1. Restructure the funding of government-backed VC funds

As these are the biggest VCs in Malaysia, we need to restructure the loans provided to the VCs into investments instead i.e. there is no need to repay the Government the funds until the VC exits its investment. This will take away the risk-averse nature of Government-funded VCs and base the returns on performance instead.

2. Change the incentive structure to make them partners not employees

Once the loans are converted we need to make them real VCs by making the managers General Partners like how a private VC is structured and incentivise them based on positive returns like a 20% carried interest. This makes them competitive and they will hunt down companies with good potential because they make money when they have successful exits. The conventional VC incentive structure works because it’s very performance driven. Partners make money when they have successful exits, hence they will work hard to ensure successful deals and exits.

3. More VCs and more money needed

The number of VCs needs to be increased and so does the amount of funding in the ecosystem. We have too few VCs serving a large number of entrepreneurial ventures and too little money in the system to make a dent in helping companies to grow. Last year five of the biggest Government Linked Investment Corporations (GLICs) and pension funds – Permodalan Nasional Bhd, Employees Provident Fund, Khazanah Nasional, Tabung Haji and Kumpulan Wang Persaraan (KWAP) – agreed to invest RM1 billion into venture capital.

This year, the SC opened a request for proposals and more than 60 proposals to set up VC funds were received and they all pitched to these investors. This is a fantastic initiative to increase both the funds available and number of VCs in Malaysia. However things have gone quiet since but I remain hopeful that they will continue with this initiative. The new Government needs to encourage the GLICs and pension funds to continue this initiative and to make their selections very soon. Time is of the essence.

On top of this the late Nazrin Hassan and I had, together with the Technopreneurs Association of Malaysia (TeAM), pushed for a Corporate Investment Tax Incentive for the private sector to invest in or set up VC funds. After five years of lobbying this initiative was finally adopted last year under the purview of the Securities Commission. This incentive allows corporates to invest up to RM20 million a year over five years (totalling RM100 million) into VC funds and to get a tax credit for this investment.

This will allow VCs to secure funding from the private sector and significantly increase the amount of funding in the ecosystem. The VCs love it as it helps them when they raise funds and the corporates love it because it reduces their risk as there is an instant 24% return because of the tax credit. However, we have not had any news since. We need to speed this up and get all the approvals and mechanisms in place a.s.a.p. so that VC funding can grow again.

With the above two initiatives the Government does not have to fund the industry but it will still enable us to increase the amount of funds in the ecosystem. These are two fantastic initiatives but it has taken us one year and yet we have not seen it come to pass. The Government has to move faster on this.

4. Create a Fund of Funds from Government VC funds

While the mechanisms are being worked on for non-governmental funding, the existing government VC funds should be restructured into a Fund of Funds (FOF). This is the only point on consolidation that I agree with. But once consolidated into a FOF structure, this FOF will need to reinvest the funds into other VCs and here I would encourage the FOF to invest into partnerships between local and foreign VCs as well as corporations both local and foreign.

Mavcap (Malaysian Venture Capital Management) has already been doing this with its funds and has joint investments with Gobi Partners from China, Axiata Digital Innovation Fund with Axiata Group and also Elixir Capital from the US.

This helps diversify its investments, brings in foreign VC expertise and also corporate expertise and networks. The funds itself can be managed by locals jointly with the partners as this builds up the local expertise and yet leverages on their partner’s networks for deal flow and exits.

Since Mavcap already has this expertise they would be the perfect vehicle as the FOF company.

The funds for this should come initially from the Government but can also utilise current funds in the system as well as any returned funds from successful exits by the existing government VCs. What I’m advocating is recycling of existing government VC funds as well as additional funds that the government can allocate in future.

5. Provide matching funds to attract more foreign VCs

Singapore did this very successfully starting a decade ago and the matching funds (at one point they matched at 7:1) from the Government fostered the setting up of many foreign VCs in Singapore making them the VC hub of SEA.

