Venture Capital Malaysia
Venture Capital (VC) has played a rather significant role in the support of new technology based companies particularly in their early stages and has continued to increase the past years. The VC in Malaysia is still in the emerging phase but has been said to fail to attract private investors to penetrate the industry. However there have been quite a number of actions that the government has taken in its promotion.
Definition of Key Terms
Private Equity firms — This refers to organizations that invest in firms with the ultimate aim of selling the equity holding at a price higher so as to maximize on capital gains. VC is therefore a subset of Private Equity firms.
Venture Capital — This refers to investments that consist of the purchase of your privately held companies by outsiders for the main and primary aim of capital gain.
The main goal of venture capitalists is to increase the equity value and eventually monetize the investment by selling to another investor or by means of a liquidity event such as an initial public offering. This is so as to reap their investment benefits. VC is characterized by high risk accompanied by high return. Investment in young companies is quite risky due to quite a number of them failing and yielding total losses. The failure compensation then comes from the investments that manage to yield 20 or 100 times the capital initially invested by the venture capitalists. The asymmetric return profile then means that the venture capitalists tend to invest only in companies that have the ability to yield large returns.
The VC process includes establishing funds, the selection process, the structuring of relationships and monitoring of the funded firms, the value added activities that are then provided to the funded firms, the exit and the suggested recommendations that may be deemed appropriate for development.
History of VC in Malaysia
The Malaysia Venture Capital industry was first established in 1984 through the Malaysian Ventures Sdn. Bhd formation. This company intended to pioneer investments in plastics, electronics and ceramics. They went on to have a partner and the only other VC firm that was operating at the time was a branch of Walden Group, BI Walden Management. Other venture capital funds were gradually formed and 1999 the total VC companies were 28. The Malaysian Venture Capital Association was then established in 1995 and had grown from 13 to 15 members by 2001.
Historically the public and banking sectors have dominated a large section of the total financing within Malaysia. However, new financing options emerged in the 1980s in promotion of the private sector as the main economic growth engine and this resulted in the public sector financing declining to 20.9% in 1980 and 11.1% in 1990. The government has therefore recognized the vital role of the VC industry in the financing of emerging high growth companies. It has in turn provided significant tax and funding incentives in promotion of growth in the industry. By 2003 year end the amount of VC under Malaysia management was $557.4m and steadily increased to $596.3m by 2004 year end. The Malaysia government provided 42.5%. By 2004 year end there were a total of 38 VC funds operational in Malaysia and an investment portfolio of 34 firms. These numbers have since increased after emphasis by the government to expand the industry.
The VC ecosystem in Malaysia has managed to grow by bounds and leaps within the past decade with the investment companies that are government linked catalyzing the scene and slowing paving a clearer way for the private sector. For the past 10 years the local VC scene has been quite dominated by investors from the private sectors. Prior to 2010 the sector seemed to be quite largely made up of funds linked to government linked investments. These funds therefore slowly conceded grounds for private funds and interestingly the investment mandates have become quite adventurous.
The key drivers in the private sector venture capital funds emergence both internationally and locally was the global financial crisis that occurred in 2008. It set off opportunities for the asset class to grow due to the fact that other asset classes experienced large losses during that particular period. The government also began to introduce tax incentives specifically for the VCs in addition to the direct investments in terms of venture capital firms that are government-backed. Also, the Angel investor introduction tax incentive in 2013 became a gateway for cash-rich as well as inexperienced investors to have a hand in Angel investment. As they became a lot more seasoned they moved slowly into the venture capital space so as to gain greater returns. The increase in the local VC scene has been in line with the trends that have occurred in Southeast Asia. A study found that the VC deals grew fourfold from 2012 to 2017. Another factor to why some investors have entered into this particular asset class is due to the local stock market under-performing within the last 5 years and it has been quite volatile in the past three years. In accordance with Bloomberg between 2014 and 2019 the FTSE Bursa Malaysia managed to return a total of 5.73% to investors.
