Malaysia’s Cradle Fund to step up focus on direct equity investments

Cradle Fund's acting CEO, Razif Abdul Aziz.

Malaysian government-linked investment fund Cradle Fund Sdn Bhd will continue to drive its role as the catalyst of the Malaysian startup ecosystem and will embark on a transformation to focus more on direct equity investments, said a top executive of the firm.

Speaking to DEALSTREETASIA, Cradle Fund acting CEO and chief operating officer Razif Abdul Aziz said the firm seeks to solidify its plan for direct equity investments via DEQ800, an early-stage programme that will offer financing of up to RM800,000 ($195,528) to Malaysian startups.

In return, the grant programme will be reduced to perhaps a 30:70 ratio, giving a larger portion to direct equity investments. Razif also spoke about diversifying Cradle’s portfolio to extend its financial assistance to the non-digital space, including life sciences.

In a recent study done in collaboration with HELP University, Cradle Fund said that during 2008-2016, the agency had attracted RM1.3 billion ($320 million) in private fund and foreign funds into Malaysia, besides creating over 80,000 new full-time jobs. It added that the firm’s contribution to the nation’s GDP is expected to reach RM30.8 billion ($7.53 billion) by 2030.

Also read: UPDATE: Malaysia’s Cradle Fund CEO Nazrin Hassan dies of blast injuries

Cradle Fund has a budget of RM20 million ($4.89 million) for this year, but Razif declined to share the quantum of funds that have been deployed so far. Last year, Cradle Fund had an annual budget of RM22 million ($5.38 million) while the total fund size under Cradle’s management from 2008 to 2016 was RM158.5 million ($38.7 million).

Established in 2003, Cradle Fund is an agency under Malaysia’s Ministry of Finance Inc., a spinoff from the Malaysia Venture Capital Management Bhd (MAVCAP). However, Cradle Fund may face a ministry shuffle to be placed under the purview of the Ministry of Energy, Science, Technology, Environment and Climate Change, pending official announcements from the Mahathir-led government.

Cradle has funded 700 startups over the years and is often viewed as a value provider to the Malaysian startup ecosystem that bridges the startup community with the private and public sectors.

Cradle Fund is also instrumental in lobbying for an angel investment ecosystem through the Malaysian Business Angel Network (MBAN) with the introduction of the angel tax incentive for angel investors.

Razif took over the role as acting CEO after the demise of former CEO, Nazrin Hassan, in June. Although he joined Cradle in 2016, Razif is no stranger in the startup space, having spent a decade in Malaysian Biotechnology Corporation in 2016 to oversee the development of biotech startups in the country.

Edited excerpts:

How has the transition been so far since you took over the role as acting CEO?

It’s a transition that was not planned given that the circumstances were unusual. So it was sudden in that sense although the process of succession plan has been in place for more than a year, ever since I took on as a COO.

There is a need for extra effort to stay focused because there is a change of government… we’re also awaiting clarity and hence not appointed a No.2 yet.

Moving forward, what’s in store for Cradle?

We will be awaiting clarity from the government. As far as we’re concerned, it’s business as usual. I don’t see much difference from this year and next. In terms of vision and long-term goal, it’s increasing our reach, diversifying our portfolio into different verticals, and to pull in more private equity from Malaysian corporates. We’re also moving to reduce our grants and will lean towards direct equity.

Over the years, though we have nurtured many startups, the government has not been able to participate on the upside, like Grab which was known as MyTeksi, whom we gave a grant instead of a direct equity funding.

We feel that we’ve given enough of a grant to catalyse the ecosystem, so we will move more towards the equity side to participate more in the early-stage deals. Having said that, we’re not stopping our grants because we will continue to do what we’re doing which is to catalyse.

What will the split be?

We haven’t decided on that, but it could be 65:35 or 60:40 or even 70:30 – the larger portion for direct equity, we will firm things up by 2020. The idea is to participate in the early-funding landscape through our product which is DEQ800. This way, startups will have more choices – as long as a Malaysian startup is funded – that’s all that matters.

What sectors are looking interesting to Cradle?

I’ve been in the startup space since 2006, although my focus back then was biotechnology. The startup ecosystem in the hard sciences are much more difficult, it’s almost like you have parallel universes – you have the digital people, corporates, and the hard sciences people – they don’t really connect with each other. Going forward, this is one of the things we need to address.

It’s not going to be easy. The digital space has it easy because they need lesser money to get things running – you can bootstrap to get to the minimum viable product stage. But, for hard sciences, it’s simply not possible. The regulatory and certifications aspects take up much more resources.

So with your experience in biotech, will we see Cradle leaning more towards biotech deals?

I wouldn’t say we would lean more towards biotech, I will say that we need to be able to accommodate/address that sector. I think our portfolio right now doesn’t cover enough of the hard sciences. People in the US, when they talk about startups, they mean startups from various industries, including biotech, genetic ones – they’re discussed in the same breath as Uber, Facebook. But when we talk about tech startups here, startups from the hard sciences industry are not included in that conversation, that’s weird right? It’s an underserved/un-funded group.

Maybe it’s not our role – it’s the function of the fund size because we’re only giving out RM300,000 ($73,323) as grants but that’s not enough for these startups. They can’t come to us. What if they could? We need inclusivity and diversity. Who is to say our next unicorn startup couldn’t be someone from the hard sciences? Let’s give them the same opportunity.

