14 June 2017

The Ironic Evolution of Money: The Smart Ass Saga

Then some smart ass computer scientist decided to make money virtual. You don't need to keep livestock nor agriculture produce - that's anticipated anyway. You don't need to keep gold or silver or any damn metal elements. You don't need to keep those papers we call notes either. This smart ass decided to transform the idea of money into electricity that can be transacted via computer circuits across network of circuits we call internet. Wallah.... behold the age of internet banking

There weren't many smart asses to begin with, initially. So it was simple and easy. Wealth was in the beginning measured in terms of livestock or agriculture produce. Basically you'd need to barter what you have to get what others have at a willing buyer and willing seller quantities of the different items. The issue with this is that, those items are perishable. Hence whatever value you put into them has a useful physical and economic useful lives of those item itself.

Then some smart ass miner discovered that value can be placed onto precious metal because of its scarcity. People began to equate what they have, whether livestock of agriculture produce, in terms of an agreed amount of such metal. Soon instead of exchanging items, they exchange those metal pieces with goods. Many types of metal were used but the most valuable, presumably because of its high ranking of scarcity, or because of its purity sustainability against nature's oxidisation, gold became the ultimate metal currency. Next was sterling silver and bronze. So, as greed radiated across mankind pervasively, everybody wanted to accumulate metal rather than the stuff that you actually need to eat and stay alive. Perhaps they thought that their tummies have evolved alongside their economic understanding where metal can be digested biologically?

Then some smart ass lawyer decided to equate all this fuss into black and white legal terms written on paper. Basically this document carries with it the legal tender to transact whatever purchase equivalent to a predetermined value of gold or any metal coins used by mandkind. The document would say something like this, "The bearer or this promissory note is entitled to whatever pounds of sterling silver claimable from the Bank of England" or some shit mumbo jumbo like that. This becamr the currency notes that we use daily. Funny that some cheap material like paper can now be valued higher than precious metals like gold and silver just because some banker with Royal Charter signs on it. Again, no matter how valueble these papers are, you still cannot eat them like you'd do with livestock and agriculture produce.

Then some smart ass computer scientist decided to make money virtual. You don't need to keep livestock nor agriculture produce - that's anticipated anyway. You don't need to keep gold or silver or any damn metal elements. You don't need to keep those papers we call notes either. This smart ass decided to transform the idea of money into electricity that can be transacted via computer circuits across network of circuits we call internet. Wallah.... behold the age of internet banking. But even so, the value of those electronically recorded data is still based on the underlying value of the papers we call notes, which by right, should have been based on the value of gold reserves a country has (and I don't this is still the case); and of course, those gold reserves should have been based by the value of produce a country can export or some shit theory like that. In short, we can still find some link from our e-bank account balance to the damn goat on the field.

Then some smart ass, big mama ass, shit head, decided to exclude the damn goat, the damn gold, the damn papers and the damn electronic representation of material wealth and replace it with the idea of mining some unique virtual universe blockchains of codes, or whatever hell it is called.... the bitcoin, I think. This is when we all started banging our heads on the wall. The idea of value has transcended our comprehension. Despite our conscious incomprehension (if there is such a word) of the damn saga, we place our utmost trust with the mama smart ass of all time and of all of humanity that our wealth is secured in this new age of demonic intangibility madinsanity economic evolutionised concept.

Meanwhile, some smart ass is quietly accumulating the livestocks or agriculture produce or the precious metals or any commodity for that matter; and at the same time, securing the sources, or the ability to procure, or the ability to produce, or the ability to control, or the ability to price those livestocks, agriculture produce or metals or any commodity. In the end we who evolve may lose everything and they who stayed purist gains. One day, a big mama ass magnetic field surge is gonna wrap the planet Earth as the yellow Sun releases its occasional bursts and in just split seconds, all those wealth we have accumulated in electronic form will be erased (unless we have proof written in legitimate ink on paper).

* kopihangtuah

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09 June 2017

Know What it Takes to Do a Job Well - By Zainir Aminullah (Others Who Spoke 4 : Fuelling the Kreativ Malaysia)


Copyright © 2017 by
Zainir Aminullah
Chief Executive Officer of Ideate Media

KNOW WHAT IT TAKES TO DO A JOB WELL. Take writing for example. I can’t tell you how often we receive scripts or pitches and we struggle to find a compelling story or character that we can root for. Writing is technical. We keep thinking writing is a creative process and indeed it is very much so, but just like any other job, the task of writing is a beautiful discipline filled with technical know-how, processes, structure – almost technical.