Matching funds even if its 3:1 will increase the funds available by 33%. Say if the Government allocates RM1 billion and matches it 3:1, this will increase the size of funds available by another RM333 million. Matching like this encourages foreign funds to set up shop in Malaysia and over time this will increase the funding available in Malaysia. Once the VCs are in Malaysia, they will tend to build networks in Malaysia and stay on for the long term.

6. Remove or reduce limitations on Government VCs

As mentioned earlier many Government or even JVs backed by Government funds have limitations in terms of geography, racial, stage or other limitations. For VC to be successful remove these limitations and let the VCs invest as they deem fit. Often they will invest in Malaysian companies anyway but let them decide independently.

By removing stage limitations but by having a lot more VCs we will generally see all stages being covered because different VCs will have different interests and risk profiles. For instance those that invest in late stage investments have lower risk profiles but lower returns as well, while those that invest in earlier stages have a higher risk profile but much higher returns.

We should let the VCs themselves determine what stages they want to invest in. As a control mechanism, with the FOF structure, the FOF can choose to have investments in VCs at different stages and this way all the different stages will be covered.

7. Encourage diversity of VC funds

Diversity of funding is critical for a successful ecosystem. We need VCs that don’t just fund different stages of the business lifecycle from early to late stage, but we also need VCs who are focused on different sectors of the ecosystem. For example we have the life sciences and biotech funds but also funds like Kumpulan Modal Perdana that invest in the electrical and electronic sector as their preferred sector. Similarly we may have funds that prefer to invest in software or Internet based business or medical or food technology.

This diversity is what is needed not just to ensure all sectors have funding but to also ensure that VCs build specialist expertise and networks, as the success of not just the funds but also the companies is dependent on such expertise. The FOF structure is also ideal for investing in such diversity.

8. Get rid of archaic terms and conditions

Besides the big picture issues mentioned above some of the micro issues also need to be looked into for example the banking-like terms and conditions imposed by some Government-backed VCs. Terms like personal guarantees and sinking funds don’t belong in the VC industry and should be removed completely. VCs that have such terms are not VCs but glorified banks acting like VCs. We need to ensure that all Government backed VCs are entrepreneur friendly and set up as a proper VC.

9. Get more entrepreneurs into VC

Currently almost all VCs are managed by corporate finance and banking professionals or ex-senior managers from large corporations. Some are successful like Teak Capital or Kumpulan Modal Perdana but many aren’t and this low rate of success is why local pension funds are reluctant to fund the VC industry.

This success rate can be increased by having successful entrepreneurs to manage or co-manage the funds. In the mature Western markets many funds are managed by successful entrepreneurs but not in Malaysia. This has to change. Even if the managing partners are not entrepreneurs the next line of managers should be entrepreneurs, then we will see more successful VCs in Malaysia.

10. Bring back Malaysian professionals to manage local funds

With a new Government in place and the euphoria of Malaysia Baru, now is a good time to get successful Malaysian VC professionals and Entrepreneurs to return from abroad to manage local VC funds. Over the years Malaysia has lost a lot of talent because of the perceived lack of meritocracy and governance in Malaysia as well as negative racial and religious sentiment. Now with a new Government all these negatives will slowly be reversed and if the Government gets serious about reviving the VC industry I am sure many Malaysians abroad will consider returning. This can only be good for Malaysia.

The Malaysian VC industry is in the doldrums and needs a mega shot in the arm to be revived and set on a new direction for growth and expansion. If we don’t do this the entire startup ecosystem will suffer and worse still we will constantly lose the best companies to foreign investors. Entrepreneurs who want to scale up their business will follow the money. If that money is abroad then that’s where they will go. As patriotic as most of them are, they cannot stay in Malaysia if funding is not available here.

To ensure that our companies have the funds to scale and grow and to continue to remain and contribute to our economy, we need the VC industry to be strengthened and expanded. If we can do all of the above I am confident we can. If we don’t we will have another lost generation and we simply cannot afford that any more.

Source: https://www.digitalnewsasia.com/insights/10-ways-revive-and-strengthen-vc-industry-malaysia