TABLE OF CONTENTS CHAPTER TITLE PAGE DECLARATION OF ORIGINALITY ACKNOWLEDGEMENTS ABSTRACT ABSTRAK

Transcription

1 iv ABSTRACT Islamic venture capital financing is a new emerging type of ICT equity financing in Malaysia. Conventional ICT venture capitalists are all the while have been facing agency problems, as for that there is a need for a strategy on mitigating agency problem throughout the Islamic venture capital processes. Experiences by conventional venture capitalists are greatly needed in order to come out with strategy to reduce the risk created by agent. Firstly, this research was the first attempt to investigate Islamic venture capital financing and related agency problem in Malaysia and formulate guideline to mitigate those problems. Secondly, this research attempts to formulate guideline to implement the best practices of ICT projects financing by Islamic venture capital for Kazakhstan based on Malaysian experience. To achieve these objectives, mix-research methods have been used, such as data collection and qualitative methods. The proposed guideline will be helpful firstly to implement in Kazakhstan ICT projects financing by Islamic venture capital and secondly to mitigate agency problem which will face any Islamic Venture capitalists in ICT venture projects financing.

2 v ABSTRAK Kewangan pelaburan pemodalan Islam merupakan jenis pelaburan baru dalam era kewangan equiti ICT di Malaysia. Kewangan pelaburan konvensional dalam bidang ICT telah sekian lama menghadapi masalah agen, oleh itu keperluan untuk mengatasi pelaburan modal amat diperlukan sepanjang proses kewangan pelaburan pemodalan Islam. Pengalaman dari pelaburan modal konvensional ini mencadangkan agar strategi dibentuk untuk mengurangkan risiko yang terbentuk oleh agen. Pertama, penyelidikan ini adalah yang pertama seumpamanya dalam menyelidik kewangan pelaburan pemodalan Islam dan hubungan dengan permasalahan agen di Malaysia, serta merangka garis panduan untuk mengatasi permasalahan tersebut. Kedua, penyelidik merangka garispanduan untuk melaksanakan projek ICT dalam kewangan pelaburan pemodalan Islam untuk Kazakhstan berdasarkan kepada amalan terbaik di Malaysia. Untuk mencapai objektif ini, kaedah penyelidikan yang bercampuran digunakan iaitu pengumpulan data, kaedah kualitatif dan kuantitatif. Di akhir penyelidikan ini, cadangan dalam bentuk garispanduan disyorkan agar dapat membantu dalam perlaksanaan kewangan pelaburan pemodalan Islam dalam projek teknologi komunikasi maklumat di Kazakhstan dan seterusnya, mengatasi pemasalahan agen yang dihadapi dalam mana-mana kewangan pelaburan pemodalan Islama dalam bidang ICT.

3 vi TABLE OF CONTENTS CHAPTER TITLE PAGE DECLARATION OF ORIGINALITY ACKNOWLEDGEMENTS ABSTRACT ABSTRAK TABLE OF CONTENTS LIST OF TABLES LIST OF FIGURES LIST OF ABBREVIATIONS LIST OF APPENDICES ii iii iv v vi ix x xii xiii 1 PROJECT OVERVIEW Introduction Background of the Problem Statement of the Problem Research Objectives Scope of the Project Importance of the Research Study Chapter Summary 6 2 LITERATURE REVIEW Introduction What is a Venture Capital? 8

4 vii 2.3 Venture capital cycle Characteristics of venture capital firms Organizational Structure of VC firm The uniqueness of ICT entrepreneur Venture capital process Deal origination and screening Deal evaluation Deal structuring Monitoring Exit Agency Theory Condition for Agency Problem Agency problem Agency costs Agency problems faced by 30 Malaysian conventional VC firms Mitigation Agency Problem in 32 conventional VC firms 2.9 Islamic Venture Capital Uniqueness and Restrictiveness of 39 Islamic VC 2.10 Chapter Summary 40 3 RESEARCH METHODOLOGY Introduction Research Design Data Collection Research Instruments Respondents of the Study Research procedure Operational Framework Project Schedule Chapter Summary 48

