1.
Recommendations
for
Pemandu
On
Restructuring
the
VC
and
Funding
Ecosystem
in
Malaysia
18th
June
2010
These
recommendations
were
requested
by
the
venture
capital
&
funding
Lab
of
Pemandu
and
were
prepared
by:
Dr.
V.
Sivapalan
(Adviser
–
Technopreneurs
Association
of
Malaysia)
Mr.
David
Fong
(Immediate
Past
President
–
Malaysian
Venture
Capital
&
Private
Equity
Association)
For
further
information
please
contact:
Dr.
V.
Sivapalan
Email:
siva@team.net.my

2.
1.0
INTRODUCTION
This
document
was
prepared
by
Dr.V.Sivapalan
and
Mr.
David
Fong
following
a
dialogue
with
members
of
the
Pemandu
Lab
on
15th
June
2010
as
a
response
to
the
Government
of
Malaysia’s
new
economic
policy
the
“New
Economic
Model”,
the
10th
Malaysia
Plan
(RMK10)
and
the
creation
of
a
High
Income
economy
in
Malaysia.
As
the
Government
moves
towards
formulating
new
policies
and
proposals
to
move
the
nation
towards
a
“high
value,
high
income”
economy,
the
role
of
entrepreneurs,
specifically
Technology
Entrepreneurs
(Technopreneurs)
is
of
utmost
importance
and
policies
must
be
formulated
to
foster
and
enhance
their
role
in
helping
the
nation
meet
its
new
goals.
This
cannot
be
achieved
without
the
right
Funding
and
Finance
Ecosystem
in
place
to
foster
the
growth
of
Entrepreneurs
and
SMEs,
who
have
been
correctly
identified
as
the
primary
drivers
of
a
High
Income,
High
Value
economy.
Rightfully,
the
NEM
recognises
the
role
that
entrepreneurs
can
play
in
making
the
NEM
a
success,
but
to
ensure
the
growth
of
the
economy,
GDP
growth
and
sufficiently
high
income
employment
for
its
citizens
in
the
future,
the
role
of
Technopreneurs
is
critical.
Technology
and
Technopreneurs
are
the
ones
that
will
lead
the
nation
towards
a
high
income,
high
value
economy
and
hence
policies
formulated
by
the
Government
must
be
“Market-­‐Driven”,
i.e.
policies
must
take
cognisence
of
the
market
and
the
needs
of
Technopreneurs
and
Venture
Capitalists
(VCs)
and
Private
Equity
(PE)
players
and
should
not
be
formulated
from
a
government
or
policy
perspective
only.
Only
by
meeting
market
needs
and
creating
an
environment
in
which
Technopreneurship
and
business
can
thrive
will
the
ultimate
goal
of
the
NEM
be
met.
These
recommendations
are
“market-­‐driven”
as
they
are
what
the
proposers
believe
should
be
the
policies
of
the
NEM
so
that
the
nation
can
achieve
the
ultimate
objectives
of
the
NEM
and
create
a
thriving
and
successful
Malaysia.
2.0
ECONOMIC
CONTRIBUTION
OF
VENTURE
FUNDING
It
is
a
well
established
fact
that
VC
+
Innovation
=
Economic
Activity
=
Economic
Growth.
While
there
is
scant
information
in
Malaysia,
this
thesis
is
fairly
well
established
in
the
more
mature
VC
and
PE
markets
of
Western
Europe.

3. In
the
fifth
edition
(2009)
of
the
US
National
Venture
Capital
Association
(NVCA)
study
entitled
“Venture
Impact:
The
Economic
Importance
of
Venture
Capital-­‐Backed
Companies
to
the
U.S.
Economy”
it
was
shown
that
in
2008,
“venture
capital-­‐backed
companies
employed
more
than
12
million
people
and
generated
nearly
US$3
trillion
in
revenue.
Respectively,
these
figures
accounted
for
11
percent
of
private
sector
employment
and
represented
the
equivalent
of
21
percent
of
U.S.
GDP
during
that
same
year.
Furthermore
venture-­‐backed
companies
“outperformed
the
overall
economy
in
terms
of
creating
jobs
and
growing
revenue.
Venture
capital’s
focus
on
innovative
and
high-­‐growth-­‐potential
companies
continues
to
produce
some
of
the
U.S.
economy’s
best
performers.”
The
study
also
further
reaffirms
the
crucial
role
venture
capital
plays
in
creating
high-­‐tech,
high-­‐
growth
industries
such
as
information
technology,
biotechnology,
semiconductors
and
online
retailing.
It
also
enables
the
creation
of
entirely
new
industries
from
scratch
-­‐
the
social
networking
industry
and
even
Internet
search
industry
would
not
exist
today
were
it
not
for
VC
funding.
In
the
next
decade
the
growth
of
the
renewable
energy
and
clean
technology
industries
will
also
not
be
possible
were
it
not
for
VC
funding.
Such
luminaries
as
Apple,
Amazon,
Google,
Facebook,
Genentech,
Cisco
and
Intel
are
global
giants
thanks
to
multiple
rounds
of
VC
funding.
Were
it
not
for
venture
funds,
none
of
these
companies
would
be
the
icons
they
are
today.
In
a
study
entitled
“Does
Venture
Capital
Investment
Spur
Employment
Growth?”
by
researchers
from
the
University
of
Hohenheim,
Germany;
the
Munich
IFO
Institute
for
Economic
Research
and
the
University
of
Vienna,
they
found
conclusive
evidence
that
venture
capital
is
able
to
significantly
raise
employment
growth
and
job
creation.
They
assert
that
venture
capital
is
“mainly
conducive
to
job
creation
in
new
and
innovative
firms
and
that
it
facilitates
the
process
of
structural
change
toward
the
new
economy.”
Spanish
Researchers
Luisa
Alemany
and
José
Martí
of
the
ESADE
Business
School
and
Facultad
CC.
Económicas
y
Empresariales
respectively,
analyzed
a
sample
of
VC
backed
firms
to
study
their
economic
impact,
in
terms
of
growth
in
employment,
sales,
gross
margin,
total
assets,
net
intangible
assets
and
corporate
taxes
paid
and
found
conclusive
evidence
that
VC-­‐backed
companies
have
a
greater
economic
impact
and
that
VC
funding
has
a
significant
and
positive
effect
on
this
impact.
VC
(a
subset
of
PE)
is
the
Risk
Capital
that
enables
the
crucial
funding
of
thousands
of
young
companies
each
year
mainly
engaged
in
high
growth
businesses
(usually
technology
related).
The
process
of
funding
these
companies
creates
economic
activity,
employment,
fosters
innovation
and
ultimately
economic
growth.
California
(where
Silicon
Valley
is
located)
is
a
prime
example
of
this.
As
a
State
it
has
GDP
exceeding
most
countries
These
young
companies
can
be
likened
to
the
SMEs
that
were
a
crucial
driver
of
economic
growth
in
the
early
90s
(period
of
high
growth
for
Malaysia
and
many
Asian
countries).
There
is
much
empirical
evidence
citing
the
link
between
SMEs
and
economic
growth.
Putting
it
into
perspective,
it
is
the
creation
of
a
vibrant
SME
community
that
will
lead
to
Economic
Growth
but
VC
plays
a
crucial
role
in
funding
SMEs
at
an
early
stage
thereby
enabling
entrepreneurs
to
emerge
and
commercialize
their
ideas.

