As an emerging nation, Malaysia has been focusing and developing a future innovation economy. In line with this, the government has successfully set up the preconditions for the development of local venture capital (VC) industry; both in terms of providing supply and demand side incentives. As a result of this coordinated effort, the VC industry has enjoyed high growth as measured by committed funds growing by 8% annually from RM3.3 billion in 2007 to RM7.0 billion in 2017, with about half of the funds disbursed to investments.
Driven by the desire to support innovation, government venture capital investment has intensified over the years, and as a consequence this has impacted private sector participation. Based on historical data, capital contributed by the government—measured as a percentage of total fund size of the industry—has increased significantly from 40.7% in 2006 to 60.0% in 2017. Conversely, level of participation by corporate investors declined from 37.6% to 26.7% over the same period. Percentage share of other types of investors have remained horizontal throughout the period, particularly insurance and pension funds where their share of total fund size hover around 2.0% to 3.0%.
This lack of diversity, coupled with the dearth of investment opportunities has become a major obstacle to the emergence of a vibrant venture capital industry in Malaysia. Malaysia is in the preconditions phase where it is necessary to develop the intermediation and entrepreneurial skills to generate good investment opportunities. Without a diversified number of VC professionals and investment opportunities, it will be challenging for the country to create a strong VC industry.
As the Malaysian VC industry reaches its inflection point, much still needs to be done to create a vibrant and sustainable venture capital hotbed. Focusing on the supply of capital, the Institute for Capital Market Research Malaysia (ICMR) mapped out the current state of play in Malaysia’s venture capital industry, identified the challenges facing the industry and formulated possible solutions to further catalyse the growth of the industry.
The research report blended the findings of secondary research sources with independent dialogues with a host of public and private venture capitalists, accelerators, family offices, private equity players and the Securities Commission Malaysia (SC) to better gauge how the industry anticipate the way venture capital may unfold in Malaysia.
Among the major findings are the following:
- The predominant role of government in VC funding ecosystem in Malaysia has led to over-reliance on government funding which has failed to play a catalytic role in encouraging broader private sector participation.
- Limited private sector participation is not conducive to create a vibrant and sustainable venture capital hotbed. The economics of venture capital are often characterised by high risk and high returns and this requires breadth of risk capital intermediators and availability of complementary financing.
- Limited effectiveness of tax incentives, which are currently deemed restrictive, will require a thorough and holistic reassessment while being cognisant of the global evolution of the VC ecosystem.
- Lack of capacity building which are focused in terms of profiling and branding of the Malaysian VC industry and its entrepreneurs or new ventures.
The report outlines development strategies that will transform the competitive dynamics of Malaysia’s venture capital industry. The strategies aim to expand the role of the capital market in financing new ventures and small-to-medium sized entities, widening ownership of assets through further liberalisation of VC industry, as well as adopting a more centralised and integrated form of cooperation between the Government and private sector.
The recommendations include:
- Restructuring and privatisation of some existing public venture capital
- One centralised government agency to provide an equity pool for grants, seed investments & matching funds
- Establishment of a Funds-of-Fund model
- Creation of a single platform for market access
- To facilitate expansion of venture debt sector
- Review existing pre-conditions for tax incentives
- A one-stop centre which acts as an information gateway for Malaysia’s VC ecosystem
- An inter-ministerial council with a participatory approach
About this report
To produce this report, ICMR have developed proprietary analyses drawn from desktop research on both local and global venture capital markets, and other private markets, based on the industry’s leading sources of data. We also conducted dialogues and follow-on semi-structured interviews with executives at Malaysia’s public VC and private VCs, entrepreneurs, equity crowdfunding operators, as well as some of the region’s largest and influential corporate venture capitals, general partners and limited partners. In addition, this study was supported with data, insights and feedback from the SC.
As part of our engagement process, we expanded our interviews to include some private equity (PE) firms operating in Malaysia, which share very similar characteristics to VC, but with a different focus of investment and set of opportunities and challenges. Hence, for the purpose of this specific study, ICMR have excluded all later stage PE related investments; more as a reflection of the complexity of the field of general study of private markets investing.