At a time when venture capital and private investors are increasingly evincing interest in the Asian market – particularly countries such as Singapore, Indonesia and India – Malaysian entrepreneurs are staring at an unusual funding gap.
They say there aren’t too many VCs to fund emerging businesses. As a result, not many who have established their ventures to disrupt the connected world are able to tap the capital pool – at least in the pre-Series A to Series B stages.
According to Security Commission (SC) Malaysia’s 2018 annual report, investments in startups in 2018 stood abysmally low comprising 0.8 per cent of the total funding, while early and growth stage companies garnered a majority of the capital.
A further break down of numbers show that as many as 96 growth and early-stage companies received funding amounting up to RM533 million ($129.5 million), representing 86.9 per cent of the total investments made in 2018.
By the end of 2018, there were 105 registered VC firms in Malaysia, which saw a 46.8 per cent increase in VC/PE investment activity amounting to RM613.3 million ($150.1 million) invested capital.
While pointing out to the high number of registered VCs locally, fintech startup MoneyMatch co-founder Naysan Munusamy said: “The sad truth is that most of them are inactive and there are very few active local VCs investing in Malaysia at the moment”.
MoneyMatch recently raised an undisclosed pre-Series A round led by Cradle Seed Ventures, the VC arm of Cradle Fund.
During the previous calendar year, the Malaysia venture capital and private equity industry saw total fund commitments of RM6.08 billion ($1.5 billion). Public funds made up 40.2 per cent of it, while sovereign wealth funds contributed 30.2 per cent to the total fund commitments. Private sector contribution to the industry was led by asset managers (9.7 per cent), followed by corporate investors (10.8 per cent) and individual investors and family offices (5.1 per cent).
“It would be fantastic for the startup ecosystem if there would be a tenfold increase in active VCs locally in Malaysia. Hopefully this will change and improve in the coming years,” added Naysan.
Gobi Partners managing director for Malaysia Jamaludin Bujang, however, argued that it is not the number of VCs that is less but it is the amount of capital. “Capital is limited in Malaysia at the moment, but then again, too much capital is not good either. We should continue to focus on building startups here because eventually, capital will follow,” he said, adding that the country needs more participation from corporates.
Malaysia Vs Asia
Currently, investors and entrepreneurs are increasingly depending on a foreign pool of capital, particularly that is available in Singapore.
“It is challenging to source for local investors in Malaysia,” said Naysan. “The local VC ecosystem is still too small and too weak. Due to the lack of maturity of the local VC ecosystem, the local investors still have a traditional mindset while their Singapore counterparts move quickly sealing deals and growing rapidly,” he added.
Naysan also points out that ventures are setting up their headquarters in Singapore for tax optimisation purposes even though they run large operations in Malaysia and surrounding countries. This is also because the comfortable expatriate lifestyle in Singapore is attracting many investment professionals from overseas as compared to other Southeast Asian countries.
Echoing the same sentiment, Cradle Fund acting group CEO Razif Abdul Aziz said: “It’s simply because there is more money available in Singapore.” Given that Singapore is still the region’s financial hub, there is a lot of money sitting in the city-state that needs to “be put to work. Some of that money finds its way into startups via angels, VCs or other forms of private capital,” he added.
Singapore, say experts, is among the best places in Asia to raise capital. In fact, what creates an advantage for the SEA country is that a plethora of prominent international banks and blue chip organisations headquartered there attract talent from all over the world. “Investors will park themselves where money and talent are. Add to that, great infrastructure, strong rule of law, English-speaking population and you have a very potent mix,” said Razif.
However, it’s not Singapore alone that is giving stiff competition to Malaysia. Take Indonesia for instance. “The opportunity is huge for anyone that gets it right in Indonesia. This is also true, to a varying degree, for Vietnam, Thailand and the Philippines. The sheer size of these markets attract the investor fraternity irrespective of any language barrier or poor infrastructure,” added Razif.
Singapore remains Southeast Asia’s investment hub, according to a report by Bain & Co. The firm’s survey showed 90 of its investor sample voted Indonesia and Vietnam as the hottest Southeast Asia market outside Singapore in 2018 and 2019.
The government in Malaysia is taking a slew of measures to incentivise the PE and VC industry in a bid to attract investors across Asia. This is a situation similar to what Singapore had gone through a few years ago, say experts.
In 2018, Singapore-based VC firm Golden Gate Ventures opened its office in Kuala Lumpur – its third after Singapore and Indonesia.
It is understood that the firm is planning to commit about $18 million of its $100-million Fund III to back Malaysian startups that have had a strong track record even if their founders have moved out of the country.
“In Jakarta, companies have to be country-focused for many years before they think of moving out. But Malaysia is similar to Singapore, where founders are thinking of going beyond Malaysia from day 1,” said Golden Gate Ventures managing partner Vinnie Lauria. “The DNA of entrepreneurs in Malaysia is very different from that in say Vietnam, Thailand or Indonesia.”
Local venture capital and multi-family private investment firm RHL Ventures has launched a RM100 million ($24.2 million) fund to support the growth of local startups as well as small and medium enterprises (SMEs).
The fund is anchored by SME Corp. Malaysia, a government agency under the Ministry of Entrepreneur Development, signaling one of the first few public-private collaborations under the Mahathir-led government.
In order to give the burgeoning local entrepreneurial ecosystem a facelift, the SC Malaysia had voiced out in February that government interventions are needed to spur further growth and facilitate investments by risk capital firms.
One of its proposed recommendations is to restructure existing public VCs so that they could be more commercially-driven.
The recommendation was in line with Malaysia’s Budget 2019 tabled last November, where finance minister Lim Guan Eng had said all state-linked VC funds – Malaysia Technology Development Corporation, Malaysia Debt Ventures Bhd, Malaysia Venture Capital Management Bhd (MAVCAP) and Cradle Fund – would be streamlined and made more efficient in delivering capital to companies in various stages of financing needs. He, however, did not elaborate on what the “streamlining” would entail.
To date, the SC has reviewed 60 proposals from local and foreign VC managers for the RM1 billion ($245 million) VC pooled fund that was allocated by Malaysian government in the 2018 Budget. The fund was committed by major institutional investors, with a strong investment preference towards sector such as ICT and biotechnology.
Cradle Fund’s Razif said, the proposal is appropriate and pushes all the right buttons. “It (the VC pooled fund) makes available a significant amount of funds beyond what is already allocated via various agencies and ministries to support the local startup scene, while the tax incentives are set to attract private capital, associated talent and other resources,” he said.
Razif added that tax incentives have always been used in the past to catalyse nascent sectors.