Startup op­por­tu­ni­ties abound

Lo­cal startup sec­tor gain­ing ground with stronger in­vestor in­ter­est

The Star Malaysia - StarBiz - - Sme Biz - By JOY LEE [email protected]­

THE past few years have seen an in­crease of en­trepreneurs in the lo­cal tech startup sec­tor. With bet­ter ac­cess to fund­ing, there is am­ple op­por­tu­nity for new busi­ness ideas to take off.

But while the num­ber of star­tups in Malaysia has in­creased, in­dus­try ob­servers say we are merely scratch­ing the sur­face of where the in­dus­try could be.

Ac­cord­ing to Yusuf Jaf­far, pro­gramme man­ager of Global Ac­cel­er­a­tor Pro­gramme from Malaysian Global In­no­va­tion & Cre­ativ­ity Cen­tre (MaGIC), there is an es­ti­mate of 3,000 star­tups in Malaysia. Com­pared to the over 1 mil­lion reg­is­tered en­ter­prises here, star­tups make up only 0.25% of to­tal com­pa­nies reg­is­tered.

In con­trast, Sin­ga­pore has 42,000 star­tups, mak­ing up some 8.88% of com­pa­nies in the is­land state.

In the re­gion, South Korea has an es­ti­mated 30,000 star­tups, while In­done­sia and In­dia has over 4,700 and 7,700 re­spec­tively.

Al­though the num­bers in In­done­sia and In­dia look low, Yusuf points out that they have a vi­brant startup ecosys­tem.

“In­dia has 1,200 new star­tups ev­ery year, and this does not in­clude the ones that are fail­ing. These are the ones that are sur­viv­ing or thriv­ing. This shows vi­brancy of ecosys­tem.

“For Malaysia’s ecosys­tem to grow, we need to rapidly in­crease our num­ber of star­tups. We need more en­trepreneurs here and we need more ideas,” he says.

He names four com­po­nents that are needed for the in­dus­try to grow – more star­tups, cap­i­tal, mar­kets and tal­ent.

In terms of cap­i­tal, Yusuf notes that ven­ture cap­i­tal (VC) pen­e­tra­tion in Malaysia is rel­a­tively high with 110 VC firms. Sta­tis­ti­cally, he says, there are a lot of funds avail­able in Malaysia with US$1.75bil in VC fund­ing for the lo­cal ecosys­tem, of which, only 50% has been spent to-date.

How­ever, most of these funds go into fund­ing Se­ries A (US$1milUS$3mil) and B (US$3milUS$10mil) rounds, whereby the star­tups have grown siz­ably.

Ac­cord­ing to sta­tis­tics, only 0.89% of VC cap­i­tal went into early-stage in­vest­ment, which amounted to about eight in­vest­ments last year. In Sin­ga­pore, 67% of VC fund­ing goes to the early stage.

It is cru­cial to have ad­e­quate fund­ing for early stage in­vest­ment to en­sure that en­trepreneurs can tap these funds to grow their ideas.

“We are in­vest­ing late,” says Yusuf.

In Malaysia, he es­ti­mates that the suc­cess rate for star­tups is 20%.

He adds that 90% of the cur­rent 242 uni­corns – startup com­pany val­ued at over US$1bil – in the world re­ceived VC fund­ing from the get-go, un­der­scor­ing the im­por­tance of VCs in mak­ing high­growth com­pa­nies.

Ad­di­tion­ally, the fre­quency of in­vest­ments in the lo­cal mar­ket is low. In 2017, there were only 77 in­vest­ments made by VCs, or only 2.57% of star­tups re­ceived VC in­vest­ment. Con­sid­er­ing that there are 110 VC firms here, it is small won­der that en­trepreneurs feel that there is a lack of fund­ing avail­able in the lo­cal mar­ket.

Stack­ing up re­gion­ally

Malaysia has of­ten been cited as a coun­try with great po­ten­tial. We have a fairly well-ed­u­cated pop­u­la­tion, in­fra­struc­ture and a strong econ­omy.

