Disrupt: ‘It’s hard to raise money in Malaysia’

• ‘We couldn’t raise even a single dollar in Malaysia or Singapore,’ says Catcha’s Patrick Grove
• Can’t depend on govt-backed VCs, private sector needs to step up, says Mavcap chief

THE start-up space is recognized as amongst the most vibrant sectors in the country’s technology ecosystem, with even the Government launching initiatives to boost and support it, yet it is still very hard for entrepreneurs to raise money in Malaysia, especially from private sector funds and investors.
 
Which is what forced Catcha Group chairman and chief executive officer Patrick Grove (pic, second from left) to look to Australia in 2007 to raise funds for his then-nascent online property classifieds portal, iProperty, he told participants at yesterday’s (Feb 20) DNA-TeAM Disrupt session, themed “Follow the Money.”
 
“The fact of the matter is, we tried to raise money from local investors, but nobody was interested. We couldn’t raise even a single dollar in Malaysia or Singapore,” he said. “So I got on a plane to Australia.”
 
“We were trying to raise money for a model that was already proven in multiple, mature markets, that of online property classifieds, yet people here told us it was not going to work,” said Grove.
 
“They would tell me, ‘Why would people go online, they already have the newspapers.’ I would tell them, yes, but I’m raising money to take on the newspapers. And they would say, ‘oh, it won’t work because they already have the newspapers.’ It would go on this way, such a circular argument,” he added. The iProperty Group was listed on the Australian Securities Exchange (ASX) in 2007.
 
And despite his track record, “it was same thing with iCar – we raised RM30 million in Australia because we couldn’t raise any money locally,” Grove said. iCar Asia also listed on ASX late last year. Catcha Media was listed on the Bursa Malaysia exchange in 2010.The Catcha Group has seven other privately-held companies.
 
“Australia doesn’t necessarily have a strong tech start-up culture, but it does have a very strong betting culture, and I don’t mean gambling, but a culture that is prepared to invest in high-risk ventures,” he said.
 
{RM1 = US$0.31]
 
His fellow panelists largely concurred, with Amit Anand, founder and managing partner of Singapore venture capital firm Jungle Ventures, saying it was the same difficult situation raising money down south, although he added that “there was a huge uptake last year in the number of seed investments in Singapore.”

The other panelists were iconic technopreneur and angel investor Khailee Ng (pic above, third from left) and Jamaludin Bujang (far left), chief executive officer of Malaysia Venture Capital Management Bhd (Mavcap), the Malaysian Government’s venture capital (VC) arm. The session was moderated by Digital News Asia (DNA) founder and chief executive officer Karamjit Singh (far right). Amit participated via videoconference.
 
Govt funds drying up
 
Mavcap’s Jamaludin said that the Government was very aware that start-up companies need to raise funds and that there was very little support from private institutions, but warned of budget cuts.
 
While Mavcap itself has an RM500 million allocation under the 10^th Malaysian Plan, the national development plan that runs from 2010-2015, “there has been a move in the last seven years to reduce such government-backed funds.”
 
“According to the MVCA (Malaysian Venture Capital and Private Equity Association), which tracks such numbers, the amount of funds being managed by VCs and private firms in Malaysia was close to RM6 billion in 2010, but this went down to RM5.2 billion in 2011 as some funds closed.
 
“We expect it to remain flat this year,” he said, adding that the amount of equity funds being managed was too skewed towards the government side.
 
“About 50% to 60% of the funds being managed come from the Government,” said Jamaludin. “And while there are about 30 active VC funds being managed, more than half of the funds released in 2011 came from five or six government-backed VC funds.”
 
“There should be more participation from the private sector side,” he added.
 
He did say that Mavcap will be putting away half of its RM500 million allocation in a special program where it will work with private VC funds on dollar-for-dollar basis, where Mavcap will provide half of the investment to match the private VC.
 
“We hope that this mean twice the amount of funds can be released,” he said.
 
Who needs the Valley?
 