5 viii 4 DATA ANALYSIS AND FINDINGS Introduction Kazakhstan Venture Capital environment Gaps for Agency Problem in Islamic VC Interview Analysis of Musharakah Tech 59 Ventures Sdn Bhd 4.3 Chapter summary 65 5 PROPOSED GUIDELINE Introduction Recommendation to Mitigation Agency 67 Problem in Conventional VC 5.2 Recommendation for Implementation of 69 Islamic VC in Kazakhstan 5.3 Recommendation for Mitigation Agency 71 Problem in Islamic VC 5.3 Chapter Summary 73 6 DISCUSSION AND CONCLUSION Achievements Constraints and Challenges Recommendations Chapter Summary 77 REFERENCES 78 Appendices A-E 85-95

6 ix LIST OF TABLES TABLE NO. TITLE PAGE 4.1 Domestic VCIs in Kazakhstan Possibilities (Gaps) for Agency Problem 55 in Islamic VC 4.3 Interview answers of Musharaka Tech 58 Venture Sdn. Bhd. 4.4 Summary of the findings Important processes and procedures during venture capital process for VCIs to reduce probability of agency problem with ICT entrepreneur 66

7 x LIST OF FIGURES FIGURE NO. TITLE PAGE 2.1 ICT entrepreneur growth stages Organizational structure of venture 14 capital firm 2.3 ICT entrepreneurs financial 17 sources 2.4 Phases in VC process Agency theory illustration Operational Framework of 46 Research Activities 4.1 Percentage of invested projects by 50 NIF 4.2 Realization of NIS Program: Phases for agency problem in 53 Islamic VC 4.4 Explanatory Relationships between Agency problem and Uniqueness and Restrictiveness of Islamic VC 54

8 xi LIST OF ABBREVIATIONS VC - Venture capital VCI - Venture capital investor ICT - Information & Communication Technology IT - Information Technology IPO - Initial Public Offering MBO - Management buy-out

9 xii LIST OF APPENDICES APPENDICES TITLE PAGE A Interview with Musharaka Tech 87 Venture Sdn. Bhd. B List of registered VCIs in Malaysia 91 C List of domestic VCIs in 94 Kazakhstan D Gantt chart of the research study 96 F Main conditions for agency problem 97

10 CHAPTER 1 PROJECT OVERVIEW 1.1 Introduction The unique nature of the venture capital model, which is based on active management leads to improved corporate governance and an overall alignment of stakeholder interests with that of the management. Islamic venture capital is similar to a conventional venture capital except that it is structured and managed in accordance with Shariah principles. There are many issues in Islamic venture capital, such as Innovative and more complex structuring, additional monitoring costs, etc. On the other hand, there is major benefit to access to a larger source of capital and satisfy Muslim population need in Shariah compliant businesses. Conventional VCs have been extremely successful in the last several years: (1) they have been associated with a number of the prominent corporate successes like Ariba, Cisco, ebay, and Yahoo; (2) they have generated substantial returns and

11 2 wealth for their investors; and (3) they have raised and invested record amounts of money (Kaplan, S. N. and Per Stromberg, 2001). The well-known successes of venture capital supported firms have given the U.S. venture capital model an international reputation that other countries seek to emulate. The North American venture capital industry has played a major part in developing several of the most successful American companies, such as Microsoft, Apple and Intel (Kaplan, S. N. and Per Stromberg, 2001). Bygrave and Timmons (1992, p. 1) emphasized the importance of the venture capital industry: It [venture capital] has played a catalytic role in the entrepreneurial process: fundamental value creation that triggers and sustains economic growth and renewal. In terms of job creation, innovative products and services, competitive vibrancy, and the dissemination of the entrepreneurial spirit, its contributions have been staggering. The new companies and industries spawned by venture capitalists have changed the way [in] which we live and work. 1.2 Background of the Problem In order to understand many of the challenges in studying the venture capital process it is important to emphasize some of the basic differences between venture capital financing and traditional corporate finance (e.g. Copeland and Weston, 2005). It is in these differences that many of the empirical and theoretical challenges have their roots. Venture capital finance differs from corporate finance in many ways. Some of the most important differences include the degree of information asymmetry between outside investors and management (the entrepreneur), the role of contracting to resolve incentive problems, the level of involvement by outside investors, the role

