In the case of Biztory, besides equity, it also offered its investors—most of them are entrepreneurs—the reseller rights to distribute its accounting software, giving them skin in the game. As shareholders of the company, these investors now feel more compelled and incentivised to help push the startup’s products to their fellow SMEs.
If the company does well, investors are looking at a substantial return for the money they put into Biztory. Although raising money from a VC may be the “sexier” thing to do, Biztory’s Soong notes that a VC may not have the community network he’d like to distribute his products.
Another company dishing out incentives to investors is iHandal, a sustainable engineering solutions company. The company has raised slightly over RM1.48 million (US$340,000) from ECF platform operator pitchIN and has promised to give out 6% annual dividend for the next five years. iHandal is also profitable.
But that’s not the case with most companies.
Bikesh Lakhmichand, founder and CEO of ECF platform operator Leet Capital, notes such promises won’t work for young, yet-to-breakeven companies.
“If you’d like to give them perks—like life-long discounts for your products—because it’s a way for you to thank them for being a shareholder, that’s fine. This way, your shareholder is also more motivated to spread the word about your company, especially if it’s a consumer business,” he says.
The tech factor
Interestingly, both platform operators of pitchIN and Leet Capital also run tech accelerators—WatchTower and Friends (WTF) and 1337 Ventures, respectively. This could potentially serve as a deal pipeline for their ECF platforms, tipping the ECF scale slightly to their favour.
Leet Capital is one of the three new entrants into the ECF industry, having just received its approval from the regulator in June 2019. It launched its ECF platform on 15 April, and there are already four deals lining up to be funded by investors.
Take my money
As of 31 December 2019, the Malaysian ECF industry has raised RM73.7 million (US$17 million) across 80 campaigns. Interestingly, over half (53%) of these investments—since the first ECF campaign in 2016—come from retail investors.
According to SC Malaysia’s guidelines for recognised market operators, investors are divided into four categories:
Sophisticated investors such as high-net-worth individuals (HNIs), high-net-worth entities, and accredited investors
Institutional investors such as asset managers, sovereign wealth funds, pension funds, and university endowments
ECF platform operator pitchIN, which began operations in 2016 and claims to have the biggest market share (63.3%) in the industry, has helped companies raise RM60.5 million (US$14 million) in 2019, according to its annual report released in March.
Its co-founder and CEO, Sam Shafie says the retail investors on his platform are “young, savvy investors” who are still climbing up the financial ladder, hence they usually invest less than RM5,000 (US$1,135). Out of pitchIN’s investor base that comprises 3,200 investors, about 63% are retail investors. Despite that, most of the fund raises—RM50 million (US$11.5 million) out of RM60.5 million (US$14 million) raised in 2019—are still being led by angel investors or HNIs.