In the first quarter of 2022, venture capitalists invested US$319 million (RM1.4 billion) in start-ups in Malaysia, according to startupstash.com, a directory of tools for new businesses.
This was more than half of the amount invested in the whole of 2021.
Start-ups or new businesses are the forte of venture capitalists. They typically put smaller sums of money for minority stakes in small businesses that have just gotten off the ground.
But apart from the financial support, they also offer strategic guidance and networking opportunities to help the business succeed.
This sets them apart from private equity investors who invest larger sums of money in more established companies for which they expect a greater say in how the business is run.
The private equity investor is often directly involved in the management process with a view to increase profitability and to streamline operations to maximise returns.
The venture capitalist and the private equity investor also have quite contrasting expectations.
From the investor’s perspective, a new business is often more susceptible to risks than the more established ones.
For taking that additional risk, the venture capitalist usually expects significantly higher returns on his capital compared with his private equity counterparts.
Despite the relatively bleak global economic conditions, with high interest rates and high inflation, venture capitalists do have a decent amount of money to invest.
However, they do face challenges in putting their capital to work. For a start, early-stage companies are seemingly unwilling to accept more realistic valuations that reflect current economic conditions.
Instead, they hold on to the idea of achieving valuations that were quoted in 2021 when sources of funding were generally abundant.
But lately, investing in established businesses is beginning to look more appealing for many venture capitalists in the current economic climate.
But challenges remain.
Over the course of the Covid-19 pandemic, many established businesses borrowed significant amounts, as it made sense to do so in a low interest rate environment.
With rising interest rates, higher costs due to inflation, high workforce turnover and generally poor economic conditions, these businesses are now facing significant pressures, especially from a cash flow perspective.
Investments in these businesses may no longer yield the returns that venture capitalists are accustomed to from the percentage perspective. On the other hand, the returns in absolute amounts may still be within expectation.
The line between venture capital and private equity investments has evidently blurred and experts expect the overlap to remain in the years to come.
The views expressed are those of the writer and do not necessarily reflect those of FMT.