This article first appeared in Digital Edge, The Edge Malaysia Weekly on December 25, 2023 - January 7, 2024

The year 2023 has been a topsy-turvy one for the local tech ecosystem. There have been some challenges, some positives and on the whole, it looks like next year will be a better one for the ecosystem. First, let’s explore some significant issues that were seen in 2023 before I pull out my crystal ball for 2024.

Four major problems have had an impact on Malaysia in varying degrees: record high interest rates, inflation, the US-China cold war, and the wars in Ukraine and Palestine.

While the wars have increased tension and worries, they have mostly had an impact on inflation and oil prices, both of which have a negative effect on the local economy. High levels of inflation have a dampening impact on the spending power of Malaysian consumers and slow down the growth in gross domestic product (GDP). This also means that the government has to continue spending on subsidies. In Budget 2024, it is projected to spend RM52.8 billion on subsidies, a significant portion of which is fuel subsidy.

High interest rates have affected borrowers the most, further reducing consumer spending. This has also impacted the fundraising exercises of venture capital (VC) firms. Investors now demand much higher returns as their own cost of capital is now much higher. This raises the bar for VC firms but has also made raising funds more challenging as investors become more risk-averse.

On the bright side, while central banks may keep rates higher for longer while waiting for inflation to come down, there are indications that they will pause raising rates and may even start reducing rates from the second half of next year.

The “funding winter”, where start-ups find it hard to raise funds from VC investors, has persisted since 2022. While a number of venture capitalists have indicated that they have “dry powder” — meaning funds under management that have not been deployed — they have been very cautious in deploying these funds. A few select companies have received funding, but they have to show efficient use of capital and a very strong financial model, either with profits, a clear path to profitability or strong customer growth without exorbitant marketing spend.

Considering that many companies are still recovering from the Covid-19 lockdowns and now struggling with a risk-averse and depressed consumer market, achieving profitability in 2023 has been a challenge. However, Malaysian start-ups have always been capital-efficient because they have not been able to raise as much money as their regional counterparts in Indonesia, Singapore and Vietnam, and this now makes them highly interesting prospects for regional VC investors.

The other positive is Khazanah Nasional Bhd’s Dana Impak, which has allocated RM1 billion towards investing in high-impact start-ups and has started to deploy these funds via two VC firms that it has invested in — Gobi Partners and 500 Global. They have started investing in impact start-ups and we have seen a lot of investment activity in this space.

Local VC investors have always faced challenges when raising funds. Similar firms in the US and Europe raise money from pension funds, sovereign wealth funds, endowment funds, corporations and wealthy individuals. In Singapore, sovereign wealth fund Temasek is a major investor in VC funds. In Malaysia, for the longest time, none of the above entities had invested in VC funds, which is why venture capitalists here have had a more challenging time raising funds.

The good news is that this is changing. Apart from Khazanah’s Dana Impak, the Employees Provident Fund (EPF) has allocated RM500 million to VC funds while government pension fund Kumpulan Wang Persaraan (Diperbadankan) (KWAP) has indicated that it too will invest in VC funds. During the presentation of Budget 2024, Prime Minister Datuk Seri Anwar Ibrahim had said that government-linked companies (GLCs) and government-linked investment companies (GLICs) will commit funds of RM1.5 billion for start-ups. This will ostensibly be for both direct investments as well as investments in VC funds.

Moreover, in 2022, the government approved a corporate investment tax incentive of up to RM100 million over five years for corporations that either invest directly in qualifying tech start-ups or in VC funds. In 2023, the Securities Commission Malaysia (SC) — which is mandated to promote the VC industry — has been actively promoting this incentive, including encouraging local corporations to set up corporate VCs (CVCs).

This is, of course, a long game and it does take some time to convince previously risk-averse corporations to start taking on some risk, but the tax incentive is a huge boost that reduces their risk, thereby making it more palatable for them. I foresee that in the next few years, more corporations will step up to invest in VC funds and this will be a game changer for the VC scene in Malaysia.

In the revised Budget 2023 that was tabled in February, Anwar announced that a capital gains tax (CGT) would be introduced in Malaysia as the government is seeking to diversify its tax base. This was a source of worry for VC firms, angel investors and start-up founders.

