This article first appeared in Forum, The Edge Malaysia Weekly on October 12, 2026 - October 18, 2026

I read with great interest a really sharp article on mid-tier companies (MTCs) in this newspaper by Krystle Chan and Pearl Lee titled, “Why RM120b isn’t reaching Malaysia’s engine room” (The Edge Online, Sept 25, 2026). In it, the authors argue, “Malaysia does not have a shortage of capital. It has a problem getting the right capital to the right companies”, giving three reasons — first, big funds struggle to write small cheques; second, there is a mismatch between available capital and what suits MTCs; and third, Malaysia lacks a deep mid-market advisory network.

I think the authors are bang on target when they argue that this mismatch between companies and capital is a fundamental problem for Malaysian MTCs. I’d like to build on this further and argue for a particular kind of capital provider that is generally missing in the Malaysian ecosystem.

But before I get there, let me sketch out a few other thoughts. First, one of the big pushes in the past decade in Malaysia has been on deepening our venture capital (VC) ecosystem. Till today, it is a common refrain among VC funds that there aren’t enough high-quality start-ups in which they can invest. And when a seemingly scalable start-up appears, every VC fund chases after it, driving up its valuation, leading to inflated prices and greater difficulties in future exits.

Some of the reasons I have heard for this lack of high-quality start-ups include: Malaysians not being sufficiently entrepreneurial; Malaysia as a market being too small; Malaysia’s founders are not sufficiently ambitious; and Malaysia not having large firms that can serve as initial off-takers for the products of these start-ups, among others.

Of these reasons, I probably only buy the last one. Malaysians are plenty entrepreneurial — small and medium enterprises dominate the proportion of firms in Malaysia; what are SME owners if not entrepreneurs? Malaysia’s population is enough as a starting base and the goal is to go regional and global anyway; a small domestic market is no real excuse. Sweden, after all, has a bunch of unicorns, despite a domestic population of about 11 million people. Malaysia’s founders are not sufficiently ambitious — so what does this mean, anyway? What is a “sufficient” level of ambition?

This leads to thought two that I want to sketch. I think a big reason for this questioning of the level of ambition is because we can sometimes apply a particular model of venture capital to a context that is not quite fit for it. Many of the VC funds that I have seen operating in Malaysia tend to be based on the Silicon Valley model. These funds are, in many ways, attuned (maybe even fine-tuned) to invest in firms with a particular form of business model. This business model is one that is driven by rapid scaling, is asset-light in nature, is relatively lightly regulated and has a large, relatively homogenous market into which it can expand. The most quintessential example of firms with this business model is software firms.

Thought three — so, the Silicon Valley VC fund is especially suited to invest in software firms. Hence, much of the technology boom in the US in the past decade has been in software-as-a-service companies and, more recently, artificial intelligence (AI) firms, albeit in software. Why? Well, software does not require heavy initial capital expenditure, it is typically lightly regulated, it can be applied relatively quickly across a pretty homogenous and massive market, and so it can scale quickly. If it can scale, it is quicker to monetise, and so VC funds can distribute returns (DPI — distributions to paid-in capital) more quickly to their investors.

Investors love that their money in long-term horizon investments comes back relatively quickly, and so they then continue re-upping (a term for a repeated capital investment in the investments world, or for restocking drug supplies in the drug trade which, if you think about it, aren’t too dissimilar) into these VCs, which then continue investing in these types of firms. The very best VC funds (top decile funds) are the most over-subscribed funds in the market; simply showing up with capital may not count for anything.

Now, American wannabe entrepreneurs recognise that this is where money flows. So how do they respond? By founding companies that have the highest likelihood of receiving such capital. And so, more and more software companies get founded. There is, in essence, a co-evolution between VCs, their investors and the firms in which they invest. The economy therefore churns more and more of particular kinds of start-ups.

Well, and this is thought four, the traditional VC ecosystem may be wonderful at producing some kinds of start-ups, but what about other kinds of firms? Clean energy investments, energy transition investments, biotechnology, physical AI and robotics, among others, typically have longer gestation periods, higher initial capital expenditure, higher regulation, and may not scale as quickly — all fairly awkward fits with the traditional VC model.

