This article first appeared in Personal Wealth, The Edge Malaysia Weekly on November 4, 2019 - November 10, 2019

The volatility in financial markets is widely expected to continue for the foreseeable future. Global economic growth is deteriorating, which has the experts debating the odds and scale of an impending recession.

Despite the challenging outlook, there are still angel-investing opportunities in Malaysia. And those who have already committed funds should remain invested while continuing to look out for promising technology start-ups, says angel investor and Proficeo Consultants Sdn Bhd co-founder Dr Sivapalan Vivekarajah.

He points out that now is an interesting time to invest in early-stage technology companies that build solutions for the small and medium enterprise (SME) community. That is because SMEs are going to prioritise lean operations and cost savings wherever possible.

“They are going to need solutions [from these tech start-ups] to help them achieve these efficiency gains,” says Sivapalan, who has backed 16 companies as an angel investor since 2011.

He does not see a deep global recession occurring, but rather a protracted downturn. In times like these, one of the best ways for businesses to cut costs and improve productivity is to embrace digital transformation, he says.

“As an angel investor, a compelling theme for me would be to look at tech start-ups that provide affordable solutions to the SME community. Over the next two to three years, I think we will see a lot more early investment opportunities in the business-to-business (B2B) space,” says Sivapalan.

As it is, Malaysian SMEs have not embraced digital transformation as much as they should have. Hence, these companies are at risk of being affected by a protracted downturn, he points out.

Sivapalan believes that the looming recession may be the catalyst that finally compels the SME community to use technology to cut costs and improve productivity. This is where tech-powered start-ups will benefit, he says. “It is typically during a recession that companies try to save on human resources-related expenditure and improve on overall productivity.”

This is not to say that he is put off by the business-to-consumer (B2C) segment. But now is the time to be highly selective about its prospects. The last few years have seen an explosion of B2C technology companies in Southeast Asia as they race to capture the booming middle-class market in the region.

According to Sivapalan, while there are some promising investment prospects, the B2C space is currently a crowded field. In fact, two segments that he is wary of investing in are the broader financial technology (fintech) and mobility sectors.

“There are so many fintech and mobility companies out there right now, for angel investors and end-users. In a short span of time, the ride-sharing and fintech spaces have become very prolific. E-wallet providers, for example, have entered the market in droves over the last few years,” he says.

“It is a pretty predictable process actually. A new buzzword or process captures the imagination and soon enough, everyone wants to jump into the sector. What I have found is that when this happens, many start-ups end up doing the same thing. As a result, angel investors run the risk of investing in prospects that do not really offer anything unique or differentiated in the market.

“But I suppose this has always been the case, particularly with consumer-focused businesses. These have always been sexy as they tend to make the headlines.”

A passion for technology

Sivapalan, who is a prominent figure in the start-up ecosystem today, got his start in the mid-1990s, when Prime Minister (then Datuk Seri) Dr Mahathir Mohamad launched the Multimedia Super Corridor (MSC) initiative to transform the country into a high-tech, knowledge-based society. Back then, very few in Malaysia could have predicted the sea change that would occur over the next 10 years.

A corporate adviser with his own boutique consulting practice, Sivapalan was struck by the unprecedented push for the Malaysian economy to move into this new, digital trajectory. He soon began fielding requests from companies wanting to know about the incentives and benefits of signing up to the MSC initiative.

“It is important to understand just how stunning this initiative seemed back then. Until that point, the entire economy was about as bricks-and-mortar as could be. It was around this time that people started hearing about little-known start-ups such as Amazon, which was founded in 1994. Manufacturing and retail companies were inquiring about the possibility of replicating this new online sales trend here in Malaysia,” says Sivapalan.

He also started to recognise the major knowledge and funding gaps. At this time, there were very few venture capital firms. “In the 1990s, the only proper venture capital firms in the market were MSC Ventures and Malaysia Venture Capital Management Bhd (Mavcap), which were founded around this time,” he says.

So, Sivapalan took it upon himself to build inroads into this still very small IT industry. In 1999, he set up boutique consultancy and advisory 3Capital and began assisting clients with funding applications and relationship-building with international venture capitalists (VCs), the majority of whom had yet to enter the Malaysian market.

A self-confessed Star Trek fan, Sivapalan has always had an interest in technology and all things science fiction. With his corporate advisory acumen, he was naturally a keen follower of the budding technology trends sweeping across the globe in the mid to late 1990s.

“Just 40 years ago, no one could have imagined that we would have powerful handheld communication devices, the likes of which we had only seen on Star Trek. I have always been fascinated by how our innovations tend to be driven by our imagination,” says Sivapalan.

However, the turn of the millennium saw the dotcom bust. The market panic, which started in the US, eventually made its way to Malaysia, at which point interest in IT investments fell away.

Sivapalan tried to continue with his corporate advisory services and relationship-building, but he saw the writing on the wall. “In the early 2000s, I decided that it was as good a time as any to improve on my knowledge of the start-up ecosystem. In 2003, I decided to pursue a PhD in venture capital at the University of Edinburgh,” he says.

