Cradle Fund Sdn Bhd, an agency under Malaysia’s finance ministry, has signed a co-investment partnership with four firms, pledging a combined amount of MYR 23 million ($7 million) over the next two years.
The four investor firms are Fatfish Ventures Sdn Bhd, OSK Ventures International Bhd, Japanese firm CoEnt Venture Partners Pte Ltd and Singapore-based Crystal Horse Investments Pte Ltd.
The four firms are offering a total co-investment amount of MYR 11.5 million ($3.5 million) for the next two years. OSK Ventures, however, is offering its MYR 5 million ($1.5 million) portion over a period of three years.
For Cradle, a private-public initiative between the Finance Ministry and MyEG Services Bhd, this deal marks a change from its earlier model, where it disbursed grants, and did not take an equity interest.
Co-investment entails matching the investment made by the private equity, venture capital or angel investor partners, and taking an equity interest in these firms.
Annually, Cradle generates an average of MYR 20 million to MYR 30 million ($6.06 million to $9.1 million) of investments. With this partnership, the fund has hit one-third of its 2015 investment target.
Cradle CEO Nazrin Hassan said the agency will invest equally in three to ten Malaysian technology startups, with each partner.
The matching investment in each startup would be up to a maximum of MYR 500,000 ($151,000).
“That means the total matching investment may come up to about MYR 1 million each, with a minimum of 23 deals, over a period of two years,” he said when announcing the partnership.
Going forward, Cradle will cease its grant co-investments model, save for the existing deals and partnership with Golden Gates Ventures Pte Ltd. Instead, it will provide equity investments, subject to the approval from the Finance Ministry,
With this “landmark shift in the evolution of the fund’s role”, Cradle is hoping that by 2017, 70% of its allocated early stage funding would be in the form of equity co-investment . “I foresee the bulk of remaining 30% as direct grants for prototype funding. The 70% will be in the commercialisation stage,” Hassan said.
According to him the change in strategy of the fund was in line with the government’s intent to reduce the dependence on grants and move towards private sector driven market instruments like equity and debt. “This is one way we are improving the grant funding ecosystem, and learning from the private investors on how to exit from our investments,” he explained adding that Cradle will transform into a revenue-generating organization under this arrangement.
Nazrin told the media that the objective now was to enlarge the pool of co-investors, to achieve the 70% equity investment ratio. For that, Cradle estimates it needs 20 to 30 partners. “There are a lot of partners in the pipeline. People want to come in to Malaysia. Appetite for Malaysian deals is there,” he said.
“There is also no shortage of demand from the startups; we already have a standing demand of about 80 applications,” he disclosed.
Unlike its partners, who will be directly involved in the direction and management of the startups they fund, Cradle will take a more passive role by providing coaching, support and value-add services to the startups.
“The partners will have their pick of the start-ups they want to invest in and we will assist them, but they will at the front,” Nazrin said.
As for stake size in the target company , Fatfish said it usually looks for 10% to 40%, OSK Ventures up to 49% while Crystal Horse seeks a smaller 5% to 20% stake-holding. The return on investment targeted across the board was between 10% and 20%.
This partnership is a second co-investment agreement for Cradle, which had signed its first such agreement with the Singapore-based seed fund provider Golden Gate Ventures, in June this year.
The partnership with Golden Gates had a combine co-investment amount of MYR 5 million ($1.5 million).
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