If you think that you can just wing in then you’re dead on arrival. The people that evaluate your work are producers, network executives, studio heads and distributors. You will have to assume that these people will evaluate based on both creative and commercial criteria. Maybe you’ll get lucky when you pitch to people who don’t know what they’re doing, but luck can’t sustain an industry.

So learn, study, read, attend a course, get a certificate, be an apprentice – be humble enough to accept that if you don’t have what it takes to do a job well, get help. Drop your ego.

Offer something different. When I was at Astro and was first asked to develop the content strategy to get more Malay homes, we commissioned a research study and conducted focus groups everywhere and asked the question – what are you watching and what would you like to see on Astro? The conclusion was overwhelmingly simplistic – dramas on TV3 and we’d like to see more dramas on Astro please.

I pondered on that for a while and thought what was the point of offering more of the same, especially when all we had was a little known channel called Astro Ria, to go against the Goliath that was TV3. So we did Akademi Fantasia. To cut a long story short, it was a phenomenal success and since then I’ve had to apologise to everyone for being responsible for keruntuhan akhlak remaja Melayu’ (The fall of the Malay youth moral).

At one press conference a journalist commented to me that most participants are not really good singers and they’re not worthy to be called artists. In my head I was thinking ‘Ahhh, you don’t get it – it’s not a singing competition, it’s a drama!’ Go deep to understand why people like what they like and if you go deep enough you will discover the right emotions. Make a connection with that emotion and if you’re among the first to do it, you’re on to something groundbreaking.

* kopihangtuah

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Creating Job Opportunities for Musicians - By Zahid Ahmad (Others Who Spoke 3 : Fuelling the Kreativ Malaysia)


Copyright © 2017 by
Zahid Ahmad
Sessionist Drummer
Music Director
Music Producer

IN THE OLD DAYS, musicians only perform in bars/nightclubs or wedding functions. That is one of the reasons why music is taken as taboo to most Malaysians, particularly the Malays. Today you can work with the Government by playing/working as part of their 'Kebudayaan dan Kesenian' (art & culture) initiatives. You can also make a career as a music teacher. When comparing Malaysian music scene with our neighbours such as Indonesia, we are left behind in music education from many perspectives such as the syllabus, teaching style and lack of performance centres (of the quality if it).

As a performer for nearly 40 years in the music Malaysian industry, I can see that there's a niche opportunity that we can develop and make our music industry healthier and more sustainable. By creating jobs for experience musicians or performers (music and performing arts), we can make a decent and steady livelihood for all artists. This includes teaching in schools (primary and secondary) as well as colleges and universities all over Malaysia. Currently, all of our schools, colleges and universities are only using academically (merely) guided music teachers who are not real music practitioners themselves. Most of them (teachers) do not have the experience and only know music technically in respect of the instrument and notations. Contrary to real music playing practitioners, they are not exposed to the different scenarios a gig or a show or a concert would present. Such experience is what makes the musical knowledge real, rather than theoretical.

To diversify the musical opportunities for musicians will mean that we are promoting stability for the music industry and the creative economy of the country. In the Americas and Europe, most schools, colleges and universities have started to mix the technical experties with practical experties giving a synergy that benefits the students more. This allows the students to embrace music both in class as well as out in public. Creating jobs opportunities by hiring experience musicians (the best in their own fields) via the different levels for every school/colleges/universities in Malaysia is a simple but an effective method. Why not do this?

Another possible method is via affirmative action in policies. Imagine if music, as a subject, is made compulsory in all primary and secondary schools and is being treated as a prerequisite for entrance into the tertiary institutions. Such imagination should radiate into music camps for school holidays all over Malaysia like how the other co-curriculum activities are developed (example, scout or cadet). This imagination, if translated into reality, can provide valuable jobs for a lot of people from the performing arts sector in Malaysia.

Later on, when the formal education system has stabilised the importance of music in their programmes, there should be plans to create dedicated colleges or universities that specialise in music or performing arts like Berkeley. The subject matters for such specialised tertiary institution should include, but not limited to, performance skills, teaching skills, production skills, marketing skills and many more subjects/programmes that can be customised to the needs of for the national music and/or performing arts industry.