4.
There
is
hence
strong
evidence
that
venture
funding
makes
a
significant
contribution
to
economic
and
gross
domestic
product
growth,
it
contributes
to
higher
employment
levels
especially
in
innovative
companies
and
is
critically
important
to
the
development
of
a
high
value
economy
and
by
association
a
high
income
economy.
3.0
KEY
ISSUES
IN
THE
VC
&
PE
INDUSTRY
Over
the
past
10+
years,
government
has
allocated
a
huge
amount
of
funds
to
VC
but
it
has
to
be
asked
whether
is
has
been
effective?
To
date,
there
has
been
little
dialog
between
Government
and
the
VC
community
as
to
the
overall
state
of
the
industry
and
what
needs
to
be
done.
Pouring
billions
of
Ringgit
into
VC
may
look
like
a
good
KPI
on
paper
but
it
is
of
no
use
if
it
is
not
effective.
3.1
VC
Issues
There
are
several
keys
issues
facing
the
VC
industry
today:
a) Insufficient
early
stage
funding
for
companies
at
early
stage.
VCs
are
generally
not
interested
because
of
the
high
risk
at
this
stage.
Also
because
of
the
structure
of
government
VC
funds,
where
the
government
loans
them
the
money
and
not
invests
in
them
(see
recommendation
x
below),
the
government
backed
VC
funds
are
reluctant
to
take
on
the
higher
risks
of
early
stage
funding.
b) Lack
of
Private
sector
involvement
in
providing
funds
to
VC.
Most
VC
funds
are
either
government
or
bank-­‐backed
funds.
However,
the
bank-­‐backed
funds
are
now
being
converted
to
PE
and
are
seldom
active
in
VC
funding.
c) Lack
of
coherent
approach
to
disbursement
of
government
VC
funds
i.e.
still
largely
managed
by
government
agencies.
Is
this
the
most
effective
way
of
disbursing
VC
funds
or
should
they
be
outsourced
entirely
to
independent
VCs
players?
The
most
successful
VCs
in
the
world
are
independently
managed
with
proper
incentive
structures.
Government
VCs
should
be
limited
to
investing
in
areas
where
private
sector
is
not
keen
i.e.
early
stage
deals
and
not
competing
with
private
sector
VCs.
d) The
state
of
the
VC
industry
needs
to
be
reviewed.
We
have
more
VCs
today
but
should
the
emphasis
be
on
quality
rather
than
quantity?
If
we
cannot
have
quality
VCs
how
can
they
‘add
value’
to
companies?
Possible
solutions
include
encouraging
partnerships
between
local
and
foreign
VC
to
bring
in
expertise
and
international
networks.
e) Government
funding
for
VC
is
running
out
–
we
cannot
expect
the
same
level
of
funding
as
before.
This
is
a
MAJOR
issue.
Hence
(b)
above,
private
sector
involvement
becomes
crucial.

