and run”. You might just lose all your investment overnight. On a flip side, if the regulators like Bank Negara and SC steps in, the first thing that will happen is that the alleged bank account will be frozen. The promoters will be charged in criminal courts. It may take years before you may be able to claim back your investment. It’s not going to be a pleasant experience especially when it’s your hard earned savings.

Recently, as many more entrepreneurs explore ICO as a fundraising channel, you may bound to come across people proclaiming themselves as “ICO consultants”. These guys claim to be experts in ICO. Just by having them around would somehow create some sorts of ‘legitimacy’ in the whole scheme that would ultimately get you fundraised. Is it really that easy? Well, not as easy as you might think of it, unfortunately. Even the real “ICO consultants” expect you to be able to meet their expectations. So you really have to get ready with the cash to get all the stuff up and running. There’s apparently a name for these scam coins. They’re known as “shit coins”.

On a more positive note, the regulators seem to be taking a more active approach when it comes to regulating blockchain and the use of cryptocurrency. The Central Bank of Malaysia has made it clear that companies like Luno and Coinbase which are providing crypto wallet must comply with the anti-money laundering rules prescribed by the bank. As for the SC, it is considering to introduce guidelines on cryptocurrency exchange anytime within this year.   Apparently, SC has been working closely on the “Blockchain Project” since late 2017 last year.  I must admit that this guideline has got nothing to do with ICO per se but it is an interesting development nonetheless as it reflects the SC’s interest in responding more to the growing interest of responding to the demand of the investing community. It seem like the SC may or may not be issuing any guideline on ICO at the moment. Be that as it may, the legal position when it comes to security token or utility token may seem pretty similar to the Singapore’s Guide to Digital Token published by the Monetary Authority of Singapore last year.

In conclusion, I am not against entrepreneurs wanting to raise funds through ICOs. The point I’m trying to make is to be aware of the legality and the expectations that come with such decision.

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