Posted by: Financial Sith Lord | January 12, 2010

Venture Capitalism

Today, I want to write about venture capital. This is so because from 2000 – 2003, I spearheaded my company into that particular business. Venture capital is an alternative financing scheme, to serve as a leverage for corporations to finance their businesses or projects cheaply. In contrast to conventional loans or financing from commercial banks, Venture Capital is aimed towards working alongside the business/project owner in making the funded business/project materialize, and achieve its set financial objectives. Venture Capitalist (VCs) would normally finance the business or project in return for shareholdings of the business/project’s vehicle company. Under normal circumstances, such shareholding should not exceed 40%. These shareholdings are used as collaterals by the VCs, and they will continue to enjoy shareholder’s privileges (including profit sharing, dividends, etc), until to the point that the original shareholders of the vehicle company repays the entire invested amount to the VC, or the VC, Management or other shareholders of the vehicle company takes one step further by going for an IPO (Initial Public Offer). Normally, this is how the VCs make their money.

My experience as a VC had been an expensive one, for which I had gained invaluable expensive lessons in business, as well as human characteristics and behavior.   Unlike most VCs in Malaysia or any parts of the world, I opened my doors to basically any type of projects, of any form of business nature. Be it aviation, pharmaceutical, retail, IT, food & beverage, construction, telecommunication and even manufacturing, I had my hands in all of it. Within a span of one and a half years, I had invested into 19 companies of business nature which listed above, totaling to an investment sum of RM 28 million. The smallest venture was RM 50,000, and the largest being RM 10 million.

All the necessary measures, procedures and processes involving credit and project valuation, feasibility studies, due diligence were conducted accordingly prior to releasing the sums to these companies. Initially, everything went smooth and projects were being completed as schedule. However, things started turning the other way when delivered projects got delayed in payments, factory got burnt down, retail stores were robbed and looted of its stock, mis-management of funds etc.  At the end of the day, after taking all the necessary recourse, I could only recover 8% of the total investment amount. Only 1 company that I had invested still standing tall until today (and made a handsome profit for me, that practically covered all other losses!).

What I’m tying to say here is that most of the time,  business/project owners tends to take advantage of VCs and go beyond commercialism in its management of business. They tend to mix personal and business needs together, which results to devastating financial conditions if not managed properly. In my case, I had 19 companies to oversee, and had no choice but to extend some level of trust to their management teams. This is where things got screwed up.

They commonly assume that VCs has an abundance of wealth and is sitting pretty on a stock pile of cash. Little do they understand, that these funds we’re managing has its own set of stakeholders, and we’re answerable to all of them. Not the borrowers. Some of the management were still drawing luscious salaries and wages with perks at par with Enron, despite extended payment delays faced by their projects. They still go out to golf, fine and dine in expensive restaurants, travel first class to anywhere they like (on the pretext of business development), make unnecessary overseas phone calls during peak hours. Easy to say, they were not at all bothered to pursue the payment delays, and didn’t have the aptitude to even consider reducing their expenditures in troubled times.

All these mis-management only unfolded after I conducted surprise audits of their accounts, and it was staggering to learn of their spending habits and patterns. By that time, the possibilities of recovery was almost non-existent. Fortunately for me, the 1 company that I had invested in, made enough money for me to cover losses from other companies.. and at the end of the day, my stakeholders were happy.

I’m saddened to discover and unravel the truth in this particular lesson. Our former PM Tun Mahathir is correct with his statement that a particular race in Malaysia will never learn of its past mistakes if it continues to flock amongst each other. This particular race could only achieve modernization if they were to expose themselves to the values, cultures and thinking of other races, not just the races in Malaysia, but also races and religions of the world. Only through these exposures, and taking away a fraction of their existing privileges, can they compete in the global market place. I’m not saying that all of them are like that, but most of them are.

I’m writing this post on Venture Capitalism for 2 purposes. 1) To share the insights of a VC with you so that you’d understand them better, and 2) in honor of a dear friend of mine, who was an outstanding VC, and eventually made it, by being part of Malaysia’s biggest investment arm. He remained a VC until he drew his last breath. Al-Fatihah to the late Mr. Ismael Fariz Ali. May Allah bestow his soul with His blessings and may he be one of the loved ones. Amin..

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