5. 3.2
Private
Equity
PE
plays
a
role
in
funding
the
growth
of
SME
at
the
expansion
stage.
They
also
are
active
in
turnarounds,
M&A,
buyouts
etc,
which
can
all
result
in
more
efficient
and
profitable
businesses.
As
such
they
play
an
important
complementary
role
to
VC.
This
is
however
quite
a
new
activity
in
Malaysia
(last
5
years
or
so)
but
the
number
of
players
is
increasing.
There
are
similar
issues
to
VC:
a. Government
needs
to
promote
this
activity
via
further
incentives
etc
b. Because
it
is
less
‘high
risk’
private
sector
should
play
a
bigger
role
in
funding
–
this
should
be
a
priority.
c. Yet
Government
seems
to
be
providing
huge
allocation
to
this
sector
e.g.
RM10b
(much
more
than
to
VC)
to
Ekuinas
which
is
another
government
agency
as
opposed
to
an
established
PE
player.
d. If
there
is
indeed
RM10b
to
allocate,
some
of
this
should
go
to
the
VC
industry
–
this
is
where
the
real
economic
driver
will
come
via
creation
of
SMEs
e. The
priority
should
be
to
develop
home
grown
PE
players
rather
than
to
government
agencies.
For
example,
encourage
local
PE
firms
to
JV
with
established
foreign
PE
firms
using
the
RM10
billion
as
carrot.
4.0
RECOMMENDATIONS
The
following
are
specific
recommendations
for
Pemandu.
They
include
action
items
and
proposals
for
implementation.
4.1
Policy
Making
to
be
Industry
Driven
Many
policies
are
not
up-­‐to-­‐date,
and
not
in
line
with
the
latest
events
and
changes
in
industry
and
the
society.
For
example
new
policies
converting
grants
to
soft-­‐loans
can
have
long-­‐term
and
fundamental
impact
on
innovation
and
entrepreneurship,
yet
this
is
being
done
without
consultation
with
the
affected
industry
and
market
players
as
well
as
the
industry
associations
and
groups.
Policies
created
in
this
manner
without
proper
consultation
with
industry
or
those
that
are
counter
to
industry
recommendations
often
fail
and
do
not
benefit
industry
or
the
economy.
To
date,
there
has
been
little
dialog
between
Government
and
the
VC
community
as
to
the
overall
state
of
the
industry
and
what
needs
to
be
done.
Recommendation
Government
policy
needs
to
be
market
and
industry
driven
and
not
policy,
politics
or
institution
driven.
The
government
needs
to
engage
regularly
with
industry
and
market
players
before

6. instituting
policies
that
would
impact
on
industry.
Policies
should
be
created
to
meet
industry
needs
as
outlined
by
industry
organisations
and
players.
We
recommend
that
in
future
all
policies
that
impact
on
specific
industries
are
only
promulgated
with
full
and
complete
consultation
with
the
affected
industry
players
and
associations
so
that
they
are
indeed
industry
and
market
driven
and
meet
the
needs
of
the
market
to
ensure
the
success
of
the
policy
and
lead
to
maximum
economic
and
social
benefits.
4.2
Institutional
Structure
of
Government
Venture
Capital
Funds
The
VC
structure
in
Malaysia
is
too
rigid.
Malaysia's
VC
industry
is
predominantly
‘controlled’
by
the
Malaysian
government
via
funds
allocated
and
managed
by
entities
under
the
Ministry
of
Finance
or
other
Ministries.
The
funds
allocated
for
VC
is
also
provided
essentially
as
a
loan
and
not
an
investment.
This
is
unlike
the
funding
of
the
VC
industry
in
other
countries.
As
the
management
team
has
to
pay
back
this
loan,
it
is
strictly
not
risk
capital
and
this
makes
investing
a
difficult
proposition
for
the
VC
management
team,
especially
investing
in
early
stage
investments
which
are
considered
higher
risk
but
provide
higher
returns
as
well.
Investing
in
early
stage
ventures
is
essential
to
promote
innovation
and
commercialization
of
new
ventures.
VCs
in
Malaysia,
such
as
MAVCAP,
need
to
increase
the
risk
appetite
on
their
investment.
To
enable
them
to
do
this,
Government
funds
should
be
provided
to
VCs
as
“investment
funding”
and
not
“loan
funding”
as
it
currently
is.
Recommendation:
We
recommend
that
the
government
convert
all
its
current
VC
funding
to
“investment
funding”
instead
of
loan
funds
and
also
change
the
management
structure
of
the
VC
management
companies
by
rewarding
successful
managers
with
real
VC
type
rewards
including
the
20%
carried
interest
usually
associated
with
VC
management
globally
and
industry
practice
management
fees
of
2.5
to
3
%
per
annum
based
on
the
size
of
the
funds
(For
size
of
funds
above
RM250
mil,
the
lower
fees
can
apply).
4.3
Grant
&
Soft
Loan
Funding
Grant
funding
mechanism
and
organizations
are
under
the
wrong
management.
-­‐
Creative
Content
fund
under
Bank
Simpanan
not
efficiently
managed
-­‐
SME
Bank
might
not
be
the
right
organisation
to
manage
technology
soft
loans
Soft
loans
and
grants
should
be
managed
by
the
specific
expert
agency.
For
example
Cradle
Investment
Programme
(CIP)
to
manage
ICT,
Biotechnology,
Green
and
general
technology
funding;
Multimedia
Development
Corporation
(MDeC)
should
be
the
agency
to
manage
all
ICT
loans
and
grants,
including
Creative
Content;
Malaysia
Debt
Ventures
Berhad
(MDV)
to
manage
ICT
and
related
industries
for
project
financing;
Malaysian
Biotechnology
Corporation
(BiotechCorp)
to
manage