* kopihangtuah

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Art to Gamechange its Own Economic Model - By Low Ngai Yuen (Others Who Spoke 2 : Fuelling the Kreativ Malaysia)


Copyright © 2017 by
Low Ngai Yuen @ngaiyuenlow
Chief Executive Officer of Kakiseni
Executive Dirrector of Global Entrepreneurship Movement

SEVEN YEARS, have I been helming Kakiseni, a not-for-profit organisation, bent to spread access for the arts. From the onset, Kakiseni has had the honour to participate in the Dasar Industri Kreatif Negara 2011 – 2014 (“DIKN” or the National Creative Industry Policy) where we mooted the idea of supporting the arts practitioners by lightening their burden through grants to support production costs, set up the processes for support in extended community outreach, facilitated inter countries’ artists exchange and amongst a few more initiatives; got some guidelines going for arts organisations to start up their own performing spaces. All resulted in a 140% increase in the number of shows produced in 2012 and 2013.

While I am not alluding that the numbers are to be taken as the success of the programmes introduced under DIKN – there are many more considerations that we’ve tabled with much gusto; it is also with much delight that we do see this as a positive result in that it’s enabled an environment that has allowed for much higher productivity in the arts fraternity. Meanwhile, the ongoing debate – not just in Malaysia but worldwide; questions the need to fund the arts in order to save the arts as well as the various ways to do it: be it grants, loans, taxes, awards, exemptions, guidelines and even various committees or councils set up.

Is there one sure fire, best way to do it? In the countless discourses that I’ve been having, my conclusion is that there isn’t. Not the way we have been doing it, for sure. Even after countless presentation and lobbying and we finally get policymakers to see the value of the arts in education, alongside science and mathematics; in nation building; in building high social capital; and in creating a generation that creates and innovate – the end crusher is always about the crossroads between arts versus labour versus demand versus tangible values. All because we put art and artists in the same economic model as we do everything else.

We need to reconsider this model. We need to restart the conversation not from the point of art for economic survival but art to enhance new commercial models. Box office income, patron and private giving, grants, public funding, commissioning works and sponsorship of the arts – there is a need to create how demand is being supplied to. From Patreon to Kickstarter; enough with the celebration of these as innovative success stories and start doing more, we need to don the innovation hat ourselves – urgently.

The call now is to redesign how arts is being consumed and how monetisation for one’s work can be. We need to think outside the system to look at the development and sustenance of artworks and artists, perhaps through more cross-disciplinary collaborations and marketplace with the other sectors. Artists need to gamechange not beat the others at their games.

* kopihangtuah

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In Malaysia, Art is Very Much Separated from Law - By Khairul Anuar Shaharudin (Others Who Spoke 1 : Fuelling the Kreativ Malaysia)


Copyright © 2017 by
Khairul Anuar Shaharudin @Kruel74
Co-founder of PUDGi

AS A LAWYER, writer of non-fiction and fiction books coupled with being involved in building enclave to promote art, especially writings, in Malaysia, I feel art in Malaysia is disconnected from the law. There are a lot of artists in various disciplines living poorly and dejectedly as they feel they were not protected under the law. Their artworks were stolen, taken away and a lot of them can barely feed themselves and their family. It has happened and is still happening to a lot of giants of the art industry in Malaysia with their names bandied around by others who now own their intellectual properties. We have artists who was found through competitions organised by public or private sectors which will then take advantage of these artists. After they were declared winners, they will gain fame with their works being sold to the masses using the contracts signed.

Contracts to produce musical albums, publish books, sell visual arts at art galleries are contracts signed by artists rarely perused by lawyers protecting their interest especially if they have just been discovered. Most wouldn’t know the implication of entering a contract much less able to dictate terms. Disputes arised when book becomes film, cross-border selling of visual art and plagiarism of art in various forms. The creativity of the artists is being exploited by the creativity of thieves using the guise of digital world and the internet. At a lesser extent, there are those who are still being taken advantage by conman disguised as promoter, publisher, individual person and company.

Actually, the law in Malaysia is enough to control and give protection to all types of art in any form including but not limited to paintings, writings, films, theaters, visuals, sculptures and many others. What is not enough is the understanding and the exposure of the law protecting their works to the artists. From the point of law, there are written laws and public censure, either those needing registration, such as patents or those not needing any registration such as copyright, all are given enough protection in Malaysia. No new law is needed.

