Malaysia’s Magic toys with idea of providing funding to startups it backs

MaGIC CEO Ashran Dato' Ghazi

Malaysian Global Innovation & Creativity Center (Magic), the country’s startup and innovation lab, is toying with the idea of providing capital to startups, a top executive with the organisation said. Currently, the startup and innovation lab is known for its capacity building role, facilitating collaborations and helping companies scale to the next level.

Until last year, the organisation was firm that its role did not involve funding. It is now deliberating with other stakeholders – corporates and venture capital firms – on packaging some of its programmes with financing, equivalent to seed funding or an entry-level capital amount, to start with, Magic CEO Ashran Dato’ Ghazi told DEALSTREETASIA in an interaction recently.

“When I speak about toying with the idea of packaging with capital, we are going to be running something depending on the partners itself. But it would naturally start at entry level itself. But that (plan) is yet supposed to solidify. We are talking to a bunch of partners in the capital space and trying to do a pilot on such a model. These partners are a mix of corporates and VCs,” Ghazi said.

The government-backed agency is looking at deepening relationship with funding agencies where the current conversation is revolving just above the entry-level range. Magic is talking to a number of stakeholders who also want to look at mature startups. Ghazi noted that for entry level funding, the agency is looking at up to MYR 100,000 worth of capital.

When asked if there was a scope for Magic to start its own fund like other agencies in Malaysia, Ghazi said, “Perhaps, but not in the near future. We will look at whether there is a real need for that but for the moment our goal will be how we get a better conversion. If we have a problem doing that and the only solution is through a fund then maybe we will do that.”

In a detailed conversation with this portal, he talked about the drain of capital and even talent to Singapore from Malaysia and other regional countries and the funding and startup landscape in the region.

Edited Excerpts:

How do you see the deal flow in the region? There have been VCs who complain of not enough quality deals but at a regional level how do you view it?

In Malaysia, there are similar sentiments. Those with the money say there is a lack of deal flow and the entrepreneurs will always say there is not enough money in the system. And when you look at all sides of the equation objectively, it is not actually about the capital or deal flow. It is the ability to tighten the conversion process.

At Magic, we are trying to figure out how to have the conversion rates. I do not have an answer yet but we are trying to figure this out. We have to be able to do that in a scalable manner otherwise the question you pose will be a recurring question.

If we look at the ecosystem, our community of the startup pool is the youth market segment not just in Malaysia but across the region. When we talk about it, the entrepreneurial exposure or any exposure is very minimal. You will get the breakaways — Joel (Neoh Eu-Jin, Groupon Malaysia founder), Khailee (Ng, a former entrepreneur and now Managing Partner at 500 Startups) but they are outliers. We need a different point of view if we want to create more of them. We have to look at ways that made them move forward and the challenges within the community that need to shift.

What entrepreneurs really need is access to a mentor, not necessarily a structured programme. It is not as easy to get mentors to commit time and energy. There is a larger pool of entrepreneurs that are to be groomed. The question we ask at Magic is: how deep and how far-reaching can we go in creating this entrepreneur pipeline? Otherwise, it goes back to the same cycle.

I think a collaboration between existing businesses and startups also needs to be ramped up. There are 20,000 mid-sized companies in Malaysia. If even 10,000 of these look at how to work with startups to innovate or identify new areas of business, you may have about MYR 500 million or MYR 1 billion of capital. We can even use that as innovation capital.

One reason why deal flow is slow is that there is a very poor angel investor community. In India and China, startups with angel backing are able to approach VCs with some validation. This is lacking here.

We have to do that in parallel. One approach is let’s hope for exits so these guys can plough back into the system. You have a handful of guys who are familiar with this space. Now you may redefine angels per se and not touch the nerves of a business owner who does need to innovate.

But in China, India and Valley, the appetite is much stronger for angel investors and a lot of times they are head of conglomerates or business families.

This year we took a more proactive approach in terms of dealing with corporates, so we do see an increased interest but the conversion in terms of getting involved is a bit staggered. When we rolled out this whole corporate entrepreneurship responsibility agenda within the Malaysian context, we took 7-8 months and targeted about 40 odd companies across tier 1 and 2. But the risk appetite is varied. There are some who are excited to join and set up their own innovation labs and there are others who would wait and see first. We are trying to push the boundaries a little bit. We set up an innovation platform where they can open themselves to some challenges.

I expect within the next two or three years, more corporates are going to increase their capital pool in the market. In terms of seeding the angels, I think it is going to be filled as a combination between individuals and companies. We talked to the Federation of Malaysian Manufacturers and some of them came back and were very excited as they wanted to put in something.

Is it a challenge when you talk to VCs, they are not interested in non-tech so the entire pool of capital is taken by tech startups?

I think there needs to be a balance. The only Bible the VCs know is 20x, 30x and 100x. I had an interesting conversation with a VC that operates regionally and he has a very different lens. He separates his portfolio into two – one is the usual tech and the other is in consumer products that address the millennial market. In the consumer space, the ROI may not be too high but when he goes at the right spot he gets that consistent return of 3x to 5x in a three to four year period. So he is identifying new markets that are not addressable yet. He talked about lifestyle projects and we all see the millennial market is growing. If we take into account the principles of creativity and innovation, these guys are creating new markets.

What is your view about Malaysian companies relocating to Singapore for a stronger legal structure to tap the VC funding pool?  

I had a similar conversation around Grab and other such companies. My two cents is that if you come back from a regional ecosystem play point of view, put aside temporarily the country’s desire intent for economic benefit. If you take a regional lens and not care where these entrepreneurs move and not care where the talent comes from and where the capital comes from, then we are not getting bogged down by unnecessary issues. It is that baggage that people carry. I agree however that the minute this happens there is an economic dent. But we are trying to separate the two.

Each country should have a belief that after they (entrepreneur) reach that pinnacle they will come back to the cycle. But if on day one you are trying to do this, I don’t think we are doing justice to the entrepreneurs.

What is the next phase for you going forward?

When I joined, we looked at positioning ourselves as a creativity innovation centre for entrepreneurs. But moving forward, the strategy is shaping the ecosystem of future economies.

Would you look at direct funding or are you working towards a financing arrangement?

One part of it is we are looking at deepening relationship with funders. So we do a lot of capacity development to forge better partnerships with different players. Right now it is a bit more casual. We are looking at packaging some of our programmes together with financing.

Will it be a seed amount or credits?

So, the credit thing is relatively easy for us. As we move forward, breaking down into a micro ecosystem is very important. We are trying to curate vertical oriented super-clusters and ensure the right players. And when I speak about toying with the idea of packaging with capital, we are running something depending on the partners. But it would naturally start at the entry level. (The plan) is supposed to solidify. We are talking to a bunch of partners in the capital space. We are trying to do a pilot on such a model. These partners are a mix of corporates and VCs.

It is possible that in the future, Magic might have a programme where apart from capacity building, the startups that come through it will also get a certain level of funding. The current conversation is just above entry level range but we are talking to a number of players who want to look at more mature startups. For entry level, we are looking at a range of MYR 100,000 worth of capital and that will help. I do imagine as we foster more collaborations, the bundling will happen.

Do you see yourself running a fund like Cradle or others in the near future?

Perhaps, but not in the near future. We will look at whether there is a real need for that. For the moment, our goal will be how we get a better conversion. If we have a problem doing that and the only solution is through a fund, then maybe we will do that.

Also Read:

Malaysia: GECommunity 2016 targets to create MYR100m in cross border value

$100m value to be created over an year from upcoming GECommunity initiatives: MaGIC

Singapore: Traderwave to participate in MaGIC accelerator programme