7. Biotechnology
and
Green
industry
and
MTDC
to
manage
funds
for
Life
Sciences
and
Biotechnology
industry.
Over
the
last
few
years
these
agencies
have
developed
the
required
experience
and
expertise
to
manage
funds
better
than
a
traditional
bank.
Government-­‐owned
developmental
banks
like
SME
Bank
or
BSN,
are
better
suited
to
more
brick
and
mortar
traditional
domains
not
the
technology
domain
for
which
they
don’t
have
adequate
expertise.
This
will
also
ensure
that
the
funds
are
better
publicized
and
better
utilized
for
economic
ends,
with
better
value-­‐add
for
market-­‐driven
deals
and
future
funding.
Recommendation:
a)
We
recommend
that
all
grants
and
soft
loans
be
managed
by
the
respective
expert
agencies
and
not
by
Banks
who
do
not
have
the
required
industry
experience
or
expertise.
b)
We
further
recommend
that
existing
soft
loans
or
grants
managed
by
the
non-­‐expert
agencies
or
banks
be
transferred
to
the
expert
agencies
for
better
management.
c)
Additonally,
to
ensure
that
the
procesess
and
procedures
are
simplified
and
uncomplicated,
we
recommend
that
there
be
a
standardised
format
within
all
agencies
for
grant
and
soft
loan
applications.
4.4
Government
Mandate
for
Pension
Fund
Investments
Additionally,
the
Government
should
encourage
Pension
Funds
to
invest
in
VCs.
Even
a
1%
allocation
will
amount
to
more
than
RM3
billion
in
new
funds
from
the
EPF
alone.
VCs
together
with
industry
associations,
such
as
Malaysian
Venture
Capital
and
Private
Equity
Association
(MVCA)
and
the
Technopreneurs
Associaiton
of
Malaysia
(TeAM),
could
guide
Kumpulan
Wang
Simpanan
Pekerja
(KWSP)
and
other
pension
funds
in
setting
up
the
framework
which
can
achieve
VCs
investment
result,
as
well
as
adequate
risk
management.
Recommendation:
a)
We
recommend
that
Pension
Funds
be
mandated
to
allocate
at
least
1%
of
their
investment
funds
towards
VC
investments
to
further
promote
the
growth
of
the
VC
industry
as
well
as
entrepreneurial
and
innovative
companies
in
Malaysia.
b)
These
investments
do
not
have
to
be
made
on
their
own
but
via
a
Fund
of
Funds
method
as
mentioned
below.
4.5
VC
&
PE
Fund
of
Funds
Currently
the
government
funds
the
VC
industry
by
setting
up
government
owned
funds
like
Mavcap
or
MTDC
through
which
it
provides
VC
funding.
An
alternative
to
this
is
the
Fund
of
Funds
(FoF)

8. approach.
In
a
FoF
approach,
the
Government
allocates
a
certain
amount
of
money
for
VC
&
PE
investments
and
sets
up
a
FoF
which
can
be
managed
by
a
government
agency.
This
FoF
agency
will
invest
these
funds
in
private
sector
VC
funds
who
provide
matching
funds.
This
method
ensures
the
growth
of
private
sector
VC
funds
and
also
provides
a
huge
incentive
for
the
private
sector
to
enter
the
VC
industry.
Part
of
the
RM10
bil
Government
allocation
for
Equinas
should
be
allocated
towards
this
FoF
as
this
is
what
will
drive
the
future
of
economic
growth
in
Malaysia.
Recommendations:
a)
We
recommend
that
the
Government
allocate
RM3
billion
for
a
FoF
for
the
period
of
the
RMK10.
At
least
RM2
bil
should
be
for
VC
while
RM1
bil
can
be
allocated
for
a
PE
FoF.
b)
Pensions
funds
can
add
to
the
total
amount
available
by
allocating
1%
of
their
fund
towards
VC
investing
via
the
FoF
proposal.
c)
The
FoF
should
then
invest
a
minimum
of
RM200
mil
to
RM300
million
in
several
private
sector
initiaited
VC
funds
in
the
proportion
of
5:1
(i.e.
for
every
RM1
million
that
the
private
sector
invests
in
the
fund
the
Government
will
invest
RM5
million).
d)
There
should
be
a
requirement
that
any
VC
fund
manager
who
wishes
to
avail
himself
of
this
FoF
has
at
least
one
collaboration
with
a
Tier-­‐1
foreign
VC
which
also
invests
in
the
fund.
This
foreigh
investment
will
count
towards
the
ratio
as
the
private
sector
investment
in
the
fund.
4.6
Revamp
Venture
Funding
There
is
a
serious
need
to
revamp
the
seed
and
venture
capital
funding
ecosystem
to
better
support
budding
entrepreneurs.
We
have
already
made
recommendations
on
the
structural
issues
in
relation
to
the
VC
industry
above.
In
addition
to
structural
issues,
there
is
also
a
need
to
review
the
current
funding
ecosystem,
not
just
the
VC
funding
ecosystem,
which
does
not
cater
to
all
stages
of
the
business
enterprise.
Table
1,
on
the
next
page,
shows
the
lifecycle
stages
of
the
entrepreneurial
venture
and
the
type
of
funds
required
at
each
stage.
We
also
indicate
in
the
table
the
funds
that
were
made
available
under
RMK9
and
what
should
actually
be
available
for
the
companies.
There
is
a
clear
“gap”
in
the
funding
ecosystem
primarily
at
the
early
growth
(or
commercialisation)
stage
where
there
is
only
one
source
of
funding
available
for
these
enterprises
–
Cradle
CIP500
and
that
too
was
only
created
in
2010.
This
lack
of
funds
has
held
back
the
growth
of
entrepreneurial
ventures
in
Malaysia.
The
billions
of
Ringgit
expended
on
research
and
development
has
created
enough
patents
and
prototypes
but
the
lack
of
funds
for
commercialisation
meant
that
these
patents
were
not
exploited
and
thus
the
nation
derived
no
benefit
from
the
billions
spent.

