Malaysia should be a great venture investment story. It produced Walden International founder Lip-Bu Tan, one of the first to see the possibilities of venture investment in China, and transpacific opportunities generally. And its venture capital industry has been going for over 20 years now. Yet despite those two decades and its star qualities, despite Malaysia brilliantly riding the 1980s and ’90s boom that lifted economies across East Asia—and despite building decent capital markets—VC activity, as in other parts of Asia, is still sustained to a large degree by government handouts.
Of late, former Prime Minister Mahathir Mohamad has been having a good go at his former deputy PM and chosen successor, Abdullah Badawi, for allegedly betraying long-cherished policies.
You could see why he might get a little proprietary when Prime Minister Badawi started tweaking things. Mr. Mahathir had coaxed Japanese electronics giants like Matsushita, Sharp, Toshiba, and others to set up production lines in Malaysia and, with Japanese government aid helping to finance the requisite infrastructure, whole new industrial satellite towns rose up. There were, it’s true, small pockets of activity predating the first Mahathir government—Intel opened an assembly plant in 1972, Motorola one in 1976—but he changed the scale of everything.
Mr. Mahathir introduced incentives to bring in R&D, and later pursued software companies. On the eve of Asia’s devastating 1997-1998 currency crisis, he visited Silicon Valley to sell U.S. companies on his Multimedia Super Corridor (MSC) tech park, designed to bring together established players and startups.
At Stanford in June 1997, Mr. Mahathir answered one question about his views on Internet controls by admitting that he once entertained filtering out anything with the word sex in it—until he realized blocking that would block anything from Middlesex, one of London’s home counties. When another questioner suggested he was running down Singapore to sell Malaysia, he rebuffed the charge, explaining that, as prime minister, he had other people to do that for him. His audience was in stitches.
Mr. Mahathir also launched government venture initiatives. Chok Kwee Bee, executive director of BI Walden International in Kuala Lumpur, says government money now accounts for less than half of venture funds raised, a sign that the VC industry is beginning to come into its own. The figure was just under 38 percent last year, according to Malaysia’s Securities Commission annual report.
Insurance companies, a natural source of capital elsewhere, still only accounted for 1 percent. Asked if he had the power to change three things, Azam Azman of Opus Capital answers, “Only one—for Asia institutional investors to recognize that VC/PE [venture capital/private equity] is an asset class of its own.” The same sentiment was expressed repeatedly by Amanah Ventures Principal Officer Shaik Taufik and other VCs, both in Malaysia and beyond.
But committed funds were slow in climbing—to RM (Malaysian ringgit) 2.59 billion ($709M) last year compared to RM 2.27 billion ($621M) in 2004. Investments rose to RM 1.4 billion ($285M) last year compared to just over RM 1 billion ($273M) the year before. Malaysia’s population of investee companies had shot up to 432 from 289, according to Securities Commission data. “There was a reduction in the percentage of the total funds utilized in other forms of assets from 54 percent to 44 percent... a positive sign which indicates that more funds are channeled out of fixed deposits and cash accounts into venture investments,” the commission said.
To move things along, the government set up Mavcap, Malaysia Venture Capital Management, an organization designed to act as a VC in its own right but also nurture a VC industry at the same time. It’s now on its second RM 500 million ($137M) allocation, which is in effect a loan to be paid back to the ministry of finance. CEO Norazharrudin Talib, an ex-Walden man himself, explains that a fifth of the money is set aside to cover Mavcap running costs, another fifth is handed over to budding VCs, and the rest is used on direct investments.
One VC notes that the government’s first initiatives basically turned potential investors off by requiring fund managers to invest in early-stage companies where the high risk tended to be. “But today there’s a move away from that category to later-stage investment and we’re starting to see some participation, but it’s still very small,” he says.
A successful investment Mr. Talib likes to point to is UnrealMind, which Mavcap helped launch with seed funding in 2001. The SMS game company delivered “very good” returns on its IPO on Malaysia’s Mesdaq startup board in 2004, but it got better still. U.K. mobile entertainment company MonsterMob completed its acquisition of the company last year in a two-stage deal worth RM 11 million ($3.01M)—this for a company that made RM 52,000, or just over $14,000, in 2002.
“That was a good story in terms of seed funding,” Mr. Talib says. “There are other startups that didn’t make the cut in terms of what we wanted to do, but there are still companies we think we can work with.” Mr. Talib has thought hard about companies that don’t make the grade. “To try to change the mindset of a technocrat and turn him into a businessman is quite difficult,” he begins. “Having worked on something very close to his heart and then having to share it and try to document it is not easy because he feels vulnerable knowing that others now know what he is doing.”
