This article first appeared in Digital Edge, The Edge Malaysia Weekly on November 27, 2023 - December 3, 2023

Over the last couple of years, Malaysia’s venture capital ecosystem has grown by leaps and bounds but there is a lack of financial commitment in the mid-to-late stages of fundraising.

For funding between US$500,000 (about RM2.34 million) and US$20 million, firms like 500 Global would be able to fill in the gaps, says Khailee Ng, managing partner of venture capital firm 500 Global. But for companies raising US$20 million to US$80 million, there is a lack of funds.

The participation of local government-linked companies (GLCs), financial institutions and family offices is essential to filling funding gaps from the pre-seed to the pre-initial public offering stage, Ng tells Digital Edge.

“Getting more alternative pools of capital from GLCs and ultra-high-net-worth families who invest in venture capital funds or create their own venture capital fund is very important.

“We believe in universal basic innovation and think it’s everyone’s right to be able to build really great things. We’re going to need to fill in some of these funding holes [to provide more opportunities for companies],” he says.

500 Global recently released the 500 Global Rise Report, which covers the largest, fastest-growing economies outside of the US and China (Rise 30). By 2027, the Rise 30 are expected to surpass the US and China by gross domestic product. State-owned investors also have a role to play in venture capital.

In 2022, venture as an asset class represented 1.4% of total investments by the top 50 state-owned investors globally. Malaysia ranked 24th out of the top 25 countries by assets under management (AUM) of state-owned investors, consisting of the central bank, sovereign wealth fund and public pension fund. As at September 2023, the total AUM by state-owned investors in Malaysia stood at US$480 billion.

But then comes the question of one’s qualification to start a venture capitalist fund. Ng says that is why 500 Global set up the VC Unlocked: Silicon Valley programme in collaboration with the Stanford Center for Professional Development. This educational programme is for emerging leaders who want to hone their skills as venture capitalists.

The two-week programme is taught by Stanford University faculty and 500 global leaders who share their knowledge and expertise through live, interactive sessions.

“We have Malaysians from different GLCs who have attended the programme, which has registered more than 1,000 participants,” he says.

But this does not mean that venture capital funding and participation are not lively enough. In fact, on the contrary, there has been more participation than ever before.

500 Global recently announced that it successfully raised US$143 million, including US$100 million for its largest Southeast Asian early-stage fund to date, 500 Southeast Asia III LP (500 SEA III).

Limited partners (LPs) across its early-stage and growth investment vehicles include a sovereign wealth fund, public and private pension funds like Khazanah Nasional Bhd, Kumpulan Wang Persaraan (Diperbadankan) or KWAP and the Employees Provident Fund. A university endowment, family offices of prominent global investors and portfolio companies valued at over US$1 billion from the firm’s first Southeast Asia early-stage fund have invested as LPs as well.

“I think there’s so much self-bashing going on right now [about the lack of participation of Malaysian institutions] but it is not true. Khazanah and KWAP are participating, with the latter being an LP and part of our funds since 2017,” Ng reveals.

500 SEA III is the firm’s third Southeast Asia-focused early-stage fund, with each successive fund having nearly doubled in size since 2014. Originally targeted for US$75 million, the fund closed at US$100 million with over half of the funds coming from returning LPs. The fund will focus on investing in businesses and artificial intelligence-enabled technologies that advance rural digitalisation, sustainable cities, human and machine productivity, healthcare, food security and financial inclusivity.

The fund aims to invest in 100 pre-seed to Series A start-ups, providing first cheques worth between US$250,000 and US$500,000 across Malaysia, the Philippines, Vietnam, Thailand, Singapore and Indonesia.

Nevertheless, Malaysia has some catching up to do. The Malaysian Startup Ecosystem Roadmap 2021-2030, which aims to transform the country into a top 20 global start-up ecosystem by 2030, outlines goals to generate 5,000 start-ups (including five unicorns) by 2025. Ng says these goals are a good target to work towards, but more importantly, there is a need to measure Malaysian ownership of these companies.

Ideally, the founder should be Malaysian, with about 70% of the company’s stakes owned by Malaysians. But more often than not, Malaysian companies are founded and nurtured here, then relocate to other countries, as in the case of Grab, which is now domiciled in Singapore despite being a Malaysian-born company.

Retention of start-ups is not the biggest challenge or problem but remains a pain point. Retention can be broken down into a few factors: where a company’s domicile or holding company is registered, where most employees are located, where most of the business’ revenues are coming from, the company’s headquarters location and the nationality of the shareholders on the cap table. Solutions need to be applied to address each of these factors individually to improve retention.

A combination of these factors is demonstrated by the example of Shein, believed to be a Chinese company when in actuality it is a Singaporean company operating in China.

Ng says Carsome is known as a Malaysian unicorn even though its group holding company is in Singapore because the narrative of the company is tied to Malaysia.

Another example is Aerodyne, which has its headquarters in Malaysia and is Malaysian-owned.

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