9. R&D
must
be
exploited
to
create
economic
value
like
GDP
growth,
employment
and
the
foreign
exchange
gains
via
the
export
of
technology
products
and
services.
Exploitation
of
R&D
means
the
commercialisation
of
patents
and
prototypes
and
unless
funding
is
available,
there
will
be
no
commercialisation
and
hence
no
economic
value
is
created.
Additionally,
in
the
latest
revamp
of
funding
for
RMK10
even
the
existing
grants
are
being
converted
to
soft
loans
and
this
will
cause
serious
damage
to
innovation
and
R&D.
Conceptually,
a
loan
is
something
that
must
be
paid
back
and
this
can
only
be
done
when
there
is
revenue.
In
the
Pre-­‐Seed,
startup
(Seed)
and
especially
in
the
R&D
stage,
there
is
no
revenue
and
hence
there
is
no
source
of
funds
to
repay
a
loan,
even
at
very
low
interest.
This
means
the
Entrepreneur
has
to
either
find
a
source
of
funds
or
more
likely
will
not
take
the
loan
and
this
means
there
will
be
far
less
R&D
being
done
in
Malaysia.
This
will
not
augur
well
for
the
NEM
which
is
based
on
an
innovative
economy
and
society.
Soft
loans
are
suitable
for
companies
at
the
expansion
stage
onwards
as
they
will
at
that
time
have
a
source
of
revenue
to
repay
the
loan.
In
terms
of
VC
funds
most
of
the
Government
VC
funds
are
overly
cautious
with
their
investments
because
of
the
structure
of
the
funds
mentioned
above
and
hence
take
lower
risks
than
VCs
should.
This
also
does
not
foster
entrepreneurship.

10.
Table
1:
The
Lifecycle
Stages
Of
The
Entrepreneurial
Venture
Stage
&
Pre-­‐Seed
Stage
Seed
&
Early
Expansion
Stage
Mezzanine
Mature
Stage
Requirements
Growth
Stage
Stage
Definition
The
idea
stage
With
a
prototype,
With
successful
The
expansion
is
Co
is
already
where
small
Entrepreneurs
initial
successful
and
mature,
amounts
of
start
the
commercialization
the
Co.
is
doing
business
is
funding
is
commercialization
Entrepreneurs
well
with
stable
and
required
to
build
process
raise
additional
revenues
and
while
revenues
a
prototype
for
funds
to
expand
profits.
It
may
and
profits
are
commercialization
and
grow
the
seek
a
listing
on
consistent,
business
regionally
a
stock
exchange
there
is
no
or
globally
or
there
may
be
longer
the
a
trade
sale
of
potential
for
the
venture.
high
growth
rates.
Funding
currently
R&D
grants,
Cradle
CIP500
Venture
Capital,
VC,
IPO,
Private
Private
Equity,
available
PreSeed
Grants,
Soft
Loans
Equity,
Loans
Loans
Self
funding
Who
provides
Mosti,
MDeC,
Cradle
VCs,
MDV
VC,
Public
via
an
Private
Equity,
funding
Cradle,
Biotech
IPO,
Private
Banks,
MDV
Corp,
Founders
Equity,
Banks
Recommended:
R&D
grants,
Early
stage
VC,
Venture
Capital,
VC,
IPO,
Private
Private
Equity,
Type
of
funding
PreSeed
Grants,
Angel,
Seed,
Corporate
Equity,
Loans
Loans
Self
funded
R&D+C
Strategic
commercialization
investments,
Soft
funding
Loans
Recommendation:
Mosti
(R&D
Cradle,
MDeC,
VC,
GLCs,
MDV,
VC,
Public
via
an
Private
Equity,
Who
should
Grants),
Cradle,
Biotech
Corp,
Soft
Loan
via
IPO,
Private
Banks,
MDV
provide
funding
MDeC,
Biotech
MTDC,
VC,
Angels
Expert
Agencies,
Equity,
Banks
Corp,
MTDC,
Cradle
Founders

