Insight: Fostering a resilient start-up ecosystem

Wednesday 08 May 2024

This article first appeared in Digital Edge, The Edge Malaysia Weekly on October 9, 2023 - October 15, 2023

Start-ups often have to undergo a tumultuous journey before they find success. Even in a promising ecosystem like Malaysia, start-ups face numerous challenges. The Malaysian Business Angel Network (MBAN) Summit 2023: The Rise of Malaysian Startups event held at the Asia School of Business on Sept 20 brought together the different players of the start-up ecosystem such as angel investors and corporate organisations to share successful strategies, introduce innovative concepts, highlight tech investment opportunities and showcase Asean investment opportunities.

Panellists spoke on a range of topics related to the start-up ecosystem, including uncovering “diamonds in the rough”, opportunities for early-stage investors and how investors can harness the growing momentum.

Look beyond business valuation

Start-ups have the potential to thrive in Malaysia’s start-up ecosystem, but it is also easy for them to fail. One of the factors contributing to failure is having a short-lived passion or career fatigue, said Ben Lim, CEO of Nexea, a venture capital, angel investor network and start-up accelerator firm.

“Yearly, we get around 1,500 companies seeking investments but only 10 succeed. And, usually in the early stage, we’ve observed that most of the time, the business idea just does not work. Unfortunately, this is how the industry works.

“Some of these founders and CEOs are just not meant to be entrepreneurs. And, from an investor’s perspective, I feel that it’s good to fail fast and move on so that they can continue with life and try [to determine] where they should be,” Lim said during the “The Naked Truth About Startup Investing” panel session at the Malaysian Business Angel Network (MBAN) Angel & Corporate Investors Summit 2023. The event with the theme “The Rise of Malaysian Startups”, was held at the Asia School of Business on Sept 20.

Lim also stressed start-ups that demand high valuations without having proper justification and a good team will eventually fail.

Though failures are common in the start-up ecosystem, there are success stories such as local companies Carsome and Aerodyne, said Datuk Mohamed Sharil Tarmizi, angel investor and former chairman of the Malaysian Communications and Multimedia Commission (MCMC).

A company’s primary focus should not be limited to achieving high valuations alone; it should also encompass factors such as assembling a well-rounded team and assessing the long-term viability of its business concept.

“When a start-up comes and talks to me about a proposal, my approach to investing is that I want to understand the entrepreneur and the problem that the entrepreneur thinks he or she is trying to solve. And whether that particular entrepreneur understands the problem that he or she thinks they are trying to solve is important,” said Mohamed Sharil.

“Number two, how much do they think the idea is worth and how are they going to build it? I also make sure to give the entrepreneur a reality check. Often, if the idea, execution and capability of the entrepreneur and the team are sound to me, then I write them that cheque,” he added.

Thomas Yip, CEO and founder of Radica Software, echoed the same sentiments in his presentation, “Audacity, Culture and Persistence: Lessons from a Malaysian Entrepreneur”. He faced similar challenges when he was venturing into the business world.

“When we first made our sales for our software in 2009, we were thrilled but after a while in 2013 and 2014, we faced a period of stagnation and were running out of ideas. And, in business, this means regression. At that time, we didn’t have a mentor until Dr Siva [Dr Sivapalan Vivekarajah, co-founder and senior partner of Scaleup Malaysia Accelerator and adjunct professor at the School of Science and Technology, Sunway University] reached out to us.

“After speaking with him, we were able to go into accelerator programmes, learn a lot about investments, valuation, product market fit and much more,” said Yip.

It did not stop there. During the Covid-19 pandemic, the company was running at a loss and Yip realised it was simply unfair to retrench employees or implement a salary cut. Instead, he focused on building partnerships.

In 2022, the company was acquired by the German multinational technology conglomerate Siemens AG, signalling that it is doable for start-ups to go global but with proper guidance and perseverance. — By Ravinyaa Ravimalar

Maximising tax perks for investors

As Malaysia continues to promote and support its developing start-up ecosystem, investors are being called upon to help local start-ups reach new heights in order to realise their true potential. This is why tax incentives such as discounts and exemptions are being pushed to promote local investments.

Associate director of Deloitte Owen Wong and Cradle Fund Sdn Bhd head of corporate affairs Adam Ramskay discussed what exactly these tax incentives are and why now is the time for angel investors to step in.

Speaking at the MBAN Angel & Corporate Investors Summit 2023, Wong shared details on the Angel Investor Tax Incentive, which offers exemptions that are equal to the value of investment poured into the start-up. This exemption applies to the aggregate income that can be claimed in the second year after the investment was made.

The tax exemptions are only applicable to residents of Malaysia. The investment given must only be used to finance the start-up’s activities as approved by the minister of finance, the amount of investment must not be more than 30% of the total paid and the amount invested per annum must be between RM5,000 and RM500,000.

