Cradle-GGV funding pact to also help plug entrepreneur brain drain

• Malaysian startups, including ‘Cradle babies,’ forced to go down south for funding
• GGV has identified three companies for co-investment, discussions under way

THE one-to-one funding partnership announced last month by Malaysia’s Cradle Fund and Singapore-headquartered Golden Gate Ventures aims to not only bridge the funding gap in the local ecosystem, but also arrest the ‘entrepreneurial brain drain.’
 
“The current situation of local companies having to go abroad for funding is definitely not a satisfactory one,” said Cradle chief executive officer Nazrin Hassan (pic, left). “We’re encouraging an entrepreneurship talent drain if we keep going this way.”
 
“There are other measures we have to take so that we can tell our startups ‘You can start here; you can grow here; and you can still get global funding and value-add here.
 
“They should not be forced to think that if there is a seed or Series A crunch, they have to go to neighbouring countries to get the sort of funding they need,” he told a media briefing to further explain Cradle’s tie-up with Golden Gate Ventures (GGV).
 
In May, the two organisations announced that they had agreed to a one-to-one match in funding amounts -- for any sum GGV provides in funding, Cradle will fund an equal amount into the selected technology startup, but will not take any equity.
 
Under the agreement, Cradle and GGV will fund up to five companies a year with an annual total allocation of RM2.5 million (US$776,690). Selected technology startups will each receive a maximum of RM500,000 (US$155,340) or the equivalent amount in Singapore currency.
 
Cradle is an agency under Malaysia’s Ministry of Finance (MoF), while GGV has invested in some of South-East Asia’s most promising startups, such as online supermarket RedMart.com, mobile payments provider Coda Payments and cloud-based web development platform Nitrous.io.
 
The announcement comes as many Malaysian startups find greener investment pastures overseas, especially in Singapore, the most recent being CatchThatBus and GrabTaxi (which started off in Malaysia as MyTeksi).
 
CatchThatBus raised a seven-digit amount in Singapore, while GrabTaxi secured US$15 million in Series B funding from international investors after first getting a Series A boost from a Singapore-led funding round earlier, for a sum it has not disclosed but believed to have been in the US$10-million range.
 
‘Cradle babies’ have also found a friendlier funding regime in Singapore.
 
In March 2013, social recruitment website Tribehired.com, which kicked off with pre-seed funding from Cradle, secured seed funding worth about S$696,000 (US$557,070) from TNF Ventures through Singapore’s Technology Incubation Scheme, as well as Singapore angel investors.
 
Financial services comparison website iMoney had better luck domestically, having received a Cradle grant worth more than US$155,000 as well as US$500,000 seed funding from Kuala Lumpur-based Asia Venture Group. It however secured its Series A funding out of Singapore, to the tune of US$2 million.
 
There is still a seed-stage and Series A funding crunch in Malaysia, Cradle’s Nazrin acknowledged.
 
“We have a venture capital industry that is slowly shrinking – right now we have about nine to 10 venture capital companies in Malaysia; the rest are all in private equity. The angel [investor] scene is still quite nascent, although we’re starting to slowly drive it,” he said.
 
“Given that there is a good, healthy volume of startups in Malaysia, we’re going to have to figure out ways on how to get them funding at the earliest of stages – and not just funding, but also the experience and expertise to help them to scale up so that we can have more success stories, and which in turn will create a virtuous circle of more investors coming in.
 
“Hopefully, with the example we’re setting here with GGV, there’ll be more partnerships between local and foreign investors that will help. If we only depend on government funding or what is available in the local market alone, I would say there is not enough at the seed-stage or Series A level.
 
“There is definitely a crunch,” Nazrin added.
 
World champs
 
With the Malaysian Government moving to cut back on its funding and grant allocations, Nazrin said the initiative with GGV would help also offset some of this reduction.
 
“However, this [partnership] is not just about funding but also expertise. GGV has agreed to pool its resources with ours to support deserving startups, and we will be leveraging on its keen insights into high investment ventures and its international expertise.
 
“We don’t want to just create jaguh kampong or local [village] champions; it’s about getting startups to scale beyond Malaysia’s borders.
 
“What we like about this partnership is that GGV will provide a bigger worldview to our local startups, beyond the domestic market, and perhaps help them open up opportunities to scale to the next level,” he said.
 
The partnership is the culmination of cooperative efforts between Cradle and GGV over the last two years. According to GGV founding partner Jeffrey Paine (pic above, right), his firm has been working with Cradle since 2012 for its Coach and Grow Programme (CGP) run by Proficeo Consulting.
 
Paine, whose wife is Malaysian, was also behind the establishment of the Malaysia Chapter of Silicon Valley-based Founder Institute.
 
“GGV has been investing in the South-East Asia region over the past two-and-a-half years, and has invested in about 19 companies.
 
“We have actually invested in our first Malaysian company AtticTV, but they’re incorporated in Singapore and most of the team is based in Taipei,” he said.
 
Paine said that the Malaysian startup scene is in an earlier stage than in Singapore, where the government there has been pushing the ecosystem since 2007.
 
This has resulted in some key differences between the two markets, but Malaysia already has many of the elements in place that its southern neighbour had only one or two years ago. One key difference with Singapore startups is that they tend to think global or regional from the get-go.
 
“Malaysian startups tend to want to conquer their home markets first, then move on … but you should think global or regional from Day One because sometimes getting to scale or getting to escape velocity might take a while,” he said.
 
“There are many pillars in an ecosystem, so we’re trying to fill the capital part, as well as the mentorship part, and if we can help startups with regional expansion, that’s what we can do – say set up a post in Silicon Valley,” he added.
 
Paine said that GGV has been co-investing with different sets of investors across the region, and if it does identify a Malaysian startup which it may not be able to invest in, it will still try and match it with these other regional investors.
 
“So you will also see greater diversity in the investment pool,” he said.
 
In term of the Cradle pact, the co-investments will be led by GGV, which has three companies in the pipeline that it is in discussions with, according to Paine. Two are early stage companies, while the third is a more mature company.
 
“We haven’t issued a term sheet yet, but that should come in the coming weeks or months,” he said.
 
When asked what kind of a stake GGV would take for the investment amounts it is looking at, Paine said, “If we are the ‘first-cheque’ investors, typically it would be about 15-25% -- but this is just a benchmark.
 
“Some companies which are bootstrapped and doing well on their own, would have higher valuations. It also depends on the maturity of the companies,” he added.
 
GGV is the first international co-investment partner Cradle is working with, but more will come, said Nazrin, with the MoF agency aiming to allocate 50% of its funds in co-investment initiatives by 2017.
 
“What we’d like to do over time is to encourage a reduction in dependence on government grants, and we would also like to attract private sector participation and expertise into the funding market.
 
“It’s not really about whether it’s local or foreign investors, but to us, right now the participation of the local private sector side is minimal. There’s keen interest from foreign parties like GGV, which will take a look at the Malaysian ecosystem and perhaps fund some of our startups here.
 
“At some point, our local private investors will get in on the game as well, as they see others finding value in Malaysian startups,” he added with a hopeful note.
 
Meanwhile, GGV’s Paine said that “the startup landscape in South-East Asia has changed considerably over the last three years, and the time is now to ride on this growth … we are heavily committed to doing that.”
 
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