Cover Story: A central banker’s venture capital experience

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on October 16, 2017 - October 22, 2017.
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When Tan Sri Dr Lin See-Yan retired in 1994 after an illustrious career as a central banker, a friend challenged him to try his hand at running a commercial bank. The vagaries of such an enterprise, however, were nothing new for the former deputy governor of Bank Negara Malaysia.

Instead, Lin’s passion for technology and the opportunity to hone his business acumen led him to the thrilling domain of venture capital. “I spent four years at Pacific Bank after retiring. But the bank had to be sold because the owner was OCBC Bank and the regulations barred foreign entities from holding more than one bank. So, after Pacific Bank was sold to Malayan Banking Bhd, I decided to give venture capital a try,” he says.

“I did it on the side while doing my financial consultancy work. I had always wanted to dabble in venture capital, from when I was an Eisenhower fellow in 1986. Eisenhower fellows are very unique animals — they are given a scholarship to study in the US and the course allows them to do whatever they want in the country.

“So, I chose to study venture capital. That took me to Silicon Valley. The place I really enjoyed was Colorado Springs, Denver, where venture capital was big. That was where I learnt it all — how venture capitalists price their risks, how they price start-ups, how they look for start-ups and how they narrow them down to the one out of thousands of proposals.”

It was a time when the US venture capital industry was thriving. There was a mad dash to invest in new endeavours and venture capital materialised as one of the few means of financing an idea or innovative technology. This form of financing also earned a reputation as the engine of the new economy, which heralded the rise of the computer age and the internet boom.

For the renowned economist and chartered statistician, this was an exciting opportunity, despite hailing from the highly regulated world of banking. The inherent risks of investing in early-stage businesses was no deterrent — taking clever and calculated risks was just one of his myriad interests, which include art, economics, literature and philosophy.

“I found being a venture capitalist more interesting than commercial banking. Having done central banking policies, venture capital was a walk in the park,” says Lin, whose list of accomplishments includes serving as an adviser to six of the country’s prime ministers during his stint at Bank Negara, which he joined in 1961 at the age of 21. He was also adviser to Malaysia’s first finance minister, Tun HS Lee, and subsequent finance ministers as well as the founder director of Khazanah Nasional Bhd.

Lin has held advisory roles in the governments of China and Singapore, among others, and positions on numerous boards of companies, ranging from plantation concerns to financial services outfits. Over the years, he has invested in more than 10 companies, from start-ups to mid-stage enterprises, including the ones he founded.

As usury laws limit the amount of interest banks can charge on loans despite the risk profile of the borrower, venture capital is one of the few ways to fund businesses that have nothing but good ideas as collateral, says Lin. “Some failed, but some were a success. A few that failed were ahead of their time.”

His biggest success story is home-grown recruitment company JobStreet Corp Bhd. The company, he says, was established in 1997 with capital of only RM10,000. But in 2014, it sold its online recruitment business to Australia-based SEEK Ltd for RM1.89 billion.

A spectacular failure, yet Lin’s most gratifying venture, was his investment in EcoGlove Ltd Hong Kong — a recyclable rubber glove manufacturer. At the height of its business, the prestigious Johns Hopkins Hospital in the US was one of its clients.

This was one of his investments where he had put in up to US$500,000. “It is one that I am very proud of, despite the fact that the business folded. Most companies at the time were making single-use gloves, which you produce cheaply and throw away. A group of us decided to recycle the gloves and automate the process, in other words to clean them,” says Lin.

“Gloves are one of the dirtiest products in the world, even though technically they are supposed to help people maintain hygiene because they are used in food production and hospitals. But they are really dirty because they are not sanitised. The production process is in many ways still manual.”

The idea was to mechanise the entire process. “All you had to do was — if you were a doctor or surgeon — throw the used gloves in a pail and put the pail in the machine, which will pick up the gloves and clean them. It goes through 10 to 12 processes and can be used up to seven times. These were the cleanest gloves in the market,” he says.

Despite the great pitch and product, it was hard to get sales as the production unit was not capable of producing millions of gloves, which is the benchmark in glove manufacturing and the ever-evolving medical regulatory landscape. “This is what I learnt — we were ahead of our time. The cost of producing EcoGlove was 30% to 40% higher than for normal latex gloves and although they could be used up to seven times after reconditioning, we could not get enough people to buy the product,” says Lin.

“We had to shut down the business in the end. Even if we could get orders, we could not produce gloves in the millions. I used to sit on the board of Top Glove Corp Bhd and it manufactured at least 40 billion gloves a year.

