AN entrepreneur-turned-minister is leading the efforts to overhaul the Malaysian startup scene.
This monumental task to make Malaysia exciting for startups and investors, however, comes at a time when global startup funding is slowing down and Malaysia is facing stiff competition from regional powerhouses like Singapore and Indonesia.
Crunchbase data shows that the first quarter of 2024 was the second-lowest on record for global startup funding since the beginning of 2018, down by 20% year-on-year (y-o-y).
Meanwhile, in South-East Asia, private capital raised by startups plummeted 51% y-o-y in 2023, according to a DealStreetAsia report.
Funding, nevertheless, is just one part of the problem.
There are other areas that Malaysia needs to pay attention to, which includes enlarging the pool of quality startups and talent, improving the ease of doing business and creating a thriving culture of innovation.
Kevin Brockland, managing partner of Indelible Ventures, says that Malaysia struggles to consistently produce quality startups y-o-y.
Indelible is seed-stage venture capital (VC) firm focusing on South-East Asia.
“The problem is historically, Malaysia has tried to focus on Step 3, without completing Step 1 and 2,” he tells StarBizWeek.
However, Brockland continues to see opportunities in the Malaysian market, in comparison to Singapore where the market is maturing amid strong competition, and Indonesia, where startup valuations are high.
“Malaysia has a good representative sample market, given the various cultures and languages. It is a good test market for new product launches.”
Having produced successful startups in the past including Aerodyne, Carsome and Grab, Malaysia still has a long way to go to make itself the regional hub for startups.
However, the way forward cannot be business as usual.
A faster growth of innovation-driven startups is crucial for Malaysia to make the leap from its “Old Economy” where traditional businesses like banking, plantations and utilities drive the economy to the “New Economy”, where high-growth and borderless businesses lead to higher value creation and productivity.
The expectation is, therefore, high on the Economy Minister Rafizi Ramli to spearhead the change, considering that he was a startup founder himself.
His data analytics startup INVOKE was previously valued at over RM100mil as reported in the media.
There are at least 14 agencies involved in the startup ecosystem covering aspects of financing, product development, marketing and expertise, according to Prime Minister Datuk Seri Anwar Ibrahim previously.
Looking ahead, there must be a radical change in the government’s approach for startups that offers policy consistency regardless of change in ministers, but at the same time, flexible enough to meet the ever-changing demands of the startups.
It is fair to say that the market is not looking for another grand blueprint that does not yield impressive deliverables.
There is already the Malaysian Startup Ecosystem Roadmap 2021-2030 (SUPER) in place, which was launched in 2021.
“In 2030, we aim to be ranked as one of the Top 20 global startup ecosystems, functioning in the Integration Stage, with a mature and flourishing ecosystem abuzz with 5,000 startups, largely self-sustaining and hugely successful, creating knowledge transfer and wealth,” according to SUPER.
To further complement the startup roadmap, the government launched the Malaysia Venture Capital Roadmap 2024-2030 (MVCR) less than three weeks ago.
The MVCR has set a target to double the total VC funding value by 2030, from US$758mil in 2022.
Through three key strategies and 11 strategic interventions, the MVCR is said to be able to address the issues within the VC industry.
Adding on to this effort, the government will organise the KL20 Summit that will be held on April 22-23.
Summit of blockbuster deals
According to its website, KL20 seeks to be a centrepiece for discussion, debate and deal-making, by converging progressive politicians, unicorn founders, billion-dollar funders and thinkers to Kuala Lumpur.
Speaking with StarBizWeek, Rafizi says the summit will bring together US$1bil in funds from the government and foreign investors, including sovereign wealth funds and foreign VC firms.
KL20 promises “blockbuster deals” that include deals to move the Malaysian economy up the value chain such as in the semiconductor chip designing segment.
In fact, Rafizi says about 30% of the announcements in the KL20 Summit will be on the “high-level semiconductor segment”.
While the minister stopped short of naming the deals, it is noteworthy that key attendees of KL20 include high-level representatives from Arm Ltd, Amazon.com, Phison Electronics Corp, China Investment Corp, Nothing Technology Ltd and Intel.
Arm, for example, is the creator of the intellectual property used in the designs used to run more than 95% of the smartphones in the world.
Taiwan-based Phison, founded by Malaysian-born Datuk Pua Khein-Seng, is said to have produced the earliest pen drive or single-chip USB flash removable disk.
Rafizi also says the KL20 Summit will not be the end of “blockbuster” deals, calling it a continuous process.
“We are talking to more sovereign wealth funds to come and invest in Malaysia.”
In overhauling the Malaysian startup scene, Rafizi admits that the country needs a new approach.
A major change, moving forward, will be the move to attract foreign entrepreneurs to build their startups in Malaysia or relocate their existing startups into the country.
To make this happen, the government is promising a faster process to set up businesses and to bring in foreign talents.
Currently, it is said to take about two months to start a business in Malaysia, but Rafizi has promised entrepreneurs that the process will be cut short significantly.
There will also be a Golden Pass programme to make investing and deal-sourcing more regular by providing a series of incentives to VCs.
“If you compare KL20 to the previous approach, the difference is the international approach in KL20,” says Rafizi.
The new approach will also include the Single Window Initiative that aims to dismantle bureaucratic hurdles, expedite approvals and empower entrepreneurs to navigate the startup journey with greater ease.