How­ever, the other coun­tries in the re­gion have some­how gar­nered more in­ter­est from in­vestors. Sin­ga­pore and In­done­sia, in par­tic­u­lar, have been re­ceiv­ing size­able in­vest­ments from VCs. The In­dochina re­gion has also been get­ting a lot of at­ten­tion in re­cent times.

And not many from the in­dus­try will for­get that Malaysia-founded Grab even­tu­ally moved to Sin­ga­pore given the more vi­brant ecosys­tem across the straits.

But Justin Hall, part­ner at Sin­ga­pore-based Golden Gate Ven­tures, says that Malaysia’s startup ecosys­tem is rapidly ma­tur­ing.

“As we’re start­ing to see in other re­gional coun­tries, Malaysian en­trepreneurs are ac­tively seek­ing to build out plat­forms and prod­ucts that ap­peal to the en­tire South­East Asia, and not sim­ply the do­mes­tic Malaysian mar­ket.

“Re­gional funds are ac­tively look­ing for and in­vest­ing in Malaysian-born star­tups, and I see this trend ac­cel­er­at­ing as in­vestors look out from In­done­sia and Sin­ga­pore,” says Hall.

Last Novem­ber, Golden Gate launched its Malaysian of­fice in Kuala Lumpur to so­lid­ify its pres­ence here. The firm had al­ready utilised a quar­ter of its Fund II to in­vest in early-stage tech com­pa­nies that are based or op­er­at­ing in Malaysia. It is plan­ning to in­vest a fur­ther RM75mil in Malaysia-based star­tups.

He notes that Malaysia also has a large dig­i­tal con­sumer mar­ket.

“It bears some strik­ing sim­i­lar­i­ties to other South-East Asian coun­tries in terms of con­sump­tive be­hav­iour such as reg­u­la­tory bot­tle­necks in cer­tain in­dus­tries, and reg­u­la­tory, in­fra­struc­ture, and lo­gis­ti­cal con­straints. This means that prod­ucts and ser­vices that res­onate with Malaysian con­sumers and busi­nesses might be eas­ier to lo­calise into other re­gional mar­kets than, say, com­pa­nies that specif­i­cally ap­peal to Sin­ga­pore­ans,” he adds.

Hall opines that Malaysian com­pa­nies are un­der­val­ued com­pared to In­done­sia and Sin­ga­pore, largely due to the sheer amount of cap­i­tal be­ing in­vested in the later mar­kets. There were pre­vi­ously also some gaps in founder ex­pe­ri­ence and ca­pa­bil­ity be­tween the mar­kets, but that gap is rapidly clos­ing.

Ac­cord­ing to Hall, lo­gis­tics and sup­ply-chain fo­cused star­tups will come into fo­cus in 2019 as the e-com­merce boom starts siz­ing up in the re­gion.

“We are re­ally only scratch­ing the sur­face of scal­able, ef­fi­cient, in­ter-coun­try lo­gis­tics and sup­ply-chain plat­forms. We hope to con­tinue find­ing and in­vest­ing in the best, most tal­ented en­trepreneurs in South-East Asia this year,” he says.

How­ever, Com­merce DotAsia Ven­tures Sdn Bhd ex­ec­u­tive chair­man Ganesh Ku­mar Ban­gah notes

that the startup frenzy in the re­gion seen a few years ago has cooled off.

“Val­u­a­tions were very high three to four years ago. I think it has cooled off. There are still some star­tups who ask for crazy val­u­a­tions, but they don’t get funded. VCs can now pick and choose be­cause there are so many star­tups. They don’t com­pete with each other as much as be­fore.

“It is not like three or four years ago, where a startup can say, ‘if you don’t give me this value, the next guy who comes in will of­fer me that’. To­day, there’s re­al­ism in the game.

“There is still a lot of money in the re­gion for the right com­pa­nies. Peo­ple are less will­ing to over­pay for them,” he says.

Build­ing the ecosys­tem

Gov­ern­ments play an im­por­tant role in de­vel­op­ing the startup ecosys­tem and in cre­at­ing new mar­kets for the ecosys­tem.