11.
Recommendation
Grants,
seed,
venture
capital
funds
and
soft
loans
need
to
be
restructured
based
on
the
lifecycle
of
the
entrepreneurial
firm:
We
recommend
the
following:
a) That
R&D
grants
be
maintained
and
provided
for
researchers
and
Entrepreneurs
so
that
the
element
of
risk
taking
and
the
creative
enterprise
be
maintained
and
continued.
b) That
R&D
grants
include
an
element
of
commercialisation
so
that
the
product
or
prototype
that
is
created
via
the
research
can
be
commercialised
to
create
economic
value.
There
is
little
economic
value
in
creating
IP
if
there
is
no
attempt
to
exploit
that
IP
via
commercialisation
efforts.
We
propose
that
up
to
25%
of
an
R&D
grant
be
allowed
to
be
used
for
commercialisation
activities.
c) We
also
propose
that
the
Government
maintain
the
existing
Pre-­‐Seed
funding
under
the
respective
agencies
(Cradle
and
MDeC)
to
encourage
the
formation
of
entrepreneurial
ventures.
Funding
at
this
stage
should
be
maintained
at
RM150,000
per
venture.
d) However,
to
ensure
that
the
early
growth
stage
funding
gap
is
filled
we
propose
that
the
Government
provide
additional
funds
for
commercialisation
of
R&D
and
Pre-­‐seed
ventures.
We
propose
a
fund
size
of
RM
50
million
a
year
(RM250
million
over
the
RMK10)
to
provide
funding
of
between
RM500,000
to
RM
1
million
per
company
at
this
stage.
This
will
encourage
growth
of
the
venture
and
enhance
the
contribution
to
economic
value
and
employment.
e) At
the
expansion
stage
we
recommend
VC
funding
and
soft
loans
and
propose
that
the
soft
loans
be
managed
by
the
respective
expert
agencies.
f) Additonally
we
recommend
that
the
Government
review
the
policy
of
converting
R&D
and
PreSeed
grants
to
soft
loans
as
we
believe
this
is
a
mistake
and
will
seriously
affect
R&D
and
risk
taking
in
the
country.
g) We
also
recommend
that
Cradle,
as
the
only
organisation
that
funds
all
technology
sectors,
be
allocated
RM150
million
to
provide
conditional
convertible
grant
funding
(with
an
option
to
convert
to
equity
upon
success
or
defined
milestones)
for
both
seed
and
pre-­‐seed
funding,
to
cover
the
funding
gap
at
that
stage,
from
the
period
of
ideas
conception
to
18
months
post-­‐commercialization.
This
provides
an
incentive
to
produce
more
successful
outcomes
for
fund
recipients
and
for
Cradle
to
have
an
“upside”
should
its
recipient
companies
do
well.
This
will
also
ease
the
burden
of
the
Government
in
the
future
as
it
encourages
self-­‐sustainability
and
also
the
re-­‐circulation
of
existing
funds
to
fund
more
companies.

12. 4.7
Private
Sector
involvement
in
VC
Funding
There
is
a
dire
lack
of
private
sector
involvement
in
VC
funding
or
investments
in
innovative
companies.
While
the
government
can
provide
funding
for
the
short
term,
in
the
long
term
the
private
sector
has
to
play
a
bigger
role.
While
the
old
economy
companies
may
be
reluctant
to
invest
because
of
a
lack
of
domain
knowledge,
the
mature
technology
companies
should
be
encouraged
to
play
a
bigger
role
in
the
sector.
These
companies
should
be
offered
incentives
to
become
angel
investors
by
investing
in
or
buying
out
smaller
technology
start-­‐ups
or
licensing
and
commercializing
local
university
R&D.
This
will
encourage
a
start-­‐up
culture
of
“build
to
sell”
and
provide
alternative
exits
for
both
entrepreneurs
and
VCs,
other
than
IPOs.
The
excitement
of
alternative
“exits”
via
trade
sale
will
drive
the
start-­‐up
culture
and
a
more
market-­‐driven
orientation,
focused
on
the
needs
of
current
big
players.
Exits
also
allow
for
successful
start-­‐ups
to
become
angel
investors;
Recommendations:
a) We
recommend
that
the
Government
encourage
individuals,
private
sector
companies
and
Government
Linked
Companies
(GLCs)
to
invest
in
startups
by
providing
double
tax
benefits
for
all
investments
in
such
enterprises.
A
measure
of
control
can
be
exercised
by
only
providing
these
tax
benefits
for
companies
that
are
MSC
or
Bionexus
Status,
Green
enterprises
certified
by
the
Ministry
of
Energy,
Water
and
Green
Technology
or
those
that
are
prior
recipients
of
a
government
sponsored
R&D
grant,
PreSeed
or
Commercialisation
grant
(like
MDeC
and
Cradle
grants)
and
also
VC
backed
companies.
b) Also
we
recommend
that
any
profits
or
gains
from
such
investment
be
fully
tax
exempt.
4.8
Business
Growth
Fund
The
Government
has
announced
the
Business
Growth
Fund
in
RMK10
which
will
be
parked
under
MTDC.
It
is
not
clear
how
this
fund
will
be
invested.
Recommendation:
This
fund
should
be
focused
on
technology
companies
which
are
between
2-­‐5
years
old,
hence
providing
the
bridge
for
young
companies
to
mature
themselves
and
make
themselves
more
attractive
to
VCs,
once
their
revenues
are
bigger
and
their
track
record
stronger.
This
also
prevents
any
overlaps
or
duplication
in
funding
areas
with
other
funds
and
VCs.
4.9
Bank
Funding
Banks
in
Malaysia
currently
do
not
provide
funding
for
technology
companies
primarily
because
these
banks
do
not
have
the
domain
expertise
or
experience
to
evaluate
technology
proposals
and
also
because
of
the
lack
of
traditional
collateral.
However,
the
more
mature
technology
companies

