Friday 23 Feb 2024
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This article first appeared in Digital Edge, The Edge Malaysia Weekly on July 10, 2023 - July 16, 2023

Compared with regional peers, Malaysia’s venture capital (VC) landscape is slightly laggard, owing to various factors such as political instability, the Covid-19 pandemic and, most importantly, the lack of a long-term planning to grow start-ups.

Malaysia is trying to play catch-up now, says S T Rubaneswaran — better known as Ruban — CEO of BEYOND4 Malaysia, a multi-tier ecosystem accelerator, and it is evident through the many public and private initiatives that have emerged.

The country’s true progress, however, remains to be seen, says Ruban. While it is clear that start-ups are getting support from more parties, the assistance provided has to be executed properly and business sustainability ensured.

“For a start, there needs to be political will because it doles out incentives, mentors and also pushes start-ups to grow. But, eventually, the private sector needs to come in to grow the whole ecosystem all the way,” he says.

“Right now, Malaysia is sandwiched between the two phases. We had an [established] start-up industry as early as 2005 but studies show that while there are many start-ups being incorporated in Malaysia, they eventually leave and move [the business].

“So, in a nutshell, [although] we have a good talent pool — and Malaysians are a resilient bunch who can survive anywhere in the world — we’re not able to keep the talent here and, at the same time, help them grow their business across the region.”

Essentially, running a start-up is just like growing a business. The only difference is, when the company raises funds or brings on investors, it needs to have an exit strategy, which is the most important. In fact, Ruban jokes that the “headache starts once funds are raised”.

“When you raise funds, you’ll [make space] for investors in your cap table, so you need to have a fund size to exit in seven to 10 years. But what happens along the way is, while you’re supposed to grow to a level where it becomes profitabl   e for you to exit, either through an M&A (merger and acquisition) or IPO (initial public offering) or SPAC (special-purpose acquisition company), you need growth strategies and the right people to advise you,” he says.

With that in mind, Ruban says, the ecosystem has to be built to support the process from the early stages right until the exit. This ecosystem is what BEYOND4 is looking to build over the next five years, especially since investors are now focused on investing in companies that are profitable and sustainable.

“High-net-worth individuals and funds are looking at start-ups that are profitable, sustainable and heading towards an exit. It’s no longer like before, where investors put money in companies for growth,” he says.

“So, when start-ups start their journey, they need to have a proper governance structure. If you raise funds, spend it on what you’ve raised it for. Grow the business, expand it, build your network and have agency support in the form of services, mentors, advisers and coaches.”

The disconnect always happens when the advisers tell companies how to grow the company when they need to lead by example, says Ruban. “The best way is to get someone who has done it before to lead. It’s just like it is with our badminton players — they’re all coached by former gold medallists. We need to apply the same concept here to push the industry forward.”

The final element that is missing is regional support. An ecosystem cannot be built in Malaysia alone because start-ups need ecosystem support from countries such as Singapore and Indonesia, for example, so a company can grow regionally, he asserts.

“For example, if I [have] a start-up and I go into Indonesia, I will need the same amount of talent, VC support and resources as I do back home in Malaysia, so that the growth of my business is seamless.

“That’s why we have a lot of start-ups that are being built in Malaysia and if they don’t scale up, chances are they won’t succeed. Malaysia, as a country, is a very good place to build, operate and test products to validate them. But to grow a start-up and keep it domiciled here is the challenge.”

The bucket system

Since Malaysia’s start-up ecosystem is fragmented, Ruban says it is time to connect the dots.

The issue, he notes, is that people who are supporting the ecosystem are looking at the wrong parameters, because it is not about the number of start-ups that they create but the number of start-ups that successfully go through funding rounds and qualified exits.

Ruban sets the scene: If he has 2,500 start-ups under his care, he will evaluate how many are suitable for the Series A, B and C levels of funding and how many are ripe for exit. “The idea is, if I were to draw a line from the start to seven years, I would put the companies into buckets corresponding to which part of the journey they are at.

“From there, I decide how I’m going to intervene for each bucket, which means that the intervention programme for the Series A bucket is different from Series B. With a holistic view, I will know how to get them to the next round of fundraising, push the valuation and expand outside of the country.”

Typically, it is when companies want to expand outside the country that support is lacking. This is where Ruban wants to step in with BEYOND4, which aims to build a support network among countries.

“I will call my support network in regional countries, get the companies to head over there for a road show to try and get investors or VCs to come on board with the fundraising. That’s how we should plug the holes in the ecosystem, and then route companies to an exit and that is what BEYOND4 is trying to do from a private perspective.”

He adds, however, that there needs to be government intervention. This is undoubtedly a challenge, says Ruban, because it involves the government ministries and agencies getting their neighbours and peers to help local start-ups grow. On top of that, there is the challenge of keeping talent and the company rooted in Malaysia while taking it regional or international.

“A key reason that Singapore has become a hub for start-ups is that it has market connectivity to 20 to 30 countries globally. This means if I [have] a start-up in Singapore and I fundraise there and accelerate there, the government ensures that I can go to a country like Japan or [South] Korea, and I am supported financially.

“It has a launchpad programme that pushes start-ups to those countries to do business and grow. Even Malaysian start-ups go there because of the ease of propelling the start-up to another country. Right now, the challenge Malaysia faces is that if a start-up goes into another country, the country takes over the start-up and it ends up [being] rooted there instead.”

Discovering Pahang’s start-up potential

At end-May, Economy Minister Rafizi Ramli said the government planned to make Kuala Lumpur a regional hub for start-up companies and the digital industry in an effort to boost the country’s digital economic activities.

In April last year, however, BEYOND4 decided to pivot and look to Pahang instead. As an ecosystem builder, Ruban says the state was a greenfield for the firm and BEYOND4 worked with Yayasan Pahang to build the ecosystem there.

There were no tech companies and few tech talents in the state at the time. Ruban and his team went to market in search of ideas and to scout prospective talents in universities from Pahang and started to build the talent pool first.

“We had to build people who specialised in development, programming, enterprise resource planning (ERP) and software engineers, creating a talent bank, and kept searching on. Finally, about a month later, we did our first cohort with nine start-ups,” he says.

“They all came with ideas and, towards the end of the programme, their ideas [were refined] and we saw a 180-degree shift. From there, we picked the top three to go to the next stage. At the moment, there are a total of 40 start-ups and more than 100 tech talents, from zero just a year ago. And based on my calculation, the Pahang ecosystem’s value is now at RM50 million.”

Launch of BEYOND4 Fund 1

BEYOND4 is now raising US$20 million (RM93.35 million) for its BEYOND4 Fund 1 to support investments for the digital ecosystem in Malaysia. The VC fund was launched in Singapore by the Malaysian High Commissioner on June 14 and saw the participation of six start-ups — two Singaporean, two Kuala Lumpur-based and two Pahang-based.

The start-ups were exposed to the process of a pitching panel session and, simultaneously, BEYOND4 expanded its footprint into Singapore. “The idea is to build a BEYOND4 chapter in Malaysia that builds, operates and tests products in the country, and also a BEYOND4 Singapore to help in start-up fundraising,” says Ruban.

“The third chapter will be BEYOND4 Indonesia, which will be for growth and exit and will probably be set up next year. We want to build a golden triangle model so each market has access to each other.”

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