Yusuf says favourable pol­icy can mo­bilise funds and help grow the in­dus­try.

He cites the ex­am­ple of Sin­ga­pore, which has al­lo­cated S$5bil in match­ing grants for star­tups, ef­fec­tively pour­ing in S$10bil for the sec­tor. In the US, some US$84bil is in­vested into VCs an­nu­ally, with the bulk of these funds com­ing from pen­sion funds.

Ob­vi­ously, the fund­ing ecosys­tem in Malaysia has a long way to go. But de­vel­op­ments in the lo­cal mar­ket such as eq­uity crowd­fund­ing and Leap Mar­ket have opened up more fund­ing av­enues for star­tups look­ing to tap new money. Ad­di­tion­ally, more peo­ple have shown in­ter­est in be­com­ing an­gel in­vestors, which would help fill the gap in the early-stage fi­nanc­ing.

“It is not that there is not enough money in the ecosys­tem. The case is, there’s not enough in­tel­li­gent cap­i­tal at the early stage here. In­tel­li­gent money means that these in­vestors have the knowl­edge to value the star­tups, and have the abil­ity to give them the add-ons to help them grow.

“We don’t lack cap­i­tal, we lack in­tel­li­gent cap­i­tal at the early stage. We’ve got a lot of peo­ple with money and a lot of them want to in­vest in tech­nol­ogy but don’t know how,” notes Ganesh.

Yusuf con­curs. The Malaysian ecosys­tem lacks spe­cial­ist tal­ents who can run funds. Most of the lo­cal VCs are man­aged by gen­er­al­ists who may not be able to dis­cern startup-spe­cific is­sues and chal­lenges.

Thus, there is a need to at­tract more for­eign fund­ing and tal­ent to close the gap in the lo­cal mar­ket.

“Gov­ern­ments also play a big role in mar­ket cre­ation. The gov­ern­ment needs to put in real money into these spe­cific mar­kets.

“A good ex­am­ple is the “buy so­cial” cam­paign in the UK where all gov­ern­ment pro­cure­ment con­tracts have to go to so­cial en­ter­prises. That has led to the UK be­com­ing the epi­cen­tre of so­cial en­ter­prises in the world, be­cause the gov­ern­ment made that ef­fort and made that pledge.

“So it’s not just about iden­ti­fy­ing a mar­ket, but cre­at­ing real value in the mar­ket. There’s no way an en­tre­pre­neur can grow un­less the mar­ket is cre­ated,” says Yusuf.

He notes that 5% of the UK’s GDP now comes from so­cial en­ter­prises.

Yusuf also urges en­trepreneurs them­selves to be part of the ef­fort in build­ing the lo­cal startup ecosys­tem by cre­at­ing com­mu­ni­ties that will en­able them to work out­side their si­los. By work­ing within com­mu­ni­ties, en­trepreneurs will be able to share ideas and col­lab­o­rate to form bet­ter so­lu­tions and busi­ness mod­els.

“We need to have clus­ters, where you can get match­ing of skillset and vi­sion. And these clus­ters should be con­nected to other clus­ters to see how you can build the ecosys­tem and move the ecosys­tem for­ward.

“So build the com­mu­nity. And the im­por­tance of build­ing a big­ger com­mu­nity is so that you can af­fect pol­icy in a way that will ben­e­fit the in­dus­try,” he says.

Re­gional funds are ac­tively look­ing for and in­vest­ing in Malaysian­born star­tups

Justin Hall

FORSMARTMALAYSIANEN­TREPRENEURS Band to­gether: En­trepreneurs are urged to build strong com­mu­ni­ties to have a big­ger voice that will en­able them to af­fect pol­icy that is ben­e­fi­cial to the in­dus­try.

Smart cap­i­tal: Ganesh notes that VCs can now pick and choose their in­vest­ments be­cause there are more star­tups around. — Ber­nama

Get­ting there: Hall says Malaysia’s startup ecosys­tem is rapidly ma­tur­ing.

Paving the way: Gov­ern­ments can play an ef­fec­tive role in cre­at­ing new mar­kets for the ecosys­tem.

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