Reboot: How the Anwar Ibrahim Government Can Jumpstart Malaysia’s Startup Ecosystem Pt2

• Ministry of Communications and Digital needs to ​be the startup story teller
• Need for central coordination to help focus efforts for maximum impact

Funding: Fuel For The Fire

After presenting our nine recommendations across the talent and market access areas, we conclude with our recommendations around funding – where the rubber really meets the road.

Read Also: Reboot: How the Anwar Ibrahim government can jumpstart Malaysia’s Startup Ecosystem  

If we want our companies to be competitive with their regional counterparts we can’t handicap them and hope they will find success. It’s imperative that we build a healthy funding ecosystem that leverages a variety of instruments and incentives. While this is crucial for building a robust startup ecosystem, there are significant weaknesses in our current system. 

For instance, Singapore’s success in becoming the VC hub of SEA highlights the importance of investing in VC funds. Despite Malaysia’s first mover advantage in setting up a VC fund for tech companies in 1999 with MSC Ventures, subsequent government funding for the VC industry was poorly structured as the funds were provided as loans instead of investments. 

However, in 2019, the Funding Ecosystem Task Force, led by Chairman Dr. Sivapalan and appointed by former MOSTI Minister Yeo Bee Yin, provided recommendations to improve the funding ecosystem. These included creating a Fund of Funds structure for venture capital (which eventually became Penjana Kapital under the former finance Minister Tengku Zafrul Aziz), offering corporate tax incentives to encourage corporations to invest in VC funds, and reinstating prototype grants by Cradle to support product development for startups. That said, there are still gaps that need to be addressed. Here are some of our recommendations:

Recommendation #10: Provide long term funding under the Fund of Funds model. Penjana Kapital should not be a one and done deal. Nor should the annualised funding to MAVCAP be speculative. We Recommend annual funding of US$136.6 million (RM600 million) for five years on a matching basis. This will go some way to position Malaysia as a VC hub in the region.

Recommendation #11: Encourage pension funds to contribute to VC funds with a 1% contribution annually. This can unlock US$227 million (RM1 billion) in funds yearly. The government should let either Penjana Kapital or Mavcap manage the funds using the successful Fund of Funds model. Focus on later stage companies at the Series B stage onwards while government funding can be focused on the earlier stages.

Recommendation #12: Increase funding for Cradle Fund to at least RM50 million a year for prototype funding and commercialisation funding. The bulk of this funding should go to prototype funding to launch new ideas and products which will then become new companies. 

[RM1 = US$0.227]

Recommendation #13: Change Cradle’s policy to give startups the grant money up front to build the prototype or business instead of making it claimable. Startups being startups, cash flow is always an issue and this model creates tremendous stress for startups. If you’re going to give them a grant, then give them a grant. It can be based on milestones but give them the money and let them spend it to build the prototype or business. Reduce the operating load so that founders can focus on running their business instead of making claims. 

Recommendation #14: The Corporate Tax Incentive which Dr. Sivapalan and the late CEO of Cradle Fund, Nazrin Hassan, championed finally came to fruition after more than 5 years. While this is an excellent development there is one clause in the gazette that limits the use of the incentive. This is the need for the fundco to be a registered corporation under the Companies Commission of Malaysia. We recommend removing this requirement. Allow funds set up in Labuan to also claim the tax incentive.

Recommendation #15: The government also provides a tax incentive of up to RM500,000 per year for Angel investors who invest directly in qualifying technology companies. 

This has created a lot of interest and over the last 5 years many people have invested as Angels and this has been great for startups. Cradle Fund is the entity that registers these Angels to qualify for the incentive and also facilitates the claims for the incentive. 

However, the process to make the claims is very, very long and cumbersome. But Cradle is not at fault here, on the contrary, they do an exemplary job in processing the claims. However, these claims must also be approved by the Ministry of Finance (MOF) before the certificate is signed by the Minister. 

We have seen delays of 1 year in making the application as there is a second round of processing by MOF. This is superfluous and is essentially a duplication of the same job Cradle has already done. We recommend that MOF do away with their double processing and make Cradle the final authority on the approval of the claims.

Telling the Malaysian Story 

We are really terrible at telling a great story about Malaysian technology. Very few people and companies outside Malaysia (and even within Malaysia) know about Malaysian companies. 