Another key feature of the government’s new approach is to prioritise funding for startups in the pre-seed and seed stages.
“Most probably, only 10% of the companies that are funded at the seed stage will be able to grow to Series A and onwards.
“So, if you have a very small funding here (seed stage), it is an oxymoron to expect the creation of five unicorns,” says Rafizi.
Rafizi was referring to the target to develop five local unicorn companies in Malaysia as announced in 2021 by former science, technology and innovation minister Datuk Seri Dr Adham Baba.
Unicorn is a term used for startups worth more than US$1bil.
“We have made the policy change. The instructions to government agencies have been made very clearly that this administration’s focus is on pre-seed and seed.
“This is because at Series A, B, C and onwards, they should be able to take care of the funding themselves.
“If they still require government funding, it means the market is not convinced with their business or product,” says Rafizi.
The minister also points out the importance of grooming local VCs, which is one of the focus areas of the current government.
“Our focus on pre-seed and seed funding is not to take more public money and give freely to the startups but rather to build the funding and the VC ecosystem,” he adds.
Meanwhile, Centre for Market Education chief executive officer Carmelo Ferlito tells StarBizWeek that the problem lies not only in seed-stage funding.
“Late-stage funding continues to be a significant challenge and this is one of the two main obstacles in the way to achieve full potential.
“Another obstacle is red tape. The World Bank’s Ease of Doing Business 2023 report indicates that Malaysia still has work to do in cutting red tape, ranking 84th in the world for ease of starting a business.”
Doing it right
It is highly essential for the domestic funding ecosystem to be enlarged, with the participation of more VCs with local knowledge investing in the startups.
It is also important to gradually reduce the reliance on the government as the major funding source for startups and hand over the baton to the private sector.
For too long, the government has been pumping in public money to support the domestic venture capital ecosystem.
For example, between the Ninth Malaysia Plan (2006-2010) and the Eleventh Malaysia Plan (2016-2020), the total amount of government funds approved or invested into five technology-based funds was RM1.31bil.
While government funding may not be entirely removed, the issue in Malaysia is that government-linked VC firms tend to take on the role of shareholders instead of indirect investors.
This needs to change whereby the government-linked VC firms should act as enablers, to avoid direct competition with VCs and private funders.
An industry insider says that Malaysia’s previous approach of providing matching grants to VCs, with the bulk of funding coming from the government, is sub-optimal and unsustainable.
“If we lure them in with money but we don’t have enough high-quality deals to invest in, the money will flow back out.
“This can be a net negative for Malaysia and a waste of public funds,” he says.
He also suggests that the government should include a “hard clause” in its investment agreements that the funding provided can only be invested in the country.
“The government should only offer only a small fraction of the fund size, to be matched by outsized private sector contributions. This was how it was done in other model countries to create successful outcomes.
“Otherwise, this becomes a moral hazard as the foreign parties have little skin in the game with nothing to lose and everything to gain.”
Meanwhile, startup entrepreneur Shahryn Azmi questions the relevance of over-depending on the VCs to develop the local startup scene.
“The objectives of the profit-driven VCs are different from the government, who instead wants to enlarge the startup pool and create more entrepreneurs.
“What the government thinks as a good startup may not appear so in the eyes of a VC because they focus on the profits,” he says.
Shahryn, who is the co-founder of seed-stage startups MakeTimePay and Kard Asia, says it is easier for startups to obtain funding from foreign investors than government-linked entities.
“Local investors are highly risk averse and thus, lack the kind of courage required for wide scale startup investments.
“Locally, the expectation is to invest in one and for that one to be a unicorn. It can’t work that way,” he says.
Pointing out that the previous government allocations for startups have been under-allocated, he urges for more funding in the future.
Shahryn also says that funding is not the only area the government should pay attention to.
“We need to improve our intellectual property regulations, especially the enforcement. This is what the investors want.
“Also, we must strive to ease the process of setting up a company. In Singapore, I can set up a company within hours.
“But in Malaysia, it will take weeks with many requirements even in picking a name for the business. You have to explain the meaning behind the name, which is unnecessary and will only drag the entire process.”
Meanwhile, Ferlito questions the government’s recent decision to tax businesses with a 20% of foreign ownership, pointing out that it does not align in the direction of welcoming investments.
“From 2024, if more than 20% of paid-up share capital of SMEs is owned by a foreign company or a non-Malaysia citizen, the SMEs will not be entitled to the 15% and 17% preferential tax rates.
“These firms will be subject to a 24% tax rate straight away.
“A generally fairer taxation system becomes imperative to nurture entrepreneurship and the influx of venture capitals, which are in general domestically difficult to grasp,” says Ferlito.
Moving forward, in building a more thriving startup economy, Brockland of Indelible Ventures suggests that there is a need to boost incubation and acceleration programmes.
“The government should also work together with emerging fund managers that manage smaller size VCs abroad. They are better at risk taking and they pay more attention to seed-stage startups.
“We have also seen in the past where the top decile of emerging fund managers have better performance than the top decile of established funds,” he says.
With the KL20 Summit set to take place next week, the hopes are high on Rafizi and his quest to make Malaysia the startup hub.
Only time will tell if he can truly deliver his promises.
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