12 3 of diversification as a way to reduce risk and increase investment value, and the illiquidity of the market for venture capital investments (Smith and Smith, 2004). One major challenge for venture capital firms is how to handle the information asymmetry that an investment in a young entrepreneurial firm gives rise to (Amit et al., 1998). Venture capital investments in firms with a short history (lack of historical data) and in new industries give rise to information asymmetries between venture capitalists and entrepreneur of a much higher magnitude and importance then investments in publicly traded corporations. The theory of information asymmetry originates from agency theory (separation of management and control) (Eisenhardt, 1998) and suggests that the entrepreneur often has an information advantage over the venture capitalist. Information asymmetry creates two major problems that need to be dealt with, the risk for adverse selection and the risk for moral hazard (Amit et al., 1998; Cumming, 2006). The risk for adverse selection is basically the risk that hidden information leads to bad investments (in firms with poor performance). The risk for moral hazard is about the risk that the entrepreneur acts opportunistically to the venture capitalists disadvantage. All of these problems stated above are the subjects of agency problem which need further investigation especially in Islamic venture capital process. Islamic venture capital financing is a new emerging type of ICT equity financing in Malaysia. Conventional ICT venture capitalists, as stated above, are all the while have been facing agency problems, as for that there is a need for a strategy on mitigating agency problem throughout the Islamic venture capital processes. Experiences by conventional venture capitalists are greatly needed in order to come out with strategy to reduce the risk created by agent.

13 4 1.3 Statement of the Problem The research problems can be expressed as follows: 1. What are the reasons for emergence of agency problem ICT projects in investment by conventional venture capital firms? 2. How do conventional venture capital firms respond to agency problem in ICT projects investment? 3. What is the uniqueness of Islamic Venture Capital in ICT projects financing, which may lead to agency problem? 4. What can be a guideline to implement ICT projects financing by Islamic venture capital for Kazakhstan based on Malaysian experience? 1.4 Research Objectives The objectives of the research study are: 1. To carryout analysis for the emergence of agency problem in ICT projects investment by conventional venture capital firms; 2. To analyze ways on how conventional venture capital firms respond to agency problem in ICT projects investment; 3. To identify uniqueness of Islamic Venture Capital in ICT projects financing, which may lead to agency problem; 4. To formulate a guideline to implement ICT projects financing by Islamic venture capital for Kazakhstan based on Malaysian experience.

14 5 1.5 Scope of the Project Generally research on the venture capital process focuses on how the venture capitalist and the entrepreneur develop businesses together. It is important to clearly delineate the actors and relationships involved in order to understand the venture capital process. The main actors are investors (fund providers), venture capitalists, and entrepreneurs. This research will be focused on the ICT projects financing by Islamic Venture capitalists in Malaysia. It is almost impossible in one framework to encompass all phases of financing from investee and investor sides of view. This research will focus only on Venture capitalist side, where adverse action will be anticipated only from the investee side. Also, due to the limited time frame, investment and monitoring VC phases will be emphasized. The data collection will be done by the observation of the secondary sources and collecting the primary data, having applied qualitative and quantitative research methods. The duration taken for the whole study to be carried out is short. 1.6 Importance of the Research Study Islamic Venture capital financing is the emerging type of equity financing of ICT entrepreneurs in Malaysia where all ICT projects are under the screening phase. There is a need to formulate guideline to mitigate agency problem which will surely arise in the later phases of venture capital process.

15 6 Firstly, this research will be the first attempt to investigate Islamic venture capital financing and related agency problem in Malaysia and formulate guideline to mitigate those problems. Secondly, this research attempts to formulate guideline to implement the best practices of ICT projects financing by Islamic venture capital for Kazakhstan based on Malaysian experience. The proposed guideline will be helpful firstly to implement in Kazakhstan ICT projects financing by Islamic venture capital and secondly to mitigate agency problem which will face any Venture capitalists in ICT venture projects financing. 1.7 Chapter Summary This chapter has covered about the introduction of the project including the background of the problem, problem statement, research objectives and scope of the project. This project will be done with literature review from some resources such as the Internet, books, conferences and journals and collecting primary data using different research methods.