Credit must be given to MaGIC (the entity formerly known as Malaysian Global Innovation and Creativity Centre which has now been merged with MRANTI) for a great job they did telling the Malaysian story abroad. Many entrepreneurs and investors we have met abroad know about the Malaysian story through MaGIC. We need to revive this storytelling as this will help Malaysian companies to export our services and solutions to global buyers. MDEC, to their credit, has of late been redoubling their efforts in this regard. 

Recommendation #16: The Ministry of Communications and Digital needs to take on this task and spread the story of Malaysian tech far and wide so that Malaysia and our technology endeavours are better known abroad. This needs to be a concerted effort with MITI, Matrade and other agencies. We cannot go out to international conferences with various variations of acronyms with the alphabet “M” in them. We have to be one united Malaysian ecosystem. Showcasing the best of the nation.
 

The Call For Leadership

It’s really hard to believe we’ve had a startup ecosystem for almost 27 years now. That’s a really long time. We had a head start with the Multimedia Super Corridor (MSC) initiative in 1996 that led to the formation of some of the early stalwarts like Jobstreet, Catcha, iProperty and MOL (Malaysia Online) all of which became household names and their founders are still revered today. 

And yet, we’ve not made much progress in subsequent years as some of our neighbours, proving the adage that there isn’t always an advantage in being a “first mover”. Our ecosystem barely ranks in the top 10 of the emerging ecosystems list on Startup Genome or the Global Startup. It’s hardly where we should be given our head start. We’ve missed a great opportunity to be the leading startup and technology ecosystem in Southeast Asia and that mantle has passed to other ASEAN nations.

And it’s not for a lack of trying. Malaysia has more government agencies focusing on startup initiatives than any of our regional neighbours. We have more programmes and a significantly larger civil service working in this space than any other ASEAN nation. We have invested a meaningful amount of government resources developing our ecosystem over the years. 

So when we are faced with the harsh reality that Malaysia is lagging behind, it is both perplexing and frustrating. Year after year we hear of how Singapore is the Silicon Valley of ASEAN, Indonesia is the region’s unicorn factory and Vietnam is a phoenix rising.

It’s not that they are smarter than us, nor that they have many great advantages over us. We have everything we need right here to build a world class ecosystem – great entrepreneurs, a supportive government and Malaysia remains one of the best places in the world to build a startup. 

So while we do sincerely believe that great policies are key, perhaps that’s not the critical point for success. Perhaps what we truly need is strong leadership.

We need to end the days when multiple ministries and agencies are competing for an ever shrinking pie of startups. More often than not acting independently and with similar programs. For founders, investors and ecosystem players this is confusing and counter productive. All this does is dilute the impact of the efforts of the government. 

Recommendation #17: There needs to be a central coordinating force to help focus our efforts to gain maximal impact. Going back to 1996, one of the things that allowed the then MSC to have gravitas was that the prime minister himself was involved in the digital transformation of the nation. Perhaps we need a national Chief Innovation Officer or perhaps the Prime Minister’s Office needs to act as a coordinating body. This way, all the agencies that are operating in this space will have a common vision for how to develop our ecosystem. 

And yes, it is that important. Malaysia’s potential to lead the startup and technology ecosystem in Southeast Asia is still within reach. Successful startups create jobs, have a positive impact on GDP and reshape our economy for the better. 

By recognizing the need for strong leadership, we can unify our efforts, align our vision, and collaborate more effectively. With a coordinated and focused approach, Malaysia can create an environment that fosters innovation, attracts investment, and nurtures startups to become successful, world-class companies. 

Let us all work together to make Malaysia a true leader in the startup and technology ecosystem, and achieve the bright future that we all envision. 

It’s time to reboot >>>

Dr V Sivapalan has a Ph.D in Venture Capital from University of Edinburgh, Scotland, is co-founder and Senior Partner of ScaleUp Malaysia Accelerator and Adjunct Professor in the School of Science and Technology, Sunway University. He is the author of the book “Supercharge Your Startup Valuation. Aaron Sarma is an entrepreneur, speaker and investor. He is a co-founder and serves as General Partner at ScaleUp Malaysia Accelerator and co-founder of a startup studio called Remote Ventures. He writes about the digital economy at The Aaron Sarma Newsletter.