Artists in Malaysia need a support system like in Hollywood that has professional agencies to represent them and professional managers who can help them to make better decisions on the contracts they entered into. Usually, in the current art scene, most (artists) are being managed by their family members. Some are lucky to have professionals such as lawyers among their family members and some have enough money to hire them. Although the art world in Malaysia is considered by some to be small, some Malaysians have been making leaps and bounds in the world through their artworks. It is time for the art world to use the law accorded to them in full and take the world by storm.

* kopihangtuah

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The Gap in the Creative Industry Ecosystem of Malaysia (Chapter 3 of Fuelling the Kreativ Malaysia)


The very nature of a creative business is intangible. They have plenty of intangible assets called Intellectual Properties (IP). IPs can be valued. There are specialised valuers who can value IPs. However, the banks (in Malaysia) is still not confident in accepting the valuation done on IPs. It was said that the valuations are often too astronomical.

THE MALAYSIAN CREATIVE ECONOMY consists of many sub-sectors. The Malaysian Dasar Industri Kreatif Negara (DIKN), or in English, The Malaysian National Creative Industry Policies, had identified an exhaustive list of creative offerings, for which, if grouped into smaller groups, can be allocated into ten main categories. They are Visual Arts, Performing Arts, Music, Literature, Film/TV/Gaming Content, Fashion & Design, Traditional & Cultural Arts, Creative Education, Creative Technologies and Culinary Arts. Each one of these sectors has their own behaviours, issues, mechanisms and require tailored approach for its nurturing.

To begin with, the overarching philosophy  for any sector to grow is “to embrace creativity in a sustainable manner that ensures both economic and societal benefits”. The key words here are Creativity, Sustainability and Benefits. Creativity is what we, Malaysians, have in abundance. What we ought to figure out is how do we make these sectors into sustainable economies. Sustainable must mean that whoever are the participants, they will get sufficient rewards, monetary rewards. Without monetary rewards, the word “Economy” becomes irrelevant to this discussion. As further extension to the quest to make money, we also have the duty to ensure that our creative offerings do not cause harm to the society as a whole. Therefore, ripping the rewards must be balanced with societal benefits, which may not necessarily be in monetary terms.

As previously announced by many parties, the size of our Creative Industry can be approximately measured at a contribution of 1.6% to the Gross Domestic Product of the country (Malaysia) – 2014 statistic. There is a lot to catch up when we see our neighbouring countries showing 5% to 7%. Surely there must be something that can be done to jump start that 1.6% into a more dignified number. So what does the Malaysian Creative Industry need? Through various discussions and research by various agencies, there are a few key aspects of the industry that have been identified as the core needs of the Creative Industry. These areas need attention in order to break free from a stagnant or worse, deteriorating state of the industry.

The critical areas are: 1. Capital injection for economic growth; 2. Wide spreading of sales and marketing channels; and 3. Infrastructure enhancement for development, production and distribution activities. At this juncture, it is wise to contain the discussion at No. 1, which is the capital required. Once we have produced enough entrepreneurs, items 2 and 3 will be considered quite naturally as an organic growth to the industry (hopefully). So, the main gap is “Financing”.

Capital injection requires a pool of financial sources. It is the fuel to the economy. The main sources of funds are typically Government grants, private money, banks and equity investors. As we all know, not many creative practitioners have their own private money to fund their creative operations. Only a few like David Teoh or Dato’ Yusuf Haslam, who have accumulated enough wealth to fund their own movies. Others do not have such wealth. Just like many other entrepreneurs such as restaurant owners, plantation owners, retail shop owners and many more, entrepreneurs in the Creative Industry also want to depend on loans from the banks. Sadly, given the uncertainty in the revenue potential for Creative Industry, the banks shy away. The banks are allergic to high risks. Creative Industry is the epitome high risk industry.

If the banks are not willing to take such risk, surely there are other investors who have bigger risk appetite. The Venture Capitalists (VC) and the Private Equity (PE) investors generally take higher risk than the bankers. They go for green field businesses exploring new technologies. They have an expectation of 20% or more Return on Investment (ROI) per annum. Can the Creative Industry entrepreneurs promise that? With such high expectation, no wonder the Creative entrepreneurs discounted seeing those investors. For the same reason, the investors shy away (as well) joining their banker counterpart. It will take a while before those VCs and PEs can match their cousins in Hollywood who have for decades funded not only individual movies, but slate of movies on a portfolio basis.

