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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.