The State of the Nation: Creating a digital economy ecosystem supportive of start-up growth

This article first appeared in The Edge Malaysia Weekly, on September 25, 2017 - October 01, 2017.
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THE target set for the contribution of the digital economy to gross domestic product has been raised to 20% by 2020 from 18%. However, does Malaysia have all the ingredients to nurture the fledgling digital economy and make it a major contributor to GDP?

While the government has an ecosystem in place — including tech start-ups and content creation — to grow the digital space into a major industry, there are shortcomings in the funding space. The country lacks a mature venture capital industry to fund tech start-ups. But having said that, the digital ecosystem is becoming more developed and supportive of the growth of the industry.

According to TheLorry.com co-founder Nadhir Ashafiq, the lack of a developed venture capital industry, which is needed for the growth of tech start-ups, does not mean Malaysia-based start-ups cannot get venture capital funding. Local tech start-ups can approach Malaysia Venture Capital Management Bhd (Mavcap) or Cradle Fund Sdn Bhd for both funding and referral to venture capital funds in this country and elsewhere, including Singapore.

“I don’t think being in Malaysia is a disadvantage in terms of fundraising. We are a Malaysian company and yet we have investors from Singapore. In fact, our current round of fundraising includes international investors,” says Nadhir.

“But it is true that many global venture capital funds are in Singapore. Tan Sri Abdul Wahid Omar has spoken about this. He says the venture capital industry in Malaysia is still 80% funded by the government. He wants to turn this around to have more private wealth invested in venture capital.”

The Malaysian tech start-up scene is growing and vibrant. There are several Made-in-Malaysia regional champions, such as Piktochart, iflix, Fashion Valet and, of course, Southeast Asia’s largest homegrown ride-hailing company Grab.

There could be many reasons why Grab moved to Singapore, and the lack of a mature venture capital industry in Kuala Lumpur may be one of them.

In an article published by FinanceAsia magazine, Chua Kee Lock, group president and CEO of Vertex Ventures and one of the funders of Grab, was quoted as saying that he persuaded the ride-hailing company to move to Singapore, citing the city state’s more mature fundraising ecosystem.

This issue was even highlighted by Abdul Wahid, chairman of Permodalan Nasional Bhd, at the Growth Diagnostic Forum organised by PNB Research Institute in May this year. He called for more private wealth to be invested in start-ups and new ventures.

However, this does not mean there is no support at all for local start-ups.

 

More funding avenues for tech start-ups

The government is aware that the digital economy is the future. If the digital industries are not nurtured, the country will be left behind as the traditional manufacturing and services industries die out due to competition from technology firms.

Therefore, it is crucial for the government to provide all the support needed for the digital economy to thrive. It has thus  set aside RM100 million for the Cyberjaya Innovation Fund for the Future.

This fund is to be disbursed by tech hub enabler Cyberview over the next 10 years from 2018, and will be channelled through a co-investment model into innovation and smart city-related projects located in Cyberjaya.

This is in addition to the funding already made available through Cyberview Living Lab Accelerator (CLLA), Mavcap, Malaysia Digital Economy Corp (MDEC) and Cradle Fund for tech start-ups. Besides direct investments, Mavcap is partnering private venture capital firms to fund tech start-ups.

These include China-based Gobi Partners, Silicon Valley’s Elixir Capital, Teak Capital Sdn Bhd as well as Axiata Group Bhd. Mavcap does not only invest in tech start-ups in Malaysia, but all over Southeast Asia.

While funding is crucial for the growth of an innovative digital economy, mentorship and guidance are needed to allow technopreneurs to develop their ideas and concepts into viable businesses and industries of the future.

 

A platform to huddle and pitch ideas

For Nadhir, mentoring is crucial for budding tech start-up entrepreneurs. As young entrepreneurs tend to be more idealistic than realistic and strategic, they need guidance from those “who have been there and made the mistakes”, he says.

Under Cyberview, CLLA lays the foundations for start-ups in the form of facilities and resources so ideas will not remain ideas but will live up to their potential. Start-ups that go through the CLLA programme are provided with mentoring sessions, networking opportunities and a platform to test and tweak their ideas. At the tail end of their programme, a Demo Day is held, where they showcase and pitch their businesses to potential investors.

TheLorry is one of the “graduates” of CLLA and has gone on to raise funds from venture capital firms in Malaysia, Singapore and Japan. In its Series A fundraising round, TheLorry raised US$1.5 million from investors such as SPH Media Fund and Elixir Capital.