In the end, everybody in the industry put their utmost reliance on the Government.  Everybody wants grants. They want free money. They want subsidies. If not subsidised funds, at least subsidised interest rates. Many grants have been made available for the Creative Industry which includes, but not limited to agencies such as Filem Nasional (FINAS), Malaysian Communications and Multimedia Commission (MCMC), Cradle Funds (Cradle), Malaysian Digital Economy Corporation (MDeC or formerly known as Multimedia Development Corporation) and Matrade. Under the DIKN, the Malaysian Government allocated RM200 million funds to Bank Simpanan Nasional (BSN) as a means to provide loans with subsidised interest rates to the Creative Industry entrepreneurs. For a few years the industry enjoyed loans at interest rates as low as 2% to 4%. This was a great help to the industry. Loads of submissions from the entrepreneurs of the Creative Industry had flooded in. Who wouldn’t? It’s cheap financing!

Whilst the administrator of those loans was BSN, the decision making process was pretty much under the DIKN Committee led by the Secretary General for the then Ministry of Communications and Culture. Subsequent to the General Elections in 2013, the Ministry was split into two. They are the Ministry of Communication and Multimedia (KKMM) and the Ministry of Tourism and Culture (MOTAC). As a result, the industry was split into two whereby fine arts, performing arts and crafts were parked under MOTAC and the remaining which has digital inclination such as TV, filming, music and publication were parked under KKMM.

Such split had eliminated the nucleus of decision making and had led to the demise of the DIKN movement. Consequently, BSN, who has now inherited the loan portfolio of RM200 million has reverted to the banking procedures of recovering those funds. When this happened, many non-performing loans (NPLs) were triggered. Meanwhile, under the 2012 Federal Government budget, another RM200 million was allocated for the Creative Industry under a VC named, MyCreative Ventures (MyCreative).

A study was done to learn and unlearn from the BSN/DIKN experience. A few important salient points were noted and were addressed in the DNA of the new entity, MyCreative. Firstly, it was decided that there were already enough Government agencies providing grants, and hence, MyCreative is to avoid such practice.

Secondly, the Federal Budget has taken a new direction (as apparent in the budgets for 2013, 2014, 2015, 2016 and 2017 as well) where Government subsidies are to be curtailed. Oil subsidy was cut. Sugar subsidy was cut. Many other subsidies were cut. So was interest rates subsidy for the Creative Industry loans. No more 2% to 4% is made available. Instead, as benchmarked to the Base Lending Rate (BLR) in 2012/2013, MyCreative provides loans at the range of 6% to 8% interest rate determinable by the risk assessment of individual applicants.

Thirdly, a more robust approach was needed to filter out those who are not serious in doing business. This is a very sensitive matter to begin with. How do you accuse someone of not being serious in his or her business? There was a joke that circulated the industry in respect of this. The term “Grantreprenuer” was introduced amongst the Government agencies to categorise those whose cash flow is heavily dependent on Government financial aid such as grants and cheap loans, or worse, loans with zero repayments.

A more tactical approach was required. After so many studies and deliberation, it was concluded that MyCreative was not to fund projects but instead, it is to fund businesses as a whole with a horizon of 5 years cash flow projection to frame an entirety approach to a business. In short, they wanted a 5 years business plan.

Effectively, instead of project basis, it became slates of project basis. A truly VC or PE approach has now taken place whereby, like many asset managers, the business performance is now a composite of the result of many projects. This reduces risk and uncertainty. – hence, eliminates “Grantrepreneurs

Those three points form the basic principles to which MyCreative was to shape the new breed of entrepreneurs in the Creative Industry. Is it the right model? Nobody knew (at that time), but now, 5 years later, MyCreative reported an NPL rate of only 0.7% for its financial year ended 31 December 2016. Something must have been right. No one claimed that the model is the best model but so far, it is a model worth working on and to be refined further. There has been many talks between the Government agencies where all the different funding formats ranging from grants to cheap loans, commercial loans and equity financing should be arranged accordingly to match the different phases of the Creative Industry businesses. This is on-going.

It is also worth mentioning what it meant by VC approach as taken by MyCreative. To avoid any confusion, MyCreative is not a pure VC. Although it was intended to be one as initially suggested by the Government, it has since evolved to be a Debt Venture (DV) with a view to recover the principal loan amount in 5 years and with interest rates of 6% to 8% per annum. The recovered funds are to be made available to the industry – a revolving fund per se. Why has it evolved into a DV instead of a VC injecting equity funding into the creative companies? Well, the answer is simple – nobody wanted new shareholders to encroach into their ownership structure. They just wanted a loan, a simple loan from the banks.

