“ANGEL investors don’t come with a halo and wings, but they can seem heaven-sent to an entrepreneur struggling to find financing.” — Cathie Gandel.
Malaysia has raised the profile of Islamic finance, takaful and the halal industry, and, now, it must do the same to venture capital (VC). VC is an important emerging asset class that should contribute to the government’s objective of building a knowledge- based economy by 2020. There were several important takeaways from the recently concluded International Venture Capital Symposium 2011. One of the most important sparks to establish a VC infrastructure in debt-based and biased Muslim countries is the role of “angel investors”. The angels are between “friends, family and fools” (FFF) seed money and established VC money. Although it’s expensive money, due to a high failure rate and a five to seven-year lock-up period, these stage two companies will not receive financing/funds from banks, Islamic or conventional, which typically lend to old economy companies whose business they understand.
The important role of angel investors is flushed out in places like India and China. Simply put, these people, of Indian and Chinese origin, accumulated their experience, expertise, network, and wealth in places like the US, Canada and European countries. Thereafter, some of the diasporas have returned to their “home country” with knowledge and achievements in the form of credible and needed angel investors. Whether we accept it or not, the Muslim world (today) is about personalities that have “cult or pied piper”-like following, which may be either flavour of the month or something more sustainable. The credibility of these returning entrepreneurs comes from their overseas presence and success, western media coverage, and removal from (home country) domestic challenges. Put differently, they are the important missing link for raising the profile of VC and filling the necessary gap knowledge. For example, one of the more prominent returning diasporas from India is Vinod Khosla, a co-founder of Sun Microsystems, general partner of a high profile Silicon Valley VC firm Kleiner Perkins Caufield & Byers, and, in 2004, established Khosla Ventures, focusing on areas like clean technology. The Malaysia Life Science Capital Fund, to overcome issues related to size, has partnered entities like Khosla Ventures.
The recently established Talent Corp Malaysia Bhd “… assumed the role of administrating the Returning Programme in 2011 to promote the return of top Malaysian talent.” It is a good and credible first step to bring the (Malaysian) talent back to lead the necessary human assets for a knowledge-based economy. The hoped-for return of diasporas-cum-angel investors is not enough, there need to be a supply of qualified local human assets. The Capital Markets Masterplan 2, released in April 2011, aptly outlines the challenge: “The VC industry is also generally constrained by the inadequate number of professionals, high staff turnover and general lack of the deep technical and market knowledge to assist successful commercialisation of technological-based ventures.” Thus, an important opportunity exists for Malaysian educational institutions like INCIEF, IIUM, UniRazak, etc, and research entities like ISRA in offering courses, certificates, and diplomas in venture capital. Thus, an educational feeder infrastructure is an important need of the hour if VC is to be the foundation for knowledge-based economic sectors to rise.
What does Islamic venture capital mean?
Its well accepted VC financing is not typically about financing the well-known prohibited sin sectors of alcohol, tobacco, defence, pork, casinos, etc. The capital structure issue, preferred shares, has been addressed by scholars and its acceptance is gaining traction. It should be noted there are 42 stock exchanges in the 57 Muslim countries, and, typically, there are four to eight economic sectors with a market capitalisation bias weighting towards the (conventional) financial sector. In developed countries, there are 10 economic sectors, including three important sectors where patents (as indicator of a knowledge economy) are a common-place: technology, healthcare and energy. These three sectors are either not present or very “lite” in the Muslim world. For example, a proposed topic for these research/academic institutions to examine concerned a ratio test that was raised at the VC event. To measure the level of VC (penetration?) in a country, the ratio of VC/GDP was articulated, and, for me, it may not be precise enough for countries like Malaysia. A possible better ratio may be VC/stock market capitalisation as the exits include listing on an exchange or trade sale. Furthermore, one can further drill down to VC/technology sector, VC/healthcare sector and VC/energy sector. However, as stated above, these three economic sectors are generally “lite” in the Muslim world. However, if there was a Malaysia IPO index, we can take the VC to market capitalisation of the IPO index as a better ratio barometer on VC’s impact and role than VC/GDP. Its equivalent of stating the price of palm oil may be better measure Malaysia’s resource than the price of crude oil. Full disclosure, at Thomson Reuters, we have TR IPO Malaysia Index and its market capitalisation is about US$25 billion (September 2011), as both indicator and eventual asset class. The VC allocation in Malaysia for 2010 was about US$1.1 billion, obviously a small number but a better beginning point the VC/GDP ratio.
Furthermore, to raise the profile of VC, as both an important asset class, and as an indicator and contributor to a knowledge economy, there is an urgent need by Islamic finance conference organisers to include venture capital as part of the programme. For example, one of the more established and successful Islamic finance conferences in Malaysia (since 2002) is the Kuala Lumpur Islamic Finance Forum (KLIFF). The 8th KLIFF was the first major Islamic finance that had dialogue and presentation on the US$640 billion halal industry. The discussions now have matured to raise the importance issue of convergence between VC and Islamic finance. Venture capital in the Muslim world needs to move from the theoretical papers to practical application. It is an important element of the Islamic equity capital market, expanding the economic sectors, and contributing to a knowledge based economy. Where are the Malaysian Diaspora Islamic Angels to lead VC in Malaysia?
The writer is global head of Islamic finance for Thomson Reuters based in New York