The problem is compounded by the fact that good managers are hard to get for seed companies—life in a startup is just too insecure. That makes the job of getting market traction all the more challenging, in turn.
Bringing young would-be VCs along has been a tough assignment for Mavcap, too. Trying to raise money and your own staff and stand on your own is something they’ve never done before, Mr. Talib says. Mavcap Senior Vice President Husni Salleh explains that the idea is to allocate funds to promising VC ventures, which in turn go out and raise additional funds. “But because they don’t have an investment track record, they can’t raise the additional money,” he says.
It’s not as if there aren’t success stories. Online job site JobStreet has since spread from Malaysia to Singapore, the Philippines, India, and beyond. JobStreet was originally backed by Walden, Sumitomo Corp., Malaysian Venture Capital Fund, and iSpring. CEO Mark Chang says good local market knowledge is crucial in a field that attracts me-too services. And being conservative helps too, he says. “Revenue projections seldom come true, but cost projections are always on target or exceed projections.” But a look at JobStreet’s largely Chinese management tells you something—none holds an undergraduate or graduate degree earned at home.
In the heat of Mr. Mahathir’s campaign against his successor, The Economist complained that “Mr. Badawi’s sin is not that he has deviated from the policies of the Mahathir era. Quite the opposite: it is his failure to go far enough.” Among other things, the newsweekly said, Mr. Badawi “did not dismantle Malaysia’s expensive and unsuccessful positive-discrimination scheme for ethnic Malays.” The price for that, critics think, is an outflow of talent, largely Chinese who pursue education and careers offshore. It’s no secret that some feel that if the government softened affirmative action policies aimed at giving Malays a bigger share of an economy once overwhelmingly dominated by Chinese, Malaysia wouldn’t be short of management skills today.
The country certainly isn’t short of potential. Take Carotech, which listed on the Mesdaq startup board in April of last year. A subsidiary of Malaysian pharma Hovid, 11-year-old Carotech developed a patented extraction process that gave it a niche in palm derivative phytonutrients used in dietary supplements, pharma, food and beverage, and skin-care products. Today, it tailors base products for manufacturers in the United States and across Europe and Asia to turn it into their own branded products.
Now it has ambitions to be big in biodiesel. Earlier this year, Carotech Managing Director David Ho told Malaysia’s Star newspaper that biodiesel was 30 percent cheaper than gasoline on a miles-per-gallon basis, noting that the company had the technology to produce the fuel at a lower cost than competitors. While other diesel players with more conventional production processes had to weigh the odds of staying in the volatile energy business, he said, “Carotech’s technology allows us to… cope with higher prices of CPO [crude palm oil] or higher-priced petroleum.”
Then there’s BriteSoft, backed initially by angel investors and now looking for Series A funding. It claims to have built a product that can speed up creating business applications 20 times programming done the conventional way. CEO Fazel Naghshineh puts the case for speed sharply in perspective. “Four hundred billion dollars are spent annually on software development,” Mr. Naghshineh begins, “[and] $80 billion in the United States alone are known to be wasted on failed or cancelled projects.”
The figures, rounded by a few million here and there, are taken from a 2003 Standish Group study. Productivity, he goes on, has improved 8 percent at best in the last 30 years. Mr. Naghshineh blames glacial speeds on “code-centric” development and claims that by automating the process with the company’s BriteWorks product, small teams can move at lightning speeds without bothering about programming languages or jotting a line of code. “Development requires a combination of modeling via visual editors and configuration of many built-in features such as security, audit, and localization,” goes one web site pitch.
“There have been sparks of interest in the U.S. and two Malaysia-based VCs are talking to the company now,” Mr. Naghshineh says. Is BriteSoft an easy sell? “It’s not a difficult sell, but maybe at the stage we’re at, it may not be very interesting for a lot of VCs.” That said, the CEO argues their risk is less than it might be because the company already has five customers and more partners who are also customers, this only months after development work was completed. Next year, BriteSoft is hoping to snare 20 more in Asia, Europe, and the U.S. Mr. Naghshineh likes the thought that VCs are interested but is equally worried that they will draw him away from tending to business. “But it’s starting to move.”
Malaysia is starting to move, too. VC and entrepreneurial activity would really fire up if policy makers took a fresh look at outdated policies that discourage investors and management talent from stepping forward.
Contact the author:JMcCormick@RedHerring.com