The Malaysian VC industry historically was dominated by local players and it was trailing behind Singapore, Japan, Hong Kong, Korea and Taiwan and was also yet to develop its full potential to become a significant financial instrument in the innovation system development. It was also seen as a tool to use for the promotion of the country’s economy. It has managed to evolve from being a novelty to a level whereby it is not considered quite vital for the economic developments and is also expected to play quite an even more significant role in the near future. VC financing has proven to have tremendous potential within Malaysia to make a contribution to the technology growth as well as knowledge enterprise. VC had a vital role in filling up the financing gap particularly in the new technology based industry. It is largely considered a high risk investment by other conventional financial institutions.
VC at Present
The VC sector has managed to enjoy a complete decade of global prominence amid record levels in terms of funding. This is true for particularly start-ups in Southeast Asia raising funds in their early stages. The industry players however believe that this has resulted in inflated valuations in recent times. The sector also attracts significant inflows of funds regionally and locally but recent failures by several multi-billion dollar unicorns may then impact the valuations in future. The VC industry has since enjoyed high growth as shown by committed funds by 8% each year from RM3.3 billion in 2007 to RM7.0 billion in 2017 and the capital contributed by the government as a percentage of the size of the total fund in the industry has increased quite significantly from 40.6% back in 2006 to 60% in 2017. The participation level by corporate investors has also declined from 37.6% all the way to 26.7% within the same period.
Malaysia is currently in the preconditions phase whereby it is quite necessary to develop the entrepreneurial skills and intermediation to then generate good investment opportunities. The fund sources in the past years have come largely from the government and partners funds as shown in Fig1 above. Without a diversified number of VC professionals as well as investment opportunities it may be quite challenging to create a fairly strong VC industry. The below illustrates main sources of vc funding in Malaysia as of 2019.
Singapore has shown to be leading in terms of funding with Indonesia tailing right behind followed by Malaysia. Currently there are 132 VC organizations located in Malaysia with total funding amounting to $2.3b. The number of investments total 252 with 112 Lead investments. The portfolio companies amount to 8712 with 221 funds. Mentioning a few would include:
NEXEA Venture Capital
OSK Ventures International
Malaysia Digital economy Corporation
Future of Venture Capital in Malaysia
The sector still continues to attract highly significant inflows both locally and regionally. The recent failures however of recent several multi billion dollar unicorns may also have an impact on the valuations of start-ups moving forward. The players in the industry believe that the push by VCs for excessive valuations in investee companies may not be sustainable moving forward due to the funding round. The startups have really become a lot more hard pressed to deliver unrealistic returns to the subsequent investors. Researchers have also emphasized the importance of investing in companies that have a clearly laid out path towards profitability. A sharp focus has been bought towards the need for portfolio companies and VCs to build sustainable ventures for the current as well as subsequent investors. Family-based venture capital funds have also since been growing within Southeast Asia due to many of the big businesses in the region being run by the founding families. These families have recognized the need for innovation in their core businesses through a combination of setting aside funds for early stage investments as well as start-up accelerators.
Going forward the regional and local venture capital scene will be characterized by the emphasis on the investments in entry-level technology with investors looking to the business to business segment as the large growth engine. VCs have also stated that investors must bring more than just their net worth to the VC firms but networks, market access as well as decisive know-how of the industry as well. The rise of (P2P) financing as well as crowdfunding as legitimate asset classes have encouraged investors further to explore the investments in private companies. The government has also done quite well in the promotion and regulation of P2P and ECF investments in the past recent years. More people are expected to enter the alternative investing space and with more people getting used to the idea of private company investment this will turn out well for VCs. In the long run there is expected to a larger pool of investors who will then tap into capitalizing the VC funds. The statistics of the VC industry successes have also indicated the demand for the VC funding. The benefits as well as impact of the VC funding to the Malaysia economy has shown to be quite immense. The VC growth has also been quite immense compared to other continents as shown below:
The VC development in Malaysia will be quite promoted in view of its significance when it comes to nurturing new areas of growth. More efforts are yet to be directed towards increased capacity when it comes to upgrading of skills as well as access to private sector financing. So as to assist in the cultivation of the entrepreneurship culture, efforts are being directed towards providing the necessary regulatory environment, business and ensuring access to earlier stage innovation financing.