Prior to the announcement of that budget, I had personally got together the three main associations that represent start-up investors — Malaysian Business Angel Network, Malaysian Venture Capital and Private Equity Association, and Registered Digital Markets Association (for equity crowdfunding and peer-to-peer lending platforms) — to lobby the government for an exemption for start-up investors.

In Budget 2024, it was announced that individuals, including angel investors and start-up founders, as well as VC funds would be exempted from CGT. This is a significant boost both for the industry and for corporations that invest in VC funds as now they have a double benefit: first, the RM100 million tax incentive for investing in VC funds and secondly, exemption from CGT for these investments.

While a lot of initiatives and budget incentives have been proposed, making sure they come to fruition is critical. Some have been acted on quite fast, such as Khazanah’s and the EPF’s investments in VC funds, so the next round of RM1.5 billion should also be disbursed quickly as this will give the ecosystem a real boost to get funding into start-ups swiftly.

The funding winter should thaw in 2024 as many VC firms have to start investing their dry powder soon, owing to the usual seven- to 10-year lifespan of their funds, which means that they have to invest and exit their investments within this time frame. This will benefit start-ups, but I foresee that VC firms will continue to demand stronger performances from start-ups as they will still be cautious.

Meanwhile, Malaysia is fast becoming a regional hub for data centres with a number of large data centres being built in the country over the next few years. This is great for our infrastructure services and cements the nation as a leader in the data centre space.

In terms of listings, local champions such as Carsome may have to put off their plans. Carsome’s plan to list on the Nasdaq in 2022 was thwarted by market uncertainties and a widespread drop in tech company valuations — as exemplified by Grab’s 70% decrease in market value as at Dec 8 this year, from Dec 2, 2021 when it had first listed on the Nasdaq. Similarly, GoTo, Indonesia’s leading digital ecosystem provider, saw a 71% plunge in its market value on Dec 8 compared to its IDR400 trillion (US$28 billion) valuation during its initial public offering (IPO) on April 11 last year.

The current market sentiment suggests a re-evaluation of tech start-ups that lack profitability. To succeed in a 2024 listing, Carsome and other IPO hopefuls must demonstrate robust financial performance. It might be prudent for them to wait until 2025 when it is hoped that market conditions would improve amid potential interest rate reductions and subsiding inflation concerns.

It has been a year since OpenAI’s flagship product ChatGPT went live and wooed the world with the first artificial intelligence (AI) platform that ordinary people could use. It led to highly controversial debates on the impact ChatGPT could have on humanity, especially the massive loss of employment. I too am concerned about machines being more intelligent than humans but not having a moral compass.

A couple of weeks ago, my friends had asked me to test out whether AI could answer questions on entrepreneurship, funding and valuation like I would or could. I agreed to this test and they took the materials from all my articles and my two books — Blue Sky Innovation and Supercharge Your Startup Valuation — and uploaded them on an AI using WhatsApp. We then invited people to this WhatsApp group who could test out the AI (called DocSiva AI) by asking it any question on the aforesaid topics. It passed the test admirably and could answer many questions as accurately as I could have. It is still being perfected but even Version 1 has passed the test as many of my friends were impressed.

This shows that AI does not just affect low-skilled workers but even a highly skilled practitioner like me who has spent 25 years in the tech ecosystem — I can, and most likely eventually will, be displaced by AI. That is a scary thought for me; imagine how much worse it will be for teachers, marketers, content writers, designers and so many more creative people.

Next year, we will see even more advanced developments in AI as it is progressing at breakneck speed with probably hundreds of thousands of people working on AI all over the world. This is going to be a very interesting decade and frankly, I don’t think anyone, even the AI researchers, will be able to predict what the next few years will hold for us.

We live in very interesting times. Technology is advancing so rapidly that I predict that everyone’s crystal ball predictions will be wrong.

For the Malaysian ecosystem, there will be positive developments in 2024 and in terms of technology, there will be huge advances. There will be a lot of good developments but also, unfortunately, some scary ones. Humankind is, however, highly resilient and I will continue to put my faith in humans. Oops, the crystal ball is getting cloudy again.

Dr Sivapalan Vivekarajah is co-founder and senior partner of Scaleup Malaysia Accelerator (scaleup.my) and adjunct professor at Sunway University’s School of Science and Technology. He is also the author of Supercharge Your Startup Valuation.

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