“As I left for Scotland, I had a hunch that over the next three or so years, nothing much would have changed since the height of the dotcom crash. True enough, when I came back in 2006, there was still no ecosystem yet. I was able to pick up almost where I left off.”

In 2008, Sivapalan and Renuka Sena set up Proficeo. They had a clear idea about wanting to collaborate with government agencies and provide a longer-term, more comprehensive series of knowledge-building courses specifically for technology start-ups.

After running trial programmes for a number of government agencies, Sivapalan eventually met with the late Cradle Fund Sdn Bhd CEO Nazrin Hassan. The latter was suitably impressed and engaged Proficeo to design and run what would eventually become Cradle Fund’s flagship Coach and Grow Programme (CGP).

The programme was aimed at nurturing participating entrepreneurs to help them grow their businesses via business coaching. It was designed to help company founders implement strategies and plan the commercialisation and growth stages of the business. Sivapalan and Renuka were able to identify these companies via CGP.

“We were engaged by Cradle Fund in the early 2010s to design and implement a comprehensive knowledge-building course for start-ups. This eventually gave rise to its flagship programme. We monitored the companies closely over 12 months while collecting relevant data to present to Cradle Fund and the Ministry of Finance. In the course of running CGP, we realised there were some really good companies that perhaps needed a little more assistance beyond the 12-month programme,” he says.

Notable alumni of the programme include MyTeksi (now Southeast Asian unicorn Grab), Babydash Sdn Bhd, Christy Ng Shoes, DeliverEat, Piktochart and GoGet.

Having identified potential investment targets after they completed the programme, Sivapalan and Renuka would take a minority stake in the start-ups, usually as equal shareholders. “Of course, all the investments were done in our own personal capacities, totally separate from Cradle Fund. We invested using our own money,” he says.

To Sivapalan, angel investing is all about striking a balance between competing incentives. The angel investor must have a meaningful stake in an investee company, but not so large that the founder is no longer incentivised to grow the business.

In practical terms, this means angel investors must be prepared to hold only minority stakes. “I know some angel investors who take the majority stake right at the start, and that is totally wrong,” says Sivapalan.

He adds that even with a minority stake, he almost never holds more than 20% of any company. “I typically invest between RM50,000 and RM100,000 in a company in return for a 10% to 15% stake. Most of our 16 investments to date fall into this range. Sometimes, I may co-invest with other angel investors, in which case the total investment can go up to about RM500,000. But this is quite rare for me.”

Of the 16 investments, three have failed while one chose to buy them out. “In that particular investment, we could not agree on a common long-term direction. That is fair enough. So, we agreed to part ways on the condition that the founder buy us out, which he did,” says Sivapalan.

There are three investments that he is particularly happy about — EasyUni Sdn Bhd, IGL Coatings Sdn Bhd and Auto Craver Tradings Sdn Bhd. The first is an online portal that connects students to universities. The second is a manufacturer of protective coatings for automotive, marine, aviation and industrial applications. The third is a software company that builds specialised management software for the used car dealership market.

Auto Craver is a more recent investment while EasyUni was Sivapalan and Renuka’s first angel investment in 2011. “We are pretty happy with EasyUni and are now working towards an exit at some point next year. IGL Coatings is doing really well right now. I think about 98% of its market is outside Malaysia and its biggest market is the US. I believe the company has got to the point where it could probably go for listing in a few years if it needs to raise funds.”

Invest in founding teams

Sivapalan advises angels to invest in the founders of the start-ups rather than the early technology trends alone. “There is no telling which technologies will be winners in the long run. So, that is largely out of your control as an angel investor. But a strong founder is a great starting point for any angel investor,” he says.

Investment dollars are important. But more than that, angel investors have to be prepared to do a lot of professional hand-holding and grooming, says Sivapalan.

In his experience, young solo founders tend to have a much harder time building a successful business than teams of founders. Solo founders must be extremely resilient individuals with strong personalities, he says. They must be capable of shouldering burdens that would normally be managed by an entire team.

“I also tend to prefer founders with 10 to 15 years of prior working experience, whether in a corporate setting or directly under another entrepreneur. It is a good sign if a founder has significant work experience. Such founders would be in their thirties or forties,” says Sivapalan.

“I have this preference because I have noticed that young founders lack real-world experience. So, they tend to struggle through the complexities of building a product, on top of managing a team. An angel investor needs to be very hands-on with younger founders as they often do not know how to manage employees.”

A small team of co-founders in their thirties and forties with diverse yet complementary skillsets tend to perform a lot better. “You cannot have a team full of technology specialists. There must be someone who is CEO material. This person must command respect from the team, have the ability to effectively manage them and have the ability to build client relationships and close sales,” he says.

But therein lies the problem, says Sivapalan. In the vast majority of prospects, there are just not that many founders of high calibre right out of the gate. “As an angel investor, your challenge is to identify an extremely talented, RM100 million-a-year CEO who is running an early-stage start-up. The problem is that these kinds of CEOs tend to be running much larger, more established companies.”

Ultimately, there are no hard and fast rules when it comes to picking the right kind of founder to invest in. According to Sivapalan, all the different permutations — solo founders, young upstarts and teams of co-founders — simply represent a series of trade-offs that angel investors must consider.

