Malaysia’s Cradle mulls equity investments as funding tap runs dry for early-stage startups

Rafiza Ghazali, Group CEO of Cradle Fund

Malaysia’s state-linked venture capital agency Cradle Fund is thinking of reviving its equity funding programme, according to its group chief executive officer Rafiza Ghazali. “We are exploring whether we should go back into equity,” Rafiza told DealStreetAsia in an interview.

In July 2019, the Mahathir Mohamad-led government had decided to restructure the operations of the country’s five state-linked VC firms Cradle Fund, Malaysia Debt Ventures (MDV), Malaysian Technology Development Corporation (MTDC), Kumpulan Modal Perdana (KMP), and the Malaysia Venture Capital Management Bhd (MAVCAP).

After the streamlining, Cradle Fund was asked to focus more on grants instead of equity to avoid duplicating the work of other state-backed VCs. Subsequently, Cradle’s equity investment programme DEQ800 was wound up, even though it continues to invest in existing portfolio companies.

Despite the restructuring, startups in Malaysia, especially the younger ones, continue to be fund-starved. “Based on the feedback we’ve got from startups, there’s still a funding gap for pre-series A and earlier stages.”

Most VCs, because of the way they evaluate investments based on data, tend to favour growth-stage startups or Series B and above. Early-stage startups are seen as the riskiest bets and not many venture capital firms are willing to fund them, Rafiza noted.

More funding avenues are needed in Malaysia as the country lacks endowment funds or a lot of family offices that other countries have, Rafiza said. Cradle, currently under the country’s Ministry of Science, Technology and Innovation, will continue to focus on early-stage tech startups, providing grants or other support, Rafiza said.

COVID-19 challenges

Rafiza took over as the group CEO at Cradle Fund in June this year, during a challenging time for startups — the COVID-19 pandemic.

But Rafiza is confident her experience in the corporate world could bring value to the Cradle Fund. She was the chief financial officer (CFO) at listed upstream oil and gas company Velesto Energy Bhd, prior to joining Cradle. She held senior roles in several organisations including the central bank Bank Negara Malaysia, RHB Investment Bank Bhd, Thomson Reuters, and Sime Darby Bhd.

Rafiza said her working experiences in different entities gave her different industry insights that came in handy as Cradle invests in various tech startups, including healthtech, property tech, agritech and fintech.

“I like challenges,” she said, adding that the country’s position is better than during the Asian financial crises of 1997-98. “I think this time, the government is a lot more prepared, we have much bigger reserves.” Rafiza said the most challenging part of her job is to make decisions when situations are fluid.

“It’s a challenge and opportunity as well,” she said. A lot of the decisions need to be made are urgent and the agency does not have the luxury to gather a lot of data, she said.

Founded in 2003, Cradle has helped fund over 1,000 Malaysian tech startups so far. “The decision to set up Cradle was made more than 16 years ago. The pandemic is a testament of the foresight of what the government and the stakeholders wanted. Through Cradle, it created a lot of tech startups, and the right ecosystem for tech startups to flourish,” she said.

The commercialisation rate of Cradle’s startups stands at 70-75 per cent (the highest among government grants in the country), which Rafiza hopes to “at least maintain or improve” as Cradle is providing grants in the later-stage fundings of early-stage startups. “Startups that come to us have got market validation. So, they are at a slightly advanced technical-readiness level.”

Cradle recently made offers to 11 startups, amounting to nearly 50% of its budget for 2020, estimated to be 20 million ringgit. It generally funds 38-48 startups every year.

These tech startups have helped to make people’s lives easier and more bearable during COVID, Rafiza said. “The pandemic forced people to move into digital. Some startups funded by Cradle are actually benefiting from this,” Rafiza said.

However, many of the startups are now facing cash flow issues, she said. But with respect to their business models, they stand to benefit post-pandemic as everyone is going digital.

“The immediate focus for Cradle is to help them but we are not in the business of lending. So we can’t lend to them. What we did was open doors and work with the policymakers, sending them the feedback from the ecosystem. And hence the government came up with various initiatives to indirectly help startups,” she explained.

With the pandemic and the lockdown, Rafiza noticed that there are more startups in the B2B sector. Previously the startups that people noticed were B2C ones.

Pride of honour — Grab

Softbank-backed ride-hailing super app Grab (formerly MyTeksi) is a Cradle-nurtured firm. MyTeksi got a boost when Cradle awarded it a development grant of 150,000 ringgit (about $36,115 now) under its Cradle Investment Programme in 2012 — the year Grab was founded.

But the Malaysia-born startup moved its headquarters to Singapore in 2014, which some see as a sign that the country cannot retain successful startups.

“I think Grab did the right thing [by shifting to Singapore]. They are entrepreneurs. They need to make decisions based on what are commercially the best options for them. At the end of the day, they [still] have a significant presence in Malaysia,” Rafiza shared.

“Grab still employs Malaysians. And they employ Malaysians in Singapore. Some of the Malaysians have come back to become mentors and coaches to Malaysian startups,” she said. “Even though they moved their headquarters to Singapore, it is still a good branding for Malaysians. [Founder and CEO] Anthony Tan is a Malaysian.”

Asked if more needs to be done to retain startups in Malaysia, such as more funding, Rafiza said Malaysia may not be able to duplicate exactly what Singapore is doing in nurturing tech startups. “Singapore has got a certain unique feature and it is not something that you can cut and paste into Malaysia,” she explained.

There is no point of having one or two unicorns and very little of the rest, she said. The whole ecosystem has to grow. “That’s where all the startups can benefit from each other. No startups can do well in isolation. Some of the startups, they grow because they merge or acquire other startups. They partner with some other startups that have got technology that they can leverage,” she said.

Instead of merely looking at what other countries are doing and copying, Malaysia needs to find out its own special strengths and leverage on that, she said, adding that the diversity in Malaysia makes the country a good testbed for new technology and products.

In Malaysia in 2018, there were a total of 143 deals, from the start of the funding life cycle to mature companies, comprising $4.2 billion’s worth of deal flows, according to official data. But in Singapore, there was $31.1 billion in 717 deals. Indonesia was fast catching up with $3 billion in the same year.

For 2021, Cradle’s budget may fall as the government is cash-strapped due to the stimulus packages to prop up the COVID-hit economy. Moreover, falling oil prices have left the revenue tap dry.  “My priority is to make sure we step up our game with respect to what we’re doing. We’ll use better analytics, data, and improve on certain internal efficiency,” Rafiza said.

“Some of the feedback that I got from foreign counterpart friends, is that Malaysia is actually a very good testbed. A commercial, viable, competitive testbed for a lot of startups, which I think we should take advantage of, and leverage,” Rafiza said.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.