Friday 29 Mar 2024
By
main news image

This article first appeared in The Edge Malaysia Weekly on November 6, 2017 - November 12, 2017

INDUSTRY players, venture capital firms (VCs) and angel investors have reacted positively to the measures announced in Budget 2018 by Prime Minister Datuk Seri Najib Razak to encourage investment in local digital start-ups and tech companies.

Many say the measures, especially the RM1 billion matching grant to be provided by major institutions, are just what they have been waiting for. Once the measures are in place, VCs will find it more attractive to invest in local digital start-ups and tech companies.

“Exactly what I have been hoping for. We already have a working model via Cradle’s investment matching programme, which attracted all kinds of regional VCs, and this programme would do the same on a larger scale,” says TheLorry co-founder Nadhir Ashafiq.

He is referring to Cradle Fund Sdn Bhd’s co-investment programme, which was started in 2014. To date, the programme has produced cumulative investments of US$171.2 million in partnership with 28 co-investors.

Beyond creating more capital for the local tech entrepreneurial ecosystem, the RM1 billion matching grant will increase the exposure of the large local institutions to early-stage entrepreneurs at a reduced risk, says Anand Krishnan, managing director of Endeavor Malaysia.

He says what is also important is to attract the right funds with a long-term commitment to the ecosystem, rather than an opportunistic view, as well as thinking about a path to transition out of dependence on the matching grant programme.

“Earmarking key areas or industries of focus where the capital should be deployed [is also important]. Prioritising which areas are most important to us will encourage entrepreneurs to pursue deeper tech ventures as well,” Anand says in an email reply to The Edge.

Endeavor is a global not-for-profit organization that selects, mentors and accelerates high-impact entrepreneurs. Endeavor helps these entrepreneurs through access to top mentors, capital and talent.

Currently, many digital start-ups go to Singapore to find investors as most of the regional headquarters of VCs are there. CatchThatBus, TribeHired, iMoney and Nexx Studio — just to name a few — all received funding from VCs in Singapore.

TheLorry received RM600,000 seed funding from KK Fund and raised US$1.5 million in Series A funding with investments from SPH Media Fund. Elixir Capital, which is based in Silicon Valley in the US, is also one of TheLorry’s early investors.

“For seed rounds, there is a good ecosystem — such as Cyberview and angel investors — and a lot of people want to play in the private equity space, right before an initial public offering. In the middle, there is nothing. We have to go to Singapore to get funding,” he says.

TheLorry is a graduate of Cyberview Living Lab Accelerator (CLLA), a four-month programme set up to guide digital start-ups in growing their businesses by matching them with mentors. TheLorry was awarded RM50,000 in pre-seed funding by CLLA.

Besides the RM1 billion matching grant, the government will enhance tax incentives for venture capital management corporations (VCMC) and VCs. These measures are expected to increase private investment by VCMC and VCs in local start-ups and digital companies.

Currently, VCMCs are exempt from income tax on statutory income derived from the share of profits received on investments made by VCs. This exemption will be expanded to include income received from management fees and performance fees from managing VC funds.

Investing has been made more flexible for VCs as they do not have to invest 70% of their funds in seed, start-up and early-stage digital companies to enjoy a 10-year income tax exemption.

Now, VCs only have to invest 50% of their funds in seed, start-up and early-stage digital companies to qualify for the tax exemption. The rest of the fund can be invested in other assets, or at a higher level of fundraising rounds.

Budget 2018 also encourages companies and entrepreneurs to invest in VC funds with a tax deduction equivalent to the amount of investment made, restricted to a maximum of RM20 million per year for each company or individual.

Tax exemptions given to angel investors, which were scheduled to end by the end of this year, have been extended for another three years. Angel investors are entitled to tax exemption equivalent to the amount of their investment in a company.

“Moves to incentivise angel investors, together with VCs, opens up new opportunities, and extending the angel tax incentive to 2020 could not have come at a better time as interest in this space has been rising, due in part to interest in equity crowdfunding.

“These are calculated moves designed to increase private-sector participation in this space and drive the growth of tech start-ups in Malaysia,” says Cradle Fund’s chief operations officer Razif Abdul Aziz in an email response to The Edge.

For angel investors, a tax break of up to RM500,000 per annum (minimum RM5,000) is available for investment in a tech start-up. The investment must be held for two years and the tax deduction is applicable in the third year of shareholding.

Malaysian Business Angel Network (MBAN), the official trade association and governing body for angel investors in Malaysia, says tax deductions have worked very well in a variety of applications in the country.

“We believe the incentives will open up options and appeal to a wider cross-section of angel investors who have different risk appetites, resources and strategies,” says Razif, who is also executive director of MBAN.

However, he hopes the government will reduce, or even remove, the holding period of two years and allow the use of “investment vehicles” for the investment to qualify for the incentive.

“These enhancements could have an immediate impact on this space and could serve to attract more private investors,” he says.

Anand of Endeavor Malaysia says that apart from providing fiscal incentives to investors, there should be a significant increase in collaboration between research organisations and academia with the local entrepreneurial ecosystem to spur more homegrown innovation.

“This is something Singapore does really well, and is evident in a lot of other great entrepreneurial ecosystems as well. We need to develop this much further if we want a truly robust entrepreneurial ecosystem,” he says.

The measures are expected to attract VCs to set up shop in Malaysia. Among them, Catcha Group founder Patrick Grove says he is considering basing the group’s VC, Catcha Ventures, in Malaysia, following Najib’s announcement on Budget Day. “For sure, it is making us [invest in digital start-ups in Malaysia] and consider basing our VC arm in Malaysia,” says Grove.

He is a prolific investor in the internet and tech scene in Asia-Pacific, having spawned various businesses such as iProperty Group, iCar Asia, Bursa Malaysia-listed Rev Asia Bhd, iflix and Frontier Digital Ventures.

Over the last 15 years, since VCs started playing a big role in funding tech start-ups, the level of private sector participation in VC funding has been very low.

The latest measures show the government’s commitment to develop the ecosystem to be more dynamic, says Malaysia Venture Capital Management Bhd CEO Jamaludin Bujang.

“After 15 years, the local VC and PE [private equity] industry has matured and has generated many investable young companies with [the right size] revenue and profit for the private sector to invest in.

“Large Malaysian companies must tap this opportunity to invest in these technology companies as a way for them to expand and complement their own existing businesses,” he says.

 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share