For example, younger investors may lack work experience, but they also do not have the baggage or cynicism of a hard-nosed 15-year corporate veteran. A lack of strong professional influences mean a young founder may be more receptive to advice and feedback. Younger founders also tend to think more creatively about a problem and they are a little more ambitious and disruptive, says Sivapalan.

Older founders may have better-developed ideas and important people management experience. On the other hand, they may be more rigid in their thought processes and less receptive to feedback and advice, he points out.

Having evaluated the founder, angel investors should then look at the business. This entails a combination of bottom-up and top-down considerations, says Sivapalan.

He prefers that a start-up builds a strong presence at home. Practically, it is a more realistic option for angel investors if the founders are based locally. So, it will be much easier to manage them, he says.

More than that, however, founders must be able to create a track record on home turf. “Of course, I like companies with the ability to go regional because however you cut it, Malaysia alone is a small market. But it is so important for the business to validate its product locally before taking it overseas,” says Sivapalan.

Again, this is not a hard and fast rule. Sometimes, a local business creates a great product for which there is simply no local market. This was the case for IGL Coatings.

“IGL Coatings was a notable exception to the rule of having local product validation. To the founder’s credit, he tried his best to gain acceptance in the local market. But Malaysia’s automotive market simply was not big enough,” says Sivapalan.

“So, he pivoted and explored US and European markets, where he found major success. He brought his products to international automotive exhibitions and found interested distributors who wanted to supply his products to valet companies and car detailing businesses.”

Growing the local angel investing scene

Dr Sivapalan Vivekarajah believes that angel investors have it good right now, a possible recession notwithstanding. Over the last few years, he has witnessed a significant growth in the number of angel investors on the local scene.

Sivapalan, founding president of the Malaysian Business Angel Network (MBAN), and the late Cradle Fund Sdn Bhd CEO Nazrin Hassan pushed for an angel tax incentive back in the early 2010s. Available to MBAN-accredited angel investors, the incentive is meant to reduce the risks associated with early-stage investments by granting tax exemptions that correspond to their investments.

“I think the angel investing scene has grown by leaps and bounds in the last four or five years. Prior to the implementation of the angel tax incentive in 2015, there were virtually no individual investors with a focus on early-stage technology start-ups. Founders relied primarily on government grants and the old friends and family financing,” says Sivapalan.

MBAN, which was founded in 2015, has about 260 accredited angel investors to date. According to Sivapalan, the network has accredited about 50 new members annually in the last few years. Having said that, he does not have data on the specific investments of its members. So, there is no reliable way to gauge the level of angel investment activity in the economy right now.

“I cannot say how many of our angel investors are actively investing right now. However, I know that our members regularly attend MBAN pitching sessions, training programmes and networking get-togethers. I also know anecdotally that many angel investors are actively investing in start-ups, simply because we often hear start-ups say they recently received angel investment dollars,” says Sivapalan.

The rise of equity crowdfunding (ECF) has also played a major role in encouraging more Malaysians to get into angel investing. The ECF boom has been a significant milestone for angel investors, says Sivapalan. It is another channel through which angel investors can fund technology start-ups.

“The government’s act to legitimise ECF was a great move for angels. We have found that while it allows investors to access prospective companies with smaller investments, it is also a great way for new angel investors to learn the ropes without risking too much capital too soon. Some of our members have told us that they decided to register with MBAN as accredited angel investors after making smaller investments with various ECF platforms,” he says.

On the whole, angel investors have benefited directly and indirectly in the last few years, says Sivapalan. The most obvious benefit is the angel tax incentive. More recently, the government confirmed during the Budget 2020 announcement that it would set aside up to RM50 million to match investments made via ECF and peer-to-peer (P2P) financing platforms.

“This will benefit angel investors who choose to invest via accredited ECF platforms. Thanks to this co-investment initiative, not only do the issuing companies get more money than they otherwise would have, investors also get to mitigate their risk since they would not have to invest as much money as they otherwise would have [without the matching investment],” says Sivapalan.

In addition to working with Cradle Fund and his angel investments, Sivapalan holds a number of positions on various government-led working committees. Recently, he was appointed a council member of the Malaysian Venture Capital and Private Equity Development Council (MVCDC). It was established in 2005 to advise the government and facilitate greater coordination of strategies for the development of the country’s venture capital and private equity sectors.

“We have some ongoing initiatives that we cannot talk about just yet. But one key issue that the MVCDC has been working on is the implementation of a corporate investment tax incentive,” Sivapalan tells Personal Wealth.

Similar to the current angel investor tax incentive, the corporate incentive is meant for businesses that invest a certain amount annually in early-stage technology start-ups. Under the new plan, they will qualify for various tax benefits too.

The corporate investment tax incentive was actually announced in 2017, but the implementation stalled amid the historic change in government after the general election in May last year, says Sivapalan. This year, Energy, Science, Technology, Environment and Climate Change Minister Yeo Bee Yin pushed for the reintroduction of the incentive, with its practical implementation to be structured and finalised by the Securities Commission Malaysia-led MVCDC.

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