So, the challenge will be, how do we address this gap? It’s hard for us to do it ourselves – it will most likely be in line with other agencies. We’re clear about where we are, we only support post-commercialisation products. It would work better when other agencies could understand what we want and then we jointly create a pipeline to ensure assistance is given at different stages. Another thing about these non-digital entrepreneurs – they’re different to coach in comparison with digital entrepreneurs. They might need a CEO to help them run and pitch their businesses.

How does Cradle stay relevant in this funding space?

Throughout the years, the vision set by late Nazrin was very clear. The funding is not it, it’s very small. RM150,000 ($36,661) to RM300,000 ($73,323). But what is it about Cradle that could help you out with? It’s the relationship and the ecosystem that we build with the private sector and Malaysian corporates – the access to private equity and venture capital. Let’s be honest, we now have three products – may not be enough to change Malaysia but it’s what we have built over the past 15 years, that’s our secret sauce and it is what differentiate us.

People are cutting large checks in the range of millions of ringgit, but we’re giving out RM500,000 ($122,205). We have an exit with MauKerja of eight times, and the holding period is less than five years. The point I’m trying to make here is we’re going to build the ecosystem based on this formula – we’re going to expand the ecosystem with more corporates. Many corporates have seen the light and are prime for such investments in disruption and we’d like to make the plunge with them because we’re the best gateway to the ecosystem.

People might think we get a lot of deal flow from other agencies but no. Most of our deal flow is proprietary. But it’s also important for us to reach out and expand geographically, hence we’re also in Penang and Johor Bahru.

We need to work with as many early-stage aggregators as possible. Because although we already have a fairly nice portfolio, we always ask ourselves: how come we missed this entrepreneur/business that went to other VCs/accelerators? As long as you have that question, it means your reach isn’t wide enough yet.

Also read: Exclusive: Malaysia’s Cradle Seed Ventures set to launch $20m second fund

But corporates are also building their own VC arm, does that pose some sort of competition to Cradle?

To be frank, we’re [part of] the government, we have no competition. You have to understand our role, while I would like to see returns, I have no pressure to beat anybody, or rather, I celebrate this because all these are not problems for us. We have over 700 applications every year. Yes, we wish that some good entrepreneurs would come to us, but from a government’s perspective, the important thing is that these guys got funded, and that’s cool.

Another view is that, imagine if Cradle doesn’t exist, would there be any other catalytic element/agency that has gotten the ecosystem to this point, today, where we have VCs competing for a single deal? It’s arguable. If I’m biased, I would say probably not. Who else is in the same space as us? MaGIC (Malaysian Global Innovation & Creativity Centre) doesn’t provide funding. Our role is to catalyse. I don’t need to get everybody but I need to get enough to inspire the rest. Once I have that base, the others will come. The challenge we have now is the competition with from neighbouring countries like Singapore, Indonesia and Vietnam. Where we are right now, we are making it based on the basic ingredients but without a catalyst like us, all these wouldn’t have happened.

Is Cradle looking to cut larger checks?

I think it depends on the powers that be. Personally, if it means we could deliver more and the government is willing to give more, why not? But a better answer would be we need to move away from big numbers – we’ve never gone into big numbers from the start. Even with Cradle Seed Ventures – that’s RM3 million at most. We will continue to do the small amounts to keep the ecosystem going. Like MBAN and angel tax incentives. that we lobbied for – MBAN is now fully operational on their own after we gave them a little financial support when they first started.

So, we give you a little money and then you take it from there on your own to get to the finish line. We also have workshops and networking sessions for the recipients at no charge. We also have returning entrepreneurs to help us mentor the new ones, this is all part of building the community that is part of the ecosystem. Delivering something of value – that’s what we do. We have done this with our equity crowdfunding players, and we’re now trying to work with the peer-to-peer players to do something for us. So, this is us, trying to get people from the community to help us with the programme and connect the dots within the ecosystem.

I think the community is something that is underrated here, Malaysia has not been able to leverage the community well simply because of the community notion has only come up a few years ago. We need to start it somewhere, despite there may not be any ROI in that, because you can’t really put a value in this kind of thing. So we will try to make all these parallel universes connect with each other and at the same time, diversifying our own portfolio. We give little nudges, like shepherds. Through a series of interaction points, we help nurture companies to where they want to go. We don’t claim to be experts in the areas these companies are operating in, they’re successful in their own space, we’re glad to be part of that journey.

How has your investment impact been so far since inception?

It’s a question that many have asked us. We did a project to evaluate our impact from 2008-2016. Some of the headline figures are that we have attracted RM1.3 billion in private fund and foreign funds into Malaysia, besides creating over 80,000 new full-time jobs. And our contribution to the nation’s GDP is expected to reach RM30.8 billion by 2030.

We hope that every time we put in our money into a startup, we’re removing a certain amount of risk so that the startup will become even more attractive for investors to invest in its later stages.

Also Read:

Malaysian funds including MAVCAP likely to be reorganised by Ministry of Finance

Could it be stormy weather ahead for Malaysia’s government-linked funds?

Southeast Asia is filled with mediocre performance: Brahmal Vasudevan, Creador

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.