“When I first joined the company’s board, the gloves were being hand-packed by foreign workers. Can you imagine how inefficient and unhygienic that is? If one person sneezes, can you imagine the number of germs that end up on the gloves?”

The regulatory burden was another issue. When the company was marketing the gloves in the US, the Mayo Clinic — the largest non-profit medical practice and medical research group in the country — banned all rubber gloves, says Lin.

“That is because rubber gloves can technically create an allergy. Although no cases had been reported at the time, they were still banned. So, there you go, one of our clients gone, just like that.

“These kinds of things happen all the time when you are a start-up. But it was wonderful. I spent two years building the company. I got my friends to invest in it, but they all lost money. This goes to show that a good idea is not enough. You need the right ecosystem.”

Apart from technology-based investments, Lin has also experimented with fish and organic farming. “I used to be involved in fish farming in Zimbabwe and Costa Rica. We reared fish in the middle of man-made Lake Kariba, which is as big as the area between Kuala Lumpur and Taiping. We farmed fish that were made into fillets for Tesco in the UK,” he says.

His farm in Zimbabwe is still operating and, like EcoGlove, is one of his much-loved ventures. That is why he has invested in a similar local start-up located at Temenggor Lake in Perak.

“This business has good prospects because of the use of technology and artificial intelligence. In Zimbabwe, we used to have an expert from England whose sole job was to desex the fish fry so that when they grow, they are asexual,” says Lin.

One of the businesses that he entered mid-stage and tried to turn around was an integrated organic farm in Zambia. “I used to do organic farming in Zambia, when a lot of people did not even know what organic farming was. I used to do it with some Germans and we used to fly the produce out of Zambia to London every morning,” he says. This was an investment that he went in at the early stage and then made a bid to buy it in competition with a leading world baby food manufacturer.

Lin says the successful exits from companies such as JobStreet made up for the losses he suffered from some of the businesses that folded. While he does not want to reveal the extent of his investments or losses he has made, he does mention that the successful investments have yielded an internal rate of return of 25 to 50 times over the lifetime of the investment.

He adds that he does not quite like investing in conventional asset classes, such as properties and bonds, and he always keeps his venture capital investments separate from his personal investments. “Venture capital is a tough business, but the experience and rewards that come with it are worthwhile. Know the people behind the business and the prospects of attracting investors. At the end of the day, follow your nose.”

Although Malaysia’s capital markets have grown by leaps and bounds over the years, a lot more still needs to be done to improve the ecosystem to encourage the innovation that will draw venture capital and private equity investments, says Lin.

“The problem is partly the education system and partly one’s upbringing. I spend a lot of time trying to change the education system and I find that the real problem with our education system is that some parents are narrow-minded. They do not believe in allowing their children to run freely. So, the education system we have is very restrictive.

“Children should be exposed to everything from science to literature. At Harvard, they say if you have not read the latest book that won the Nobel Prize for literature, you are not educated.”

Lin has three postgraduate degrees from Harvard University, including a doctorate in economics. He was the first non-American to sit on the council of Harvard’s Graduate School Alumni Association and the first non-American to chair the council.

He says his accomplishments are the result of the freedom he had to engage in subjects he liked best in school. “I studied in Ipoh. I did well in school so I was put in the science stream. But I told my headmaster that I wanted to be in the arts stream because my friends were there. So, they made provisions to let me take math and literature lessons at the same time.

“The school I went to was run by the Jesuits and when I was in Form 6, one of the members of the teaching faculty told me that I should study economics. But that was not taught in my school. So he said, ‘Don’t worry, I will do a correspondence course in economics and I will teach you what I have learnt after every lesson.’

“And that was what he did. Every time he learnt a lesson, he taught it to me. Every time his lesson got stuck in the mail, there was no class. I sat for the A-Levels economics exam and got an A.

“So, I combined economics with math and philosophy and got the best combination ever in university. We all need this combination to innovate and create.

“There is no innovation here; the environment is not conducive. In order to get ideas, you need to hang out at places such as coffee shops and talk about and exchange ideas. This type of environment has thrived overseas, but it is just getting started here. It will take time.”

Nowadays, Lin helps young businesses with strategies and provides financial consulting. “I am no longer as active. As you grow older, your time horizon shortens. So, I have no patience for long-term investments, mainly because I may not see them to fruition. My horizon for investments is now two to three years. I still do some mezzanine investments here and there,” says the 78-year-old.

“So I help businesses instead, in areas where they need help and advice. A lot of them have no idea how to start a business, such as how to value what they have. These are skills many do not have. To get vibrant start-ups, you need a lot of legal skills and business insights. You need a combination of knowledge of the experienced and inexperienced.