Whilst the financing format was a DV, MyCreative continues to behave like a VC where they monitor their clients as if those companies are their investees rather than just borrowers. This is also why a business financing approach was taken rather than project financing. Another point worth mentioning is the collateral required. The Banks will require some sort of tangible asset collateral that is flanked by debentures and guarantees. Realising that the Creative Industry is heavily backed by intangible assets, i.e. Intellectual Properties (IP), MyCreative has discarded collateral to be a compulsory requirement and has instead only limited minimum security requirements to include guarantees and debentures, and if appropriate, assignment of accounts or assignment of sales proceeds. This certainly helped many companies to receive loans when they were denied previously by the banks solely because there weren’t any physical tangible assets to be collateralised.

Going back to the different phases of the state of the companies in the Creative Industry, there were also a lot of confusion on which Government agency provides which offerings. Some came to MyCreative to apply for grants – clearly the case of ordering a Big Mac at KFC, I must say. For startups, the best method of Government aid should be grants. As mentioned earlier, FINAS, MCMC, MDeC and Cradle are the main agencies that disburse grants to the Creative Industry. Once the companies are seeded by those grants, they should approach VCs to commercialise their offerings further. A Government VC that is known to have invested in the Creative Industry is Malaysian Venture Capital Corporation (MAVCAP). Then there were loans to be procured by the more matured companies. For this, they should approach MyCreative or Malaysian Debt Venture (MDV) or SME bank.

The ultimate source of funding is from the public, either from an initial public listing (IPO) or issuance of bonds. This status, not many creative companies have reached or can reach. To name a few that has: Astro, Media Prima and the newspaper companies. Many aspire to be listed companies but many also realise the complication of being a publicly listed company. They prefer to remain as proprietary limited companies.

The investing fraternity refers to the risk of dying ideas as the Valley of Death. Companies that have great ideas but are unable to raise funds will see those ideas die away – hence, the Valley of Death. This is very morbid. A more positive and entrepreneurial approach was taken by MyCreative. When you flip a valley upside down, you will get a dome shape – the Dome of Hope.

On the right curve of the dome (representing the right brain of the creative people), the entrepreneurs go through a series of process that move initial ideas to drawing board. Then those ideas are translated into creative offerings. That offerings are wrapped with some brand establishment with the end game of creating wealth. On the left curve of the dome (representing the structured business acumen requirement of a business) the funders/investors are supposed to guide the entrepreneurs through a series of serious considerations that include market assessment, business modelling, funding structure, business continuity and finally economic value creation. This Dome of Hope provides the basic structure for the entrepreneurial spirit that was applied when nurturing the creative companies.

Let us now talk about the ROI. We have earlier established that the creative business must behave like any other industry where it must be financially rewarded. What is the quantum of that reward that is acceptable? If your creative business only gives you an ROI of 3% per annum or lower, you are basically plain stupid. Why? Well, you could have earned the same ROI by putting your money into a fixed deposit at the banks without any effort. If you are facing this, you might as well earn salary and work with other companies that are having fantastic ROI. If you can earn ROI of 7% per annum from your business, again, you may be wasting your time. Why? Well, you can earn 7% per annum by investing in unit trusts. Perhaps an ROI of higher than 10% per annum would be justifiable for a business? If benchmarked to the expectations of the VCs and the PEs, the minimum should be 20% per annum. As you can see, the output must always be significantly bigger than the input.

Having said all that, it is unfair to have an expectation of an ROI that is higher than 10% per annum for a start up company. This is understandable. However, the entrepreneurs must demonstrate the potential of achieving a “hockey stick” effect moving the company from a loss making one to that envisioned ROI of higher than 10% per annum within an acceptable limit. What is an acceptable limit? Many investors like to see their targets being reached within a period of 5 years. Many are not sure why 5 and not 6 or 7 or 8. What we do know is that merchant bankers, accountants and valuers have always been using 5 years as the fair period for a company to turn around into an acceptable level of profit generation. Nowadays, the VCs and PEs have adjusted their expectation from 5 years to 7 years to 10 years before they start exiting to close any particular fund for profit distribution.