13. are
ready
for
such
funding
and
can
sustain
bank
loans
through
their
revenues.
If
banks
continue
to
abstain
from
funding
technology
companies
growth
of
these
companies
will
be
stunted.
The
human
capital
to
assess
technology
projects
is
already
available
in
the
venture
capital
space
and
they
have
domain
in
assessing
technology
deals,
it’s
just
a
matter
of
training
them
up
in
credit
methodology
and
suiting
the
financing
to
the
needs
of
technology
companies.
In
this
way,
you
shift
the
burden
of
financing
tech
companies
to
the
private
sector
and
not
just
have
Government
agencies
like
MDV,
SME
Bank
or
BSN
carrying
it
out.
Together
with
this,
since
Bank
Negara
is
already
providing
funds
to
Commerce
Asset
Ventures
(CAV)
and
Mayban
Ventures
(MV)
for
investment
for
start-­‐up
and
expansion
stages,
there
is
no
reason
to
not
use
the
expertise
available
within
there,
to
provide
tech
financing
under
the
banking
system.
Recommendations:
a) We
recommend
that
“technology
financing
windows”
be
introduced
at
local
banks
to
fund
non-­‐collateralized
project
financing
for
technology
companies,
particularly
targeted
at
companies
which
are
below
7
years
old
and
that
this
is
initially
done
via
CIMB
and
Maybank
as
these
banks
have
sufficient
VC
and
PE
experience
to
evaluate
technology
deals.
b) To
encourage
the
banks
to
provide
loans
to
technology
companies
we
propose
that
the
Government
provide
80%
loan
guarantees
for
such
loans.
4.10
Simplifying
Bankruptcy
Laws
To
promote
a
vibrant
entrepreneurial
ecosystem
we
need
to
simplify
bankruptcy
laws
pertaining
to
companies
and
individuals.
This
is
even
more
important
especially
if
soft
loans
are
part
of
the
funding
equation.
The
current
law
provides
for
a
minimum
of
a
5-­‐year
bankruptcy
period
but
with
no
automatic
release.
Without
an
automatic
release
mechanism
and
a
“clean
slate”
thereafter,
risk-­‐
taking
and
entrepreneurship
will
be
curtailed
as
few
entrepreneurs
will
take
on
the
risk
of
a
loan
in
their
venture.
For
many
bankrupt
Entrepreneurs
the
current
laws
have
become
a
“life
sentence”
just
for
taking
an
entrepreneurial
risk.
This
does
not
foster
Entrepreneurship
but
instead
seriously
constrains
it.
These
are
the
very
risk
takers
we
need
more
of
and
if
they
remain
bankrupt
a
key
source
of
future
providers
of
economic
growth
will
be
left
idle.
This
is
a
huge
waste
of
resources.
A
comparison
with
the
more
entrepreneurial
nations
shows
the
scale
of
difference
in
their
bankruptcy
laws
compared
to
Malaysia’s.

14.
Country
Bankruptcy
Period
Automatic
Discharge
Australia/New
Zealand
3
years
but
small
bankruptcies
Yes
can
be
earlier
USA
No
specific
period
but
generally
Yes
between
1
and
3
years
Holland
3
years
Yes
UK
3
years
Yes
Canada
9
months
with
some
conditions
Yes
(creditors
can
object
with
good
reason)
Recommendation
a) We
propose
that
the
bankruptcy
laws
in
Malaysia
follow
the
more
entrepreneurial
economies
such
as
UK,
Holland,
Australia
&
NZ
and
the
USA.
Malaysia
should
change
its
bankruptcy
period
to
a
maximum
of
3
years
and
then
an
automatic
discharge
thereon.
b) For
bankruptcies
for
principal
amounts
owing
below
RM500,000
we
propose
a
period
of
2
years
with
an
automatic
discharge
thereon.
4.11
Corruption
and
its
impact
on
Technology
Companies
The
biggest
user
and
‘buyer’
of
technology
today
is
the
government
followed
by
the
GLCs
and
Government
Agencies.
The
private
sector
is
picking
up
but
is
small
in
comparison.
If
there
was
a
meritorious
system
through
which
real
technology
companies
could
bid
for
and
obtain
government
contracts
for
real
value,
we
would
be
creating
many
more
success
stories
and
these
companies
would
be
able
to
use
the
revenues
and
profits
from
Malaysia
to
successfully
penetrate
the
global
market.
However
because
of
inherent
corruption
in
the
system
and
because
of
the
intangible
nature
of
technology
especially
software
and
solutions,
most
technology
companies
that
bid
through
middle
men
and
favoured
parties
often
are
paid
only
30
to
50%
of
the
contract
value,
thus
depriving
them
of
profits
that
could
be
used
to
grow
the
business
and
hire
more
people.
Corruption
is
inherent
in
the
technology
arena
as
it
is
in
every
other
sector
and
does
not
foster
a
competitive
industry
sector
and
does
not
provide
maximum
benefit
to
society.
Recommendation
a)
All
projects
above
RM250,000
(Ringgit:
Two
Hundred
and
Fifty
Thousand)
to
be
awarded
by
open
tender

