While the past two years have seen encouraging levels of funding activity in the Malaysian startup scene, the Malaysian Venture Capital and Private Equity Association (MVCA) notes that these have been geared mostly toward early stage investment, and that there is a gap in Series A to C funding rounds that has not been adequately filled.
Chairman Amin Shafie attributed the gap in the post-early stage funding, to the heavy focus on building up new startups in the country. These startups have progressively outgrown their early stage phase, over the past two years.
“What we want to encourage now is in the Series A and so forth rounds of funding; there is a lack of these funds. Those who previously received early stage funds have reached maturity and started portfolio managing. But there is a gap here, in terms of Series A to C funding,” Amin told DEALSTREETASIA.
He said that the initial idea was for the Axiata Digital Innovation Fund (ADIF) to come in this funding segment.
“It is almost a greenfield for ADIF because some of the early stage funding companies can go up to Series A and B, but for ADIF, it is Series A onward,” says Amin, who will jointly manage ADIF via his venture capital (VC) firm QuestMark Capital, said.
“However, the market is big and not limited to technology start-ups. There are startups in sectors like the FMCG (fast moving consumer goods), the biomedical industry and so on,” he added.
While most existing funds are focused in the technology space, there are vast opportunities for funds in these other sectors. “We see a greenfield opportunity for funds to practically make a killing,” Amin described the scenario.
ADIF will be officially launched at the end of this month. Axiata and Mavcap will announce the selected companies that the fund is investing in via its VC vehicle, Intres Capital.
QuestMark Capital and Teak Capital are the partners in managing ADIF, in which Axiata and Malaysia Venture Capital Management Bhd invested MYR50 million ($13.82 million) and MYR20 million ($5.53 million), respectively. Other principal investors will invest in the remaining MYR30 million ($8.29 million) of the total fund size of MYR100 million ($27.64 million).
He noted that for Series A, the tricky part is in aligning the fund managers’ and entrepreneurs’ perceptions of Series A funding. “Many of the fund managers that I met, see Series A as the first round of institutional funding that companies are getting, but the entrepreneurs expect the round to get them money from outsiders, which could mean friends and family,” he commented on the disparity in definition.
“People are going to be frustrated as they progress along the funding rounds, as there will always be a thinning of the herd at every stage of growth,” he commented.
However, with the healthy number of programmes in Malaysia, such as those under the Malaysian Global Innovation and Creative Centre (MaGIC), Unit Peneraju Agenda Bumiputera’s (Teraju) Superb programme, Cradle Fund’s Coach and Grow programme, Amin believed that sufficient funding will be available for companies that are ready for Series A and those who qualify under early stage funding.
“Right now, it is better to know that there is less money than companies that qualify, so that we know that those who got picked really have something to boot,” he opined.
MVCA sees a good year ahead for private equity (PE) and VC practitioners to make deals in areas where traditional risk-averse financial institutions may avoid in the weak economic outlook. “Where traditional financial institutions may shy away in the current economic environment, the PE firms who look at mid to long term play, this makes sense where valuation are reasonable relative to what was,” he said.
As the deal-making opportunities is expected to increased for private investors, conditions for investing will be more stringent in terms of due diligence, he said.
“The level of due diligence will be higher, as options for companies looking for investors or funds are limited now with banks becoming more tightfisted with their money,” he said, “This allows PE investors to be more selective.”
“Often we have the challenge of having the companies accommodate our team to carry out the due diligence, but in this case, where banks may pull back in terms of the numbers they commit this year, we believe companies will have less to gripe about,” he explained.
The environment will also create opportunities for PE firms to be more creative in the way they structure their deals. “There should be more deals out there now, so instead of just doing same old routine, they can structure a new deal or an exit differently,” he commented.
Traditionally, PE firms go for an initial public offering (IPO) or trade sale but if the regional IPO market is not doing great like now, then they could perhaps look at mergers and acquisitions, or buybacks, Amin noted. “On the VC side, things are more aggressive. We see a lot of early stage Singapore or regional VC players coming into town in the past 24 months,” Amin observed.
That has given the local entrepreneurial community a lot of options in going out, while at the same time, has pushed many companies to progress past the early stage growth phase. “These VCs are willing to come in and go through the the early stage and have contributed to the natural progression for many companies, from the early stage coaching, accelerator programmes and incubators, both from the private and government-linked VCs,” he said.
“The funding flow has started and that helps the ecosystem we want to build,” he said.
Unfortunately, Amin’s note of concern was about the foreign funds that come to invest in the Malaysian companies and have repatriation mandates.
At the same time, the entrance of many foreign VCs pushes the local VC industry to increase its number of local VC and new funds, Amin said.
“At the end of the day, it’s not just about creating a local champion. If (an entrepreneur) wants to go regional, you have to accept that money comes from everywhere and that each of those who put in the money have their own network and expertise to bring together,” he said.
Where to look
For both PE and VC industries, Amin believed that that ‘hot sectors’ are software and software-related, which include the digital space and cloud-based platforms.
“I also see the emergence of analytics coming into more maturity, both cloud-based and non-cloud, and the use of neuro-networks and artificial intelligence (AI) in powering analytics. This is not just the ability to look through Big Data but also to deeply dive into it,” he said.
The use of AI will allow a lot of big corporations to create and realise new patterns in the unstructured data, where Amin believed will benefit sectors like telecommunications, power network grid, energy sectors, biomedical and healthcare.
“But it is not limited to these sectors. The ability to extract relevant and impactful data from analysing behavioural or ordering patterns is enormous, it goes down to companies identifying right products or amount of supplies for specific areas,” Amin noted.
“I see a couple of Malaysian companies going into Big Data, but also AI companies from outside trying to enter the same space. From that, I think there will be potential of merging or collaborations to happen, especially for Southeast Asia because the field is quite untapped,” he said.
Another trend he noticed was the use of media in entertainment. “It is not just beacon technology anymore, it is the next step of it – the ability for you to interact with your customers and vice versa for very specific communication,” he said.
The biomedical devices and healthcare areas also look interesting, he added. Malaysia, which has a strong background in the electrical and electronics industry, could thrive in the biomedical devices sector.
Another sector that could see some push is in games, where the Multimedia Development Corporation is set to highlight Malaysian game companies this year. “Hopefully, we will see some Malaysian games and games-supporting companies making headway this year,” Amin said.