When an investor assess a particular business, they associate their expectations to the risks of the businesses. The higher the risks involved, the higher will the ROI expectation be. The risk of putting money into a fixed deposit is so much lower than investing in a creative business. Therefore, the ROI for fixed deposit should be lower than investing in a creative business. So if you propose an ROI of 3% for your business, your proposal will naturally get thrown out of the window. An investor can earn that 3% by putting his or her money in a fixed deposit. Similar conclusion can be arrived at when considering 7% ROI from Unit Trusts versus investing into a creative business.

As you can see, this is not rocket science. You do not need a Bachelors Degree in Banking and Finance. You just have to use logic and put yourself in the investors’ shoes. Perhaps talking to a friend with financial background is a good idea before you present to a panel of potential investors. In a nut shell, there is a formula that can be used to anticipate what the investors are looking for. The analysts at MyCreative uses a model called The 5C representing the 5 components of their risk assessment consisting Character, Cash Flows, Collateral, Condition and Capital.

The “Character” of the potential investees or the Promotees has many aspects. The most important one is the Credit Strength. If you have issues with your existing loans, many banks will shy away. The infamous CCRISS Report and CTOS Report that have details of a person’s credit background is a powerful tool to both give confidence to the investors as well as destroy that confidence depending on what your existing loan repayment behaviour is. The banks will generally reject anyone who has missed their loan repayments. What the banks fail to understand is that the creative entrepreneurs do not have stable income. The nature of creative offerings is often project based and as such, income generation follows the timing of those projects. A more sympathetic approach is required. As long as there is effort to close the gap of overdue amounts from time to time, credit should be given to the character of the entrepreneurs. This is what MyCreative has done – acknowledging the inherent characteristics of the players of the Creative Industry.

What else can be said about the “Character”. The curriculum vitae of the entrepreneurs play an important role. There are two perspectives: Technical ability and Management skills. The Technical component is the ability to produce the intended level of quality for the creative offerings. Even if the entrepreneurs themselves do not have that ability, his or her ability to procure resources that ensures the production of the intended level of quality for the creative offerings will suffice. The Management skills is basically the entrepreneurs ability to run the business from crucial aspects such as marketing, financial, legal, secretarial and innovation to change in tandem with the dynamic surroundings.

Many VCs and PEs confess that when they invest, it is mostly because of the entrepreneurs rather than the product. Whilst the product saleability and innovation is key, it may not give a success story when the management is hopeless. On the other hand, if the management is strong, an average product can be made into cash cows that bring in profits. This is why “Character” has always been the first assessment component – a first impression per se.

The second C is the “Cash Flows”. As mentioned earlier, an investor likes to see a future horizon at least as far as 5 years. They want to know critical cash flow assumptions. For example, how are you going to earn revenues? Is it by subscription charges? Is it by advertising expenditure (Adex)? Is it by outright sale? Is it by consignment sale? Is it a commission fee? Is it a revenue sharing arrangement? There can be dozens of questions on this. Once they have established the methods of revenue generation, they will ask what is the pricing strategy. Are you pricing your products higher than your competitors? If your price is higher than your competitors’, what value added aspects can support that extra premium?

From the cost perspective, cash out flows are also important for its excessiveness above the cash inflow will paralyse the business operation. One must always ensure that its cash inflow is more than adequate to cover cash outflow. For example, if you give a credit term of 4 months to your customers and then accepts a credit term of 3 months from your suppliers, you are putting a gun on your head. Logically that will not put you in a position to pay your suppliers given the longer timing to collect from your customers. Again this is not rocket science or requiring a Bachelors Degree. It is merely the street smart of an entrepreneur.
Whilst minimising costs is favourable, your financial projection must always be logical to reflect what the reality would be. You must assume all possible cash out flows. Items such as rental, staff, utilities, marketing, insurance, accounting,  transportation, commission fees and costs of production, must all be identified, quantified and accounted for. These costs do not stay stagnant. They increase overtime. If not at the minimum 3% inflation per Consumer Price Index (CPI), it can be specified such as 15% rental increase at the renewal of a tenancy agreement.

What a cash flow projection will say to the investors are the answers to many of their questions. They would like to know how much revenue can you generate. Will that revenue be enough to cover all the costs with the remaining excess as profits? Will the excess be enough to repay the initial capital injected as well as pay the intended ROI be it interest rates or dividends? Will there be enough excess to be reinvested into the operations to grow the company further? All these questions are within certain parameters such as a time period of 5 years and a benchmarked ROI as discussed earlier.