Talking about his experiences in CLLA, Nadhir says the programme helped match him and his partner Chee How with mentors from companies such as AirAsia X Bhd, Grab and iMoney to strategise the business.

“We launched TheLorry in September 2014 and by January 2015, we had joined CLLA. Entry was easier because we had traction. It was a good four months because we learned how to really strategise the business,” says Nadhir.

 

Cyberview championing Smart City initiative

In May this year, Prime Minister Datuk Seri Najib Razak announced that Cyberjaya will be the model for Smart City developments in Malaysia.

For tech start-up entrepreneurs with innovative ideas and concepts, this is the real environment, away fro their co-working spaces. Here, their ideas and concepts are tested and grown into a business.

Under the Smart City and Living Lab initiative, Cyberjaya is the first place in the country to be designated as a testing ground for innovative concepts and ideas.

“The community of Cyberjaya is there, ready to test fresh ideas. Some 20% of the city’s population are early tech adopters, so, what we are doing here is bringing together ideas, the opportunity for these solutions to be deployed and, ultimately, solving problems,” says Mohd Najib Ibrahim, acting managing director of Cyberview.

Cyberview, which started out as a landowner, is a government-owned company responsible for the development of Cyberjaya into a cybercity, which involves the creation of a global tech hub.

Tech start-ups such as Singapore-based oBike used Cyberjaya as a testing ground for its bicycle sharing services. The service was then expanded into Kuala Lumpur and Petaling Jaya.

 

Collaborative disruptions with MaGIC

Some companies are wary of technopreneurs, as they are seen as disruptive to traditional industries. However, if companies collaborate with technopreneurs and facilitate innovation, they can confront the  disruptions that are happening in their sectors and be better prepared for the new economy of the future.

The Malaysian Global Innovation and Creativity Centre’s (MaGIC) Corporate Entrepreneurship Responsibility (CER) programme allows corporates to collaborate with technopreneurs. These collaborations will be able to introduce more agility into their operations, disrupt existing business models and adopt a more entrepreneurial mindset.

“The CER programme mobilises corporates to leverage their resources and networks to help Malaysian entrepreneurs. Through this programme, corporates can create market opportunities and mentor aspiring entrepreneurs,” says Ashran Ghazi, CEO of MaGIC.

MaGIC was launched by Najib and President Barack Obama in 2014 to build a sustainable entrepreneurship ecosystem and to provide catalysts for creativity and innovation.

 

Helping start-ups grow and GAIN

When talking about the country’s digital economy, one must not forget the role of MDEC in attracting domestic and foreign direct investments to set up operations in the country’s cybercities and cybercentres, as well as digital hubs.

While Cybercentres are more tailored for big corporations to set up their digital operations, digital hubs are more suited for tech start-ups due to their “sharing” attributes as a co-working and networking space.

These spaces come complete with soft infrastructure, including high-speed internet. The Digital Hubs include Co and APW, both in Bangsar, Common Ground in Damansara Heights and WORQ in Damansara Utama.

Local tech small and medium enterprises are encouraged to go global through the Global Acceleration and Innovation Network (GAIN). This programme helps local tech SMEs to expand their footprint through market access, leadership and capability development, brand visibility and scaling-up capital.

The programme provides customised assistance based on each company’s needs and goals. These goals could be in terms of elevating brand visibility, facilitating market access, upskilling capabilities, and matchmaking for mergers and acquisitions or funding.

So, does Malaysia have what it takes to become a digital hub?

The government has created many programmes to grow its capability and capacity in the digital economy. Starting with the MSC initiative 20 years ago, the digital economy has grown considerably over the last two decades.

MaGIC’s Ashran believes that Malaysia has the capability to become a major player in the digital economy as the country is blessed with an educated population and a strong engineering talent pool.

“At the moment, we are seeing healthy growth in the digital economy, which contributed 18% to GDP in 2015. With this in the background, Malaysia is set to nurture a digital workforce ready to tackle the challenges of disruptive technology.

“This digital workforce, a labour pool that integrates technology to connect all elements of the supply chain, is tailored to meet the digital economy’s demands. Upskilling the future’s young, undergraduate and professional talents will ensure employability in a digital economy,” he says.

While it is undeniable that the government has put in much effort to support the growth of tech start-ups and digital industries, it remains to be seen whether they can be nurtured to become a major force in the economy. Or will Malaysia continue to be a test bed for tech start-ups that, once commercialised, move across the straits to benefit from the mature funding ecosystem there?