Some caveats are in order. US biotechnology has a thriving VC ecosystem, particularly around Boston and San Francisco. But drug development illustrates the limits of the model. Scientific breakthroughs can originate in start-ups, but the enormous research and development (R&D) costs, long timelines and regulatory requirements often favour partnerships with, licensing to, or acquisition by the mega pharmaceutical companies. At the same time, with regard to physical technology and capital intensity, the best counter-example is SpaceX. But, my point is not that the US ecosystem cannot produce such companies; it is that the US ecosystem’s incentives do not make such companies the norm. SpaceX is evidence of possibility, not of regularity.

Thought five — all this would be fine if we were not living in a world where every single region or power is raising barriers with one another. In particular, the large powers will likely have to deal with the notion that other powers may be far more reluctant to share technology and knowledge. As such, the impetus to develop their own infrastructure becomes ever more salient. So, in the longer run, if the American VC ecosystem lends itself to one kind of technology, but not other, also extremely necessary kinds — robotics, energy transition and so on — is this not a strategic risk?

That being said, not all innovation in the US happens in VCs. There’s university research, government R&D and corporate innovation as well. But the personal economics for talented innovators has also changed. Founding one’s own company, or joining a VC-backed start-up, gives talented innovators the chance for generational wealth through equity options. This is certainly not the case in government R&D and university labs. They may get some equity upside in corporates, but the real wealth building occurs if they get in much earlier in a firm’s life. And so, talent moves towards start-ups; and if a given ecosystem favours a certain kind of start-up, then talent also inexorably leans towards those kinds of start-ups over others.

The China model, on the other hand (thought six), relies much more heavily on inter-provincial and local government competition, whose officials have historically faced strong political incentives to deliver economic and industrial outcomes. The result resembles a near-literal death match among firms with local governments building overlapping industrial ecosystems in electric vehicles, batteries, solar panels and other seemingly strategic sectors, contributing to China’s “involution” (I am simplifying). Government-guided and provincial VC funds need not operate under the same DPI and time horizons as US VC funds. Thus, combined with state support, this makes businesses that have long gestation periods and high capital expenditure more amenable to financing, even if the result can be duplication, overcapacity and a corporate Hunger Games.

Thus, bringing this back to Malaysia in thought seven, the idea that certain types of financing vehicles co-evolve with certain types of firms, and that has a big say in the future of a country’s economic capabilities implies that we have to be very clear what firms Malaysia needs and what Malaysian firms, in turn, need. I believe we need to build a really hardy and hearty layer of MTCs, because they help us build economic resilience, they create more jobs throughout the economy, and may raise overall household incomes too. Now, do we need all these MTCs to be super complex, super high-technology firms? I don’t think so. Do we want them to primarily be in software? I don’t think so either; in fact, I am pretty agnostic about sector.

What I think we simply need is robust MTCs that can export regionally, if not globally. And, as such, I’m not convinced that ever more Silicon Valley-style VC funds are the solution. Bringing this back to the article by Krystle and Pearl, we need to find the right capital to help “build” — not just finance — MTCs. As such, in addition to the equity investment structures, transformation loans and advisory networks they suggest, I think we really need capital providers that are exceptional at buy-and-builds and roll-ups of companies.

Here’s why. Malaysian MTCs already exist. They do not need to be created from scratch. The issue is they exist as — at least from a regional perspective — smaller, rather fragmented businesses with customers, capabilities and cash flows, but they usually lack the scale, management capacity, technology or regional distribution networks to become sizeable players in global supply chains. As such, the relevant investor is less so a VC fund searching for exponential organic growth, but more a really active owner capable of consolidating multiple businesses into a larger platform, professionalising management, investing in productivity and technology and opening new markets.

And so, the objective here is not to find the next one-off or two-off Malaysian unicorn, but to deliberately build more Malaysian MTCs capable of becoming regional champions — a horde of kancils, if you will. This is not to say we should not welcome unicorns, but rather that where we should be far more systematic is in building the kinds of firms Malaysia needs, and in doing so, to provide — as Krystle and Pearl argue — the right capital to the right firms.

Nicholas Khaw is an economist and head of research at Khazanah Nasional Bhd

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