The third C is “Collateral”. The banks like to use this as a basis to determine the loan amount. First they will ask whether you have a physical asset, preferably properties. Then they will ask you to get a professional valuer to determine the value of the property. Then they will apply a certain percentage of that value, say 80%, of which, the loan amount shall be. The problem for this is that the creative businesses do not always have hard tangible assets. The very nature of a creative business is intangible. They have plenty of intangible assets called Intellectual Properties (IP). IPs can be valued. There are specialised valuers who can value IPs. However, the banks (in Malaysia) is still not confident in accepting the valuation done on IPs. It was said that the valuations are often too astronomical.

So how do you address this issue? In the end, the bankers will rely on the earlier C, i.e. “Cash Flows”. They will ignore the collateral and revert back to the adequacy of future cash flows to repay back the loans as well as the cumulative interests. What we do not realise is that the absence of a physical asset (for collateral) is the main reason why the banks will now offer the loan at a very high interest rate such as 12% to 18% per annum. This is an interest rate typically given for a personal loan or for a credit card or overdraft. If that is the case, then why bother understanding “Collateral”? The answer is, this is the main determinant for a bank to shy away.

A bank will always aim for security. This is the basis of their credit assessment. “Collateral” is not the only form of security. They will ask for a debenture, that is an undertaking by the borrower to pledge liquidation of the companies’ assets to be dedicated to pay the amounts outstanding to the banks first. They will also ask for personal guarantees from the shareholders (or a corporate guarantee if the shareholder is a corporation). They can also ask for any cash in the bank account or cash proceeds to be received from customers to be assigned. What this means is that those cash inflows or balances are also pledged to be dedicated to pay the amounts outstanding to the banks.

Finally, if the entrepreneurs have pumped in money into the company by way of advances to the company, that balance will be required to be kept unpaid so long as the amounts owing to the banks is outstanding. This is what we call subordination. As we can see, the Creative Industry is ranked as high risk because of “Collateral”.

Realising how disadvantageous the creative companies can be in the eyes of the banks, MyCreative has taken a more developmental approach. They have used the “Cash Flow” as a basis to determine how much loans a particular creative company needs in order to grow in the next 5 years whilst IP is taken as collateral alongside debenture, guarantees, assignment of accounts/proceeds as well as subordination; but maintaining the interest rates at a low range of 6% to 8% per annum on amount outstanding and not on flat rate basis.

Many entrepreneurs fail to understand the term flat rate versus chargeable on outstanding basis. A flat rate is a rate used on the amount dedicated as loans. For example, if you have a loan facility of RM3 million and you have so far only used up only RM1 million of that facility, the flat rate will be applied on the RM3 million. Let’s say the flat rate is 4% per annum. The interest charge will be 4% on RM3 million instead of 4% on RM1 million. So effectively, it is 12% on RM1 million. This distinction was not understood by the entrepreneurs resulting in them paying interests at effective rates of 12% to 18% when they thought they have been paying at 4%.

The fourth C is “Condition”. This is the state of affair of the company. Basic questions regarding the operation is crucial. This is the artery of whether there is a business to run in the first place. Some of the more important questions are: Do you have enough staff with the required skills? Do you have enough inventory to fill in the stores to meet demand? Do you have reliable suppliers that can supply the right quality and quantity? Are you over relying on a few suppliers? Do you have long over due payables that will interrupt the cash flow of the operation? Do you have a pending legal suit against you? Do you have all the necessary licenses?

To continue further, have you registered all your IPs to avoid IP theft? Are there any detrimental laws and regulations being passed by the Government that affects your operations? How loose or tight is the barriers to entry by potential competitors? Is your product susceptible to technological or commercial obsolescence earlier than expected? Do you have enough distribution channels to reach out to customers? Do you have a strong market share of the customers? Are you pricing your products appropriately? The list is never ending, really.

The fifth and final C is “Capital”. The more capital the entrepreneurs inject into the company, the more commitment the entrepreneurs will put into the business. This sense of ownership is always absent in the local entrepreneurship movement. It seems that the industry has developed a new breed of entrepreneurs who do not want to invest their money at all, even RM20,000. They’d rather use 100% of other people’s money, especially grants or angels. This is indeed a worrying state. Investors now are facing numerous RM2 companies making their way into the pipeline inviting funders to place their bets. Another reason why investors shy away.

* kopihangtuah

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