As with many discussions on start-ups and entrepreneurs, the panel discussion also shifted to Silicon Valley, from where Khailee had just returned after a nearly four-month stint as a mentor and entrepreneur-in-residence to the 500 Startups initiative, which provides early-stage companies with up to US$250,000 in funding and runs an accelerator program as well as events.
 
Compared with the start-up scene in Malaysia or even the rest of South-East Asia, “there are some things there that are obviously different, and some things that are obviously the same,” he told the audience.
 
“The differences include the kinds of markets they tackle and the level of sophistication they bring to the table, right off the bat.
 
“But what I found most interesting were the things that were similar,” he added. “Even if they may speak better, their team has more experience and some of their investors have multiple exits, new start-ups there face the same kind of problems that a new start-up in Malaysia would go through.
 
“This became quite apparent to me in my three-and-a-half months there with 500 Startups, with 60% of its Batch 5 start-ups coming from international markets,” he said. “Silicon Valley is very much a global platform, not just an American one.”
 
Khailee said the other similarities were the target customers, adding that what would appeal to a consumer in the United States would pretty much appeal to a consumer anywhere else in the world
 
“Because of this, internationalization has never been easier,” he added. “It’s very hard to think of a company that has found local success that could not replicate its model elsewhere.”
 
He acknowledged that there may be a handful, “but they are the exceptions now, when previously, they used to be the rule.”
 
Jungle Ventures’ Amit (pic) however disagreed with Khailee’s take on the “ease of internationalization.”
 
“I think it’s a mistake to think that if you’re an Internet company, you can succeed anywhere in the world. For instance, commerce is a very hyper-local business. Don’t follow the herd, find out what works for you,” he said.
 
Khailee acknowledged that perspective. “True, you shouldn’t take generalizations as gospel truth, but I do believe that these options were not available before.”
 
He also noted that there are other aspects of this internationalization which make Silicon Valley an attractive avenue for start-ups to explore, with one being the high valuations.
 
“US companies – pre-execution, pre-team, pre-revenue – can expect US$1 million from the get-go,” he said. “If you have a team and you have a product, you can get US$3 million from the get-go; and if there is a buzz around your company, you can raise US$5 million easily,” he said.
 
Khailee said that it used to be that US investors would expect a non-US company to at least have an office based in the United States and a US customer before they would even listen to you.
 
“But that is changing,” he said. “500 Startups has invested in 450 companies in the past two years, of which 150 are international companies and not even based in the United States at all.
 
“There are also investment groups and angels who are more comfortable investing outside the Valley – it’s still rare, but it’s getting there.
 
“If I was to start a new company today, what I would do is prove my traction here, in the domestic or regional market, go over there and get cheap money, dilute myself less, and be king of the world,” he laughed.
 
Catcha’s Grove agreed with Khailee’s take on internationalization and globalization.
 
“That’s one of the beautiful things about globalization – yes, you can have your business here and your team here, but you don’t have to raise your money here,” he said. “Look at all those companies from China which are raising money on Nasdaq.”
 
But it cuts both ways. Ganesh Kumah Bangah, the Group CEO of MOL Global, who was in the audience, said that neither should start-ups keep looking to Silicon Valley.
 
“The Valley is no longer the magical place that you need to be in to be a successful start-up. It may have been 30 years ago, but no longer,” he said.
 
“The only difference between the Valley and Malaysia or Singapore for that matter, is that it has more of everything -- more money, more angels, companies have more shareholders, there are more VCs, more exits, and the cost is more,” he said.
 
Ganesh also chided local entrepreneurs for paying too much attention to media reports on start-ups raising funds without considering the stakes they were giving away, or that much of that came in the form of preferred or preference shares, where dividends are paid before common stock dividends are paid out.

“Even in the United States, if you’re looking to raise US$1 million or even US$3 million, you don’t go to VCs; you got friends and family first,” he said.
 
“Get US$100,000 from 10 people, and you have a million. Use that to build your business, then you go to a VC,” he added.

To watch the video of the proceedings, click here.

 
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