In order for the start-up, or investee, to be eligible for these exemptions, all activities must be approved by the Ministry of Finance and the investee has to be certified by the Angel Tax Incentive Office (ATIO), a unit under Cradle Fund. The ATIO has proven to be effective in drawing more investors to support local start-ups, with over 300 accredited angel investors registered with MBAN.

The angel tax incentives, however, are only valid up until Dec 31, 2023, though an extension is in the works.

“Cradle has already put in a request. However, we’ll have to wait until most probably [Oct 13] for us to know if they are extended or not,” said Ramskay. He noted that there is a lot of interest in the start-up ecosystem, with many actors in the government wanting to build it up further.

Corporations or venture capital companies seeking to invest in start-ups will be eligible for the Venture Capital Tax Incentives, which instead will receive tax deductions on investments.

Corporations making investments will have a deduction limit of up to RM20 million, as long as the investee is not related to the investor. In order to be eligible for the tax deductions, venture capital companies have to be registered with the Securities Commission.

Unlike the angel tax incentives, investment periods for venture capital companies are until Dec 31, 2026. These incentives are part of a big push to draw in more angel investors from around the country, with MBAN chapters opening up in Penang and Sarawak. There is also increasing interest in Sabah. — By Aris Riza Noor Baharin

Thriving start-up ecosystem around Asean

The rise of start-up ecosystems continues not just in Malaysia but across Asean. Three panellists representing Thailand, Vietnam and Malaysia shared the progress on the growth of their respective start-up ecosystems, hoping to learn from one another.

Saijai (Kia) Pongsripetch, portfolio growth manager at Krungsri Finnovate, related how Thailand is supporting its start-up ecosystem. While the country has been investing a lot of resources, its start-up ecosystem is still fairly new, with not a lot to tell in terms of big successes.

The Thais focus mainly on corporate venture capital, where corporate funds are invested directly into external start-up companies, said Kia. This has led to Thailand having more mature investors, but a lack of angel investors, which Kia stated is a key focus right now, with the government in the early stages of promoting the entry of more angel investors.

Touchstone Partners director Bobby Liu shared the growth of start-ups from the perspective of Vietnam and how it was “one cycle behind the rest in the region”. This is because when the start-up ecosystem began taking shape in the Asean region in 2011, Vietnam was experiencing a downward economic trend.

The country struggled until around 2015, when its economy started opening up with the return of businesses, bringing attention back to Vietnam. Despite Vietnam catching up since, Liu said it is still lagging because “many of these players, you guys already have … your corporate venture capital and angels, there are not as many around [in Vietnam]”.

In closing the session, MBAN treasurer Xelia Tong said that despite strong government support in Malaysia and backing from both venture capital companies and angel investors, Malaysia really only has Carsome as its sole unicorn, a start-up worth US$1 billion (RM4.7 billion).

One reason for this, as well as a regular topic of debate when it comes to discussing the start-up ecosystem in Malaysia, is that the government is viewed as being too supportive of start-ups, to the detriment of other businesses. — By Aris Riza Noor Baharin

Making the most of turbulent times

The tide has shifted from high-growth companies to high-impact companies, post-pandemic. The government mandate has changed over the past few years, and instead of focusing only on high-growth companies, there is now a move to companies that can survive turbulent times and economies, said Farah Wahidah Rafik, head of the investment unit at Cradle Fund Sdn Bhd.

“The lesson that we have learnt is how these businesses can thrive and sustain themselves during difficult times. What I’ve seen is that companies that enable people and focus on things like food security or food businesses have long-term gain,” said Farah during the panel session on “Unveiling the Art of Investing in Turbulent Times” at the MBAN Angel & Corporate Investors Summit 2023.

However, in order to secure investments, start-ups should look into validating their ideas in order to be taken seriously.

“If the idea has not been validated, don’t [invest]. That’s the lesson I learnt,” said MBAN president Alan Lim. “If the pitch is about minimum viable products (MVPs) and they need the money for the MVPs or to go to market, make sure that it is validated. Then you give [the start-ups] the money, and that’s how they move to the next stage.”

In the years ahead, a good idea will be easily recognised as the world has become more global post-pandemic.

“If your idea is good, you can get funding and exits everywhere. So, the thinking is that it is now a flatter, faster and more knowledgeable world,” said Jeffrey Seah, general partner at MSW Ventures.

While in the past it would have been necessary to wait five to six years to see investments come to fruition, there is now a clearer path to exit, added Seah.

Despite this, what works in one country does not necessarily mean it will work in another.

“If your business is exactly the same as the one in Israel or China, does that really mean it will succeed?” Seah queried. “The Singapore government made a lot of mistakes in giving funds away. It gave away grants, and officials based these on the model [that start-ups said were based on] the US, Israel or China. It gives the money away but the results are not the same.”

Lim reckoned the maturity of the Malaysian start-up ecosystem will be recognised. This includes the landscape itself, start-ups, angel investors, venture capitalists and corporates.

“The whole ecosystem is maturing. I might not be looking at five unicorns, but I think I can easily look at 100 soonicorns,” he added. — By Kiran Jacob

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