The Securities Commission’s puzzling VC ecosystem study

• Rehashed recommendations that ecosystem players are well aware of
• Should push through announced US$490mil co-investment with private VC funds

THE Securities Commission issued a puzzling press release on Monday highlighting some key recommendations made from a study it commissioned with the hopes of strengthening the venture capital ecosystem in Malaysia.  The study was undertaken by the SC funded Institute for Capital Market Research (ICMR).

The press release was strange to me because the recommendations of the study are not new and have been discussed among ecosystem players for the last five years at least. And the SC, being a key supporter and partner of the venture capital sector, well knows the issues as well. Yet the SC says it will engage with relevant stakeholders directly and through the Malaysian Venture Capital and Private Equity Development Council (MVCDC), which it chairs, to execute the recommendations.

Has the SC not been engaged with ecosystem players in the past to help strengthen the VC ecosystem? Did they not know what to do in the past? Of course the SC and the ecosystem players knew the gaps and what needed to be done. So how is this current study any different in a meaningful manner?

Which is why the current study had some VCs scratching their heads as three VCs I spoke to agreed that the recommendations were not new. And in Oct 2018, Dr V.Sivapalan, the president of the Malaysian Business Angels Network, had written a comprehensive two-part article on the state of the Malaysian VC ecosystem and how it should be strengthened. Siva made many recommendations then, that the ICMR is echoing now.

Of course Sivapalan’s article is the synthesis of his 20 years involvement in Malaysia’s VC and startup ecosystem as one of its leaders. The ICMR did not approach its research with anywhere near the amount of passion and commitment that Sivapalan has. And that is fine. They are researchers, not entrepreneurs. But I would still expect a much better piece of work from an organization that is aiming to position itself as a top quality producer of research work.

And in fact, some of the recommendations are already being operationalised, though not in the exact manner as suggested by ICMR.

For instance, one of the recommendations is for the establishment of a fund-of-funds with matching elements and appropriate incentive mechanisms. While there is no one fund-of-fund existing, Cradle has already been operating a co-investment fund since 2014 with a total of US$46.7 million (RM190.2 million) committed to its 32 co-investment partnerships as of Dec 2016 with Cradle committing 50% of the amount.

And even earlier than that, the main government venture fund, Malaysia Venture Capital Management Bhd (Mavcap) had jointly launched a US$30 million (RM122 million) fund with Axiata Group in Nov 2014 called the Axiata Digital Innovation Fund (ADIF). And Mavcap has also set up joint funds with two other VCs, China based Gobi Partners and Silicon Valley based Elixir Capital Management.

These are examples of matching scheme funds. At the same time they are also examples of how public VC funds have become more commercially driven (specifically through the greater risk appetite of the private VC partner).

The government has long recognised that it needs its public VCs to be more commercially driven to allow for the possibility of greater returns but it has yet to come across a formula that it is comfortable with in allowing this to happen. Because, at the end of the day, the funds are still tax-payer supported and the politicians and bureaucrats are afraid of being roasted by the public should the funds fail.

Does the ICMR have an innovative solution that allows for this greater commercial focus to be unleashed? That would be great if they do but right now it is just a repeat of a long held view.

Meanwhile, the study comes against a backdrop of talk about "rationalisation" of government-owned VCs. “But we don't know the end-game for this initiative as the government has not made it clear to us what the objective is?” says a VC whose biggest fear for the industry is that it is getting more difficult to raise funds from local institutions. To make it worse, allocation from the government is shrinking.

What is the contribution of a VC sector then when there is little risk capital being put on the table? As it is, Malaysia lost the global limelight from the halo of Grab’s success in beating Uber in Southeast Asia and raising billions in funding. That ecosystem boost and global branding as the country that created Grab is enjoyed by Singapore, whose public VC arm, Vertex Ventures, was brave enough to bet on Grab when Malaysian investors shied away.

With less public VC money in the system and no clear sight of how public policy can unleash more private money in, could Malaysia end up losing another of its home grown potential global champions to another country?   

Speaking of policy levers, there is something the SC can do right away. “Actually if the SC wants to assist in operationalizing anything, it could start with moving the needle on the US$490 million (RM2 billion) announced last Oct during the Budget speech for co-investment with private VC funds into strategic and new growth areas,” says the VC. The funding is supposed to come from government-linked investment funds.

Meanwhile there were also some good tax policy proposals in recent past budgets designed to attract foreign VCs to set up shop here and also to encourage local corporates to invest in VC funds. There are good proposals that have somehow been left hanging. The SC can do well to go push those through, says the VC.

I agree with him. There is a lot of good the SC can do to help the VC ecosystem, but I am afraid this study it commissioned, is not one of them.

For a matter of record, I have listed below in full the eight recommendations made which ICMR emphasizes are to be considered interconnected and viewed in a holistic manner.

• Restructuring of existing public VCs to be more commercially-driven;
• Establishment of a dedicated government agency to bridge the funding gap for nascent and high-growth ventures;
• Establishment of fund-of-funds with matching elements and appropriate incentive mechanisms;
• Creation of a single platform for market access to assist domestic entrepreneurs overcome developmental challenges;
• Facilitation of the expansion of the venture debt sector;
• Further liberalisation of VC tax incentives;
• Establishment of a centralised information gateway to assist in research, policy formulation and industry profiling; and
• Establishment of an inter-ministerial council to ensure alignment of objectives across different ministries involved in the VC ecosystem.