15. b)
All
companies
to
be
allowed
to
tender
direct
without
middlemen
c)
Companies
to
be
shortlisted
and
tenders
awarded
on
merit,
based
on
experience
and
expertise
only
d)
Tender
selection
or
evaluation
panel
members
names
to
be
provided
on
the
relevant
Ministry’s
website
for
complete
transparency
e)
Decisions
on
awards
to
be
transparent,
with
reasons
given
for
successful
awards
f)
All
tender
awards
to
be
posted
on
the
relevant
Ministry
website
for
transparency
g)
Both
directors
and
shareholders
of
any
company
that
fails
to
complete
an
award
to
be
placed
on
a
blacklist
and
not
be
awarded
future
tenders.
This
will
ensure
that
all
tender
awardees
perform
their
part
of
the
contract
as
failure
to
do
so
will
lead
to
no
future
contracts.
This
should
serve
as
sufficient
deterrent
for
future
tenderers.
4.12
Sustainability
of
Growth
of
Green
Investments
For
most
green
investments
there
is
a
tangible
benefit
in
reducing
electricity
costs.
However,
electricity
is
considered
‘cheap’
in
Malaysia
and
is
controlled,
thus
the
payback
period
for
technology
related
adoption
would
naturally
be
longer.
Regardless,
fossil
fuels
are
expected
to
be
more
expensive
and
are
a
diminishing
resource.
The
Kyoto
Protocol
provides
for
another
source
of
revenue
in
the
form
of
carbon
credits.
Projects
under
the
Kyoto
Protocol
are
termed
Clean
Development
Mechanisms
(CDM).
The
cost
of
registering
CDM
and
the
associated
time
to
do
it
is
quite
substantial
and
requires
very
capable
project
design
skills
not
easily
available
in
Malaysia
or
the
region.
Although
banks
can
provide
financing
for
green
projects,
the
amount
of
equity
required
is
still
big
for
most
of
the
local
VCs.
For
example,
a
composting
facility
to
treat
200
mt
of
organic
waste
a
day
could
cost
RM
10-­‐30
million
depending
on
complexity
and
technology
used.
Banks
still
require
at
least
a
20:80
equity
to
debt
ratio,
and
this
would
mean
an
equity
investment
of
at
least
RM
2
million
(low-­‐technology
solution)
to
RM
6
million
(higher
value
technology
solution).
Investment
returns
need
to
pass
hurdle
rates,
and
a
buyback
of
both
the
off-­‐take
fertilizer
and
carbon
credits
is
important
for
a
bank
to
finance
projects
like
this.
However,
bio-­‐organic
fertilizer
adoption
continues
to
be
challenged
by
chemical
fertilizer
producers
and
is
thus
a
further
distortion
of
the
industry.
Since
banks
usually
do
not
have
expertise
in
assessing
green
investment,
hence
this
is
better
done
with
a
Special
Purpose
Vehicle
such
as
MDV.
In
terms
of
VC
funding,
VCs
will
be
there
if
there
is
money
to
be
made.
The
action
item
is
to
first
show
them
the
money,
by
starting
with
grants
and
seed
or
commercialisation
funding,
and
the
industry
needs
to
grow.
Then
the
VC
money
will
start
coming
in.
In
parallel,
government
should
consider
a
carrot
approach
so
as
not
to
construct
regulation
that
could
kill
carbon
credits.
As
of
today,
the
government
has
taken
steps
to
reduce
green
adoption
risks
–
lending
facilities,
some
credit
guarantee
and
policies.

16.
Recommendation
a)
We
recommend
that
the
Government
set
up
an
investment
fund
outsourced
to
fund
managers
familiar
with
carbon
funding.
These
can
be
in
the
form
of
joint
ventures
between
Malaysians
and
foreign
fund
managers
many
of
whom
can
only
be
found
outside
of
Malaysia
and
most
probably
in
London
or
Hong
Kong,
the
two
most
established
centres
for
carbon
trading
and
financing.
4.13
Roadmap
for
VC
Industry
There
is
currently
no
clear
road
map
for
the
development
of
the
VC
industry.
Right
now,
we
have
multiple
government
agencies
managing
VC
funds,
having
their
own
approach.
We
need
a
coordinated
approach
-­‐
a
single
person/entity
who
is
charged
with
understanding
the
issues
and
creating
a
road
map.
This
person/entity
must
have
the
support
of
government
at
the
highest
level
and
be
able
to
get
cooperation
from
across
ministries.
He/she
must
be
there
for
the
next
5
-­‐10
years
to
oversee
the
implementation.
Recommendation:
a) That
the
Government
set
up
a
single
entity
with
an
experienced
VC
or
PE
individual
to
oversee
the
development
of
the
VC
and
PE
industry
and
to
plan
for
the
future
and
monitor
the
present
developments
and
proposals.
b) We
also
recommend
that
this
entity
be
placed
directly
under
the
Prime
Minister’s
department
as
it
is
critical
to
ensure
that
this
person
obtain
the
cooperation
of
all
ministries
and
agencies
to
ensure
the
success
of
the
VC
&
PE
industry.
5.0
Conclusion
We
fully
support
the
formulation
of
policies
and
action
plans
to
enhance
the
funding
ecosystem
in
Malaysia
as
this
is
necessary
for
the
country
to
remain
competitive
in
a
highly
sophisticated
and
globalised
world.
To
compete
more
effectively
we
have
to
adapt
and
change.
Despite
the
many
years
of
prosperity
most
Malaysians
remain
low
income
wage
earners.
The
future
of
the
country
depends
not
just
on
entrepreneurs
but
more
so
on
Technopreneurs
to
lead
the
way.
Technopreneurship
is
the
key
to
the
future
of
the
country,
towards
achieving
a
high
income
and
high
value
economy.
However,
without
a
vibrant
and
sustainable
funding
ecosystem
Technopreneurship
cannot
grow
and
hence
it
is
critical
that
we
ensure
that
we
have
the
best
funding
ecosystem
available.
Government
needs
to
be
engaged
continuously
with
industry
and
academia
so
that
together
we
can
make
Malaysia
a
better
place
to
work
and
live.
We
hope
that
our
contribution
will
assist
in
the
creation
of
a
better
Malaysia.