Malaysia Will Launch A RM2 Billion VC/PE Matching Grant To Support Startups

Ben Lim Funding, Investments, Investors, Startup Grants, Startups, Venture Capital Leave a Comment

Nov 2, 2018 is a great day for Startups in Malaysia, and turbulent day for venture capital in Malaysia on the announcement of the matching grant. Let me explain what’s good and bad about it. But before that, here is the official statement from the government of Malaysia:


135. TWO: Government-Linked Investment Funds will similarly allocate RM2 billion in matching funds to co-invest with the private equity and venture capital funds. This Fund will focus on strategic sectors and new growth areas for Malaysia.


https://www.thestar.com.my/news/nation/2018/11/02/here-is-the-full-speech-by-finance-minister-lim-guan-eng-during-the-tabling-of-budget-2019/

The Announcements Affecting the Malaysian Startup Industry

The new government is quite supportive of the Startup industry and private funding. In the new budget, RM2 billion in matching grants will be giving local startups a wider and better selection of funding options. However, the game has also changed as now, ‘grantopreneurs’ are being left out as the funding decision now lies with the private sector – which is a step in the right direction for investment prudence on the government side of things.

That’s not all. There is also RM50 million to be put into P2P lending, Equity crowdfunding, so that will also help to push out funding to Startups.

Continuation of Venture Capital, Venture Debt & Grants by Government Agencies

The existing agencies supporting startups in loans, venture debt, grants, and venture capital seem to be continuing to do so, but with an announcement to merge up:

134. ONE: The many venture capital funds managed by Government agencies – Malaysia Technology Development Corporation, Malaysia Debt Ventures Bhd, Malaysia Venture Capital Management Bhd, Kumpulan Modal Perdana Sdn Bhd and Cradle Fund Sdn.Bhd, will be streamlined and made more efficient in delivering capital to companies in various stages of financing needs.

The Star

Startup R&D Grants

For Startups that may need R&D budgets in the realm of digitalisation, there is also the “
High Impact Fund (HIF) with a specific emphasis of Industry4.0 initiatives. This includes activities such as Research & Development, initiatives to obtain international certification and standards, modernizing and upgrading of facilities and tools and licensing or purchase of new or high technology.”

Proptech

And good news for prop-tech Startups! They “
will be approving private sector driven ‘Property Crowdfunding’ platforms which will serve as an alternative source of financing for first time home buyers.”

The RM2 Billion Matching Grant for Venture Capital & Private Equity

So, what does it mean to have so much money in the local startup funding system? How does it affect Startups, venture capital and private equity? Is it good or bad? Or both?

Announcement of RM2 billion matching grants for Startups via PE and Venture Capital

Alright, here’s why it could be good (and for who) in my point of view. More money in the system means more chances for struggling startups to get funding. The truth is, that the best startups do not find it too hard to find investments – especially these days, where the market is starting to be quite aware of Accelerators, Angel Investment, and Venture Capital. Investors are also very much aware of the potential returns of Startups and are starting to pour in cash to alleviate their growing high-risk, high-return appetites. 

Who else is it good for? Well, since it is a matching grant, investors that are eligible to invest alongside would have, perhaps, 50% of the capital investment from the government given free to the Startup. While the mechanics or even the ratio matched are yet to be confirmed, we have seen the government do 1:1 matching. There is no word yet on the street what kind of matching grant it will actually pan out to be.

It is also great for the government to be able to get data on the market – for which they have traditionally been in the dark with. Sure, they had VCs reporting to them. But not all VCs and/or their investors want to setup shop locally. The growth of such high-tech companies can only boost the economy in the future. I should know, because these are the kinds of companies NEXEA is hunting and funding – the tech giants of the future.

And why would something so good be bad at the same time? Basically, it depends on how the matching grant will be administered. 

I am guessing most of it would go to Private Equity, where the risk is much lower, and the amounts required are much higher. That only makes sense – but it is also just an educated guess. Then, it should be allocated to the later stage VCs series A & beyond. Finally, to Seed stage & below VCs. Definitely not to Angel Investor Networks or Accelerators as they are not licensed by the Securities Commission of Malaysia. This is good news for NEXEA as we are a locally registered VC, thankfully!

The bad part comes, if, for example, most of that funding goes to the late stage VCs or early stage VCs. That could pretty much flood the early and late stage VC market with cash that Startups do not actually need. It can be bad for Venture Capitalists who will have to deal with over-fluctuated valuations while investing, and normal valuations when exiting – causing what we call down-rounds which have caused many unicorns to lose billions of dollars in investment money

It will also be bad for unsuspecting, inexperienced Startup founders who raise at extremely high valuations. For example, if their revenues do not justify their valuation by a huge gap, this is what we at NEXEA call a high-valuation trap. These Startups have great speed in ‘making it’ but have little consistency in ‘keeping it’. What happens next (we’ve witnessed the horror many times over), is that the startups’ chances of producing enough revenues for the next round of funding plummet to nil.  And because they do not produce enough revenues, in the long-term, their chances of getting funding tend to be very, very low. 


These Startups have great speed in ‘making it’ but have little consistency in ‘keeping it’.


So, be warned, startups! Try to avoid raising at high valuations too far from your actual value. It will one day come and bite you in the form of giving up more equity, years of stressful fundraising attempts, or even the death of a perfectly workable Startup.

That’s all the time I have to share with you guys today. If you have any thoughts or questions, please let me know in the comments below!

Ben Lim

Partner at NEXEA
I am the Founder/Partner at NEXEA, a startup investment group in Southeast Asia. We have invested in idea stage to early stage investments around the region.

We fund the best Founders and provide them with a certain edge via mentoring by the best investors (look them up!).