This article first appeared in Digital Edge, The Edge Malaysia Weekly on October 13, 2025 - October 19, 2025

Venture capitalism has always been portrayed as a glamorous profession. Venture capitalists (VCs) wield millions (even billions) of dollars and call the shots on which start-up gets funded and which doesn’t.

Start-up founders fawn over you and everyone wants your attention in the hope of getting funded. After all, only one or two out of 100 start-ups that pitch to a VC get funded, so getting funded is equally glamorous and gives the start-up founder bragging rights.

However, the venture capital industry has seen a change in the last three years. Funding peaked in 2021 but, since 2022, has been in free fall. It is now harder for start-ups to raise funds and many that did do so pre-2021 with a promise of further funds have failed to raise the next round, resulting in many of them retrenching staff and consolidating their business or even shutting down.

The one exception to this is funding for the artificial intelligence sector, especially in the US. AI funding has taken off like a supercharged rocket. In 2024, global venture capital funding for AI start-ups reached US$131 billion (RM550 billion). If we exclude the US$40 billion for OpenAI, the creator of ChatGPT, funding was still a high US$81 billion, representing one-third of all venture capital funding globally. In 4Q2024, half of the funding went to AI start-ups.

In Asia, venture capital funding has slumped to the lowest level in seven years. According to KPMG’s Venture Pulse Report for 2Q2025, in the first two quarters of the year, a total of US$25.4 billion was raised, close to the US$25.3 billion raised in a single quarter, 1Q, in 2019. That’s a 50% downward trend on quarterly funding.

This article, however, is not about start-up fundraising. It is about the VCs and the challenges faced by the industry.

Only US$14.1 billion was raised by VCs in Asia in the first half of 2025, the lowest in seven years. The number of funds that have successfully raised money has also dropped significantly at only 10% of the peak of about 2,400 funds in 2019. This explains the lack of funding in Asia.

While founders are finding it hard to raise funding, they probably do not realise that VCs are finding it equally tough to raise money for their venture capital funds.

A recent news report on some of the leading private-sector venture capital funds in Malaysia did not paint a rosy picture, with most of them not even providing a 1:1 return to investors. Even the brand name funds lost money.

In 2019, I was appointed as the task force chairman by then minister of science Yeo Bee Yin to recommend a restructuring of the government funding agencies. We discovered poor results among the government venture capital funds — this was disclosed publicly by Yeo in 2019. But certainly, discovering that privately run funds are performing equally poorly is highly surprising, to say the least.

All of these factors make it even harder to raise venture capital funds from sophisticated investors or limited partners (LPs), as the investors in such funds are known. Generally, LPs are pension funds, large corporate players or super high net worth individuals who are already fairly conservative, especially in Asia.

How do you convince LPs to invest in venture capital funds when the latter’s track record is extremely poor?

Fund investing is a long game. There is no liquidity and you generally have to wait seven to 10 years for the funds to return your investment with a profit. The expected profit is at least a three times return, or an internal rate of return (IRR) of at least 15% over this period.

Since the wait is long, with no liquidity, the return has to be a lot higher. However, if the funds can’t even return one time the investment (that is, 0% IRR or negative if the fund lost money) then why would anyone want to invest in the venture capital industry?

There is also an opportunity cost. If LPs were to invest in money market funds, bonds or even fixed deposits, they could easily get 4% to 5% annual returns, with capital virtually guaranteed, unlike venture capital fund investing. According to a Malaysianist report, some funds did not return even a cent after 10 years.

All of this is giving the venture capital industry as well as start-up founders migraines. Fund managers find it hard to raise money for their funds, which means there are too few venture capital funds for founders to raise from.

Malaysia has never been blessed with a lot of funds. Most have been government-backed or funded, but government funding is limited. Our pension funds have been investing but rather cautiously, which is still better than our large corporates that rarely invest in venture capital funds. They prefer faster returns, and the lack of successful funds means they would feel that their caution is justified.

In recent times, some major start-up failures — such as eFishery, which raised US$294 million — have put an added dampener on the venture capital industry as some major funds lost money in this deal. Although there was fraud involved, investors do not really care as a failure is a failure.

The biggest cause of failure, however, is not fraud or bankruptcies but simply a lack of exits for funds. In my previous writings, I have highlighted why exits do not happen in Malaysia or even in Southeast Asia generally. Much of this is driven by a lack of acquisitions as no one wants to acquire a loss-making start-up.

Our potential acquiring companies also do not have large balance sheets with billions of extra dollars with which to make acquisitions, unlike the large tech companies in the US. Hence, while acquisitions happen regularly in the US, an acquisition in this part of the world is a rare occurrence.

No exits means that VCs cannot make money and can’t give the LPs a return. Where does this leave the venture capital industry in Malaysia? In a very tight spot indeed. We need to see more successful VCs as only this success will loosen the purse strings of wealthy LPs.

There is no silver bullet for this problem. At best, it can be addressed by ensuring their investee companies turn profitable in the shortest time possible, so that they can exit either via an initial public offering or via an acquisition because large companies are willing to acquire profitable companies as this will add to their bottom line.

We are now seeing this change in mindset, both among founders and VCs who are now pushing their investee companies to get to profitability as soon as possible. This is a good thing as profitability equals long-term business sustainability and better prospects for an exit.

Another option is to fix the problem with the LEAP Market on Bursa Malaysia. LEAP was designed for loss-making start-ups and in the early days, many of them were listed on LEAP.

However, due to almost zero liquidity and because there was no easy process to transfer their listing to the ACE Market, LEAP listings have dropped significantly, with only four listings in 2024 and only three so far in 2025.

The reason for poor liquidity was because only sophisticated investors, as defined in the Capital Markets and Services Act 2007, could invest in the LEAP Market. Sophisticated investors must be high net worth individuals and those with financial knowledge and experience. Despite this, hardly any trade happens on LEAP. This is also because sophisticated investors have many choices when it comes to where to invest their money — and based on the available data, the LEAP Market is not their preferred choice.

Bursa Malaysia and the Securities Commission Malaysia should remove these restrictions to allow retail investors to invest in LEAP companies, just like they do in other stocks. If they want to protect the mom-and-pop investors, then set limits on the amount they can invest in LEAP companies — RM100,000 is a good limit.

Currently, retail investors are already investing in start-ups via Equity Crowdfunding, which carries a higher risk, so allowing them to invest in LEAP is not a big leap (pun intended).

I believe this one solution will provide a boost to LEAP Market listings and will, in turn, assist the venture capital industry in getting some exits. It also has the possibility of saving some of the existing funds.

Exits are the lifeblood of VCs. No exit means no returns to LPs, which then means there is no money to recycle into new funds. This recycling is how the US venture capital industry has done well over the last seven decades. In Malaysia, there is not even one round of recycling because VCs have not provided decent returns to LPs.

It is in the interest of the country and the start-up community for all stakeholders to seriously consider why the venture capital industry has failed and to take all possible measures to support this critical industry.

Dependence on the government or government-linked entities to continually support the industry is not a viable solution. The industry must show success and provide good returns — only then can it survive. Without a vibrant and successful venture capital industry, the start-up sector is in jeopardy of failing. We simply cannot afford to let this happen.

Dr Sivapalan Vivekarajah is co-founder and senior partner at 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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