“I advise entrepreneurs on how they can build their business rather than make investments. But you never know, if something great comes along, I may consider it.”

A company that Lin has played a small role in incubating is ride-hailing service Grab. The Southeast Asian billion-dollar unicorn was built on the ground floor of his modest office in Damansara.

The most important lessons he has learnt from investing as a venture capitalist is commitment, knowing the right time and assessing people. His advice for up-and-coming entrepreneurs: Once committed, you must be prepared to sweat it out.

Although Lin has exited from most of his ventures, he would still invest in a good idea. “But as it is with any good business, it takes up to 10 years to build and I realise that I do not have much time left,” he laughs. “Still, venture capital is the best business in the world.”



Raise productivity to improve economic growth

The main problem behind Malaysia’s slowing economic growth in recent years is the lack of strong fiscal discipline, says former central banker Tan Sri Dr Lin See-Yan.

Lin, who served Bank Negara Malaysia for 34 years, 14 of which as deputy governor, points out that the government needs to practise fiscal discipline at every level and focus on improving productivity if the country is to achieve high-income status by 2020.

“We need reforms. We used to be very good. When I retired in 1994, we were growing at 8% to 10% and countries such as South Korea and Taiwan were way behind us. But now, they are miles ahead,” he says in an interview with Personal Wealth.

“Soon, Indonesia, Thailand, Vietnam and the Philippines will be ahead of us. Why are we slowing down? We are a rich country, so why are we lagging behind?

“Productivity is low because we do not really reform. We need structural reform. At the rate we are going, we will never reach high-income status.”

Last month, Lin published his second book, Turbulence: In Trying Times. It is a compilation of articles published in his long-running column in The Star that covered a wide range of topics, including currency woes, macroeconomics and education reform.

Lin stresses that the cheap ringgit does not reflect the underlying strength of the economy. “I am one of those who is  not satisfied with the central bank’s handling of the ringgit. We can do better. When we became independent in 1957, we had a currency board system and the exchange rate was fixed at 3.06 Malayan dollars, or two shillings four pence, to the US dollar.

“If you look at the law on the setting up of a central bank, it says the central bank should issue a currency and safeguard its value — not the value of the reserves, but the currency. No one will say no to high reserves. But when you accumulate reserves, you weaken the currency.

“That was why we did away with the currency board. When you have exports and there is a boom, the currency board had no choice but to buy up US dollars and throw out more Malayan dollars. Then, we had inflation and suffered the gold and exchange crisis in 1968. That was why we set up a central bank to stabilise the currency.

“But 30 years after the 1968 crisis, why did we peg the ringgit at 3.80 to the US dollar in 1998? They forgot that when we had very little, we were at 3.06. When I retired in 1994, it was at 2.50 against the greenback. It took us 10 years to go from 3.80 to 3.50, but it is 4.50 now.”

Lin says the British colonialists benefited from the commodity trade (in rubber and tin) and the gains were used to finance the purchase of bonds in Tanganyika (now part of Tanzania), Nigeria, Ghana and Australia. “We [as a country] financed all of that 60 years ago. What’s the point of rising income if the purchasing power keeps falling? And the central bank reportedly said that the economy is fundamentally strong. If that is the case, why is the ringgit so weak? From 3.06 against the US dollar, we are now at 4.50 and people say we have done better. Does that make sense? No. And the central bank says the economy is fundamentally strong. If that is the case, why is the ringgit at 4.50 to the dollar? So, my thesis is, a weak currency does not reflect a strong economy.”

The only way to turn the economy around is to reform so as to raise productivity. Lin points out that the country can no longer depend on cheap land, labour and conventional manufacturing systems.

“In the old days, we had two sources of growth — people and productivity. Now, our population is not growing. We are growing at a rate that is not sufficient to support ourselves. So, we are left with productivity and our productivity is not rising fast enough. We need to start thinking seriously about reforming, including labour standards. Our labour laws are still very much from the 1950s,” he says.

“If the government wants to reform labour standards, they can. I gave them the solution years ago. If the government wants to stop imported low-skill labour, give businesses five years and a plan and strategy to adjust. In the meantime, the government can provide a soft fund to help companies automate and upskill their employees. It is a win-win situation.”

Lin asserts that the economy has to be weaned off public and consumer spending and focus instead on the overhaul of the legal system, including the labour market, digitalisation of services of the civil service, finances, healthcare and education, and take the leash off the economy by way of reducing protectionism.