Finance: Changing face of global venture capital industry

This article first appeared in Unlisted & Unlimited, The Edge Malaysia Weekly, on January 9, 2017 - January 15, 2017.

If you are not sharing information about your business, about what is working and what is not, then you don’t get good investors, you don’t get mentors and coaching, you don’t get help from other people. > Magid. Photo by Haris Hasan/The Edge

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The venture capital industry has changed tremendously in the past 20 years. Today, with the right mix of qualities, any company should be able to attract the big boys.

Local investors, however, should act as angels to nurture these start-ups, creating a proper ecosystem and critical mass of the right companies so that they attract the right international attention.

Deborah Magid, IBM Venture Capital Group’s director of software strategy, says the venture capital industry is more global than it has ever been. “Now, there are venture capitalists (VCs) who will invest in Kenya, South Africa, Vietnam and even in Myanmar — places that wouldn’t have had any kind of investments in start-ups in the past.”

She cites the accelerator and angel investment firm called 500 Startups, which has a fund in Southeast Asia. “Just recently, it sponsored an angel investment forum in Yangon. So, the whole venture capital game has become much more global.”

Magid says there is more angel money than there used to be to help get companies off the ground. There are also more accelerators where start-ups, or even teams that do not really have a start-up yet, can get coached and work on their plans.

During this phase, they can meet investors, mentors and other people in the community that they would not have known about otherwise. “There is just all kinds of activity now,” she says.

Magid says some governments invest directly in early-stage companies. “The Irish government has a real fund that invests in start-ups. Some governments, such as the US, have programmes for entrepreneurs, but do not invest directly. The models may vary, but there is a lot of support for start-ups.”

Where there are venture capital firms, there must be deal flow, right? The deal flow varies, however, says Magid.

“The reason there isn’t more investment in Malaysia and other places in Southeast Asia is because investors want to know that people there can build really big companies. That is because investors do not make their money back unless there is an exit,” she points out.

“The company needs to be listed or sold to someone for a reasonable amount of cash. So, the investors need to see these kinds of successes in the region before they believe that the deal flow will be good.”

What this means is that there needs to be enough of a critical mass, so investors believe that it is worth their time coming here, as opposed to going somewhere else. For this to happen, the ecosystem needs to be built up by the locals themselves.

“If there are people in Malaysia willing to come in as angel investors, that will be really good for the ecosystem because you have local money and local talent and they know the business environment here really well, as opposed to people coming in from the outside,” says Magid.

She adds that the reason 500 Startups is in the country is because its managing partner, Khailee Ng, is a Malaysian. “Dave McClure [the founding partner] works in Silicon Valley and he will just fly in, meet some people and leave. So it is really helpful to have a local presence in places where you are going to invest.”

In Silicon Valley, start-ups have big ambitions and scale really quickly, says Magid. “That is what makes them successful. Okay, not every start-up is successful. They do not all do it well. But the ones who do, have a much greater chance of making it big.

“And that is what the local start-ups need to learn. They need to be very ambitious and they need to grow fast. In order to do that, they need to have the right business and technical people on board.”

Magid says it is important to have both kinds of people — those who take care of the business side and those who focus on the technology, and many companies don’t. “The US companies that get venture money, say, PhDs coming out of MIT (Massachusetts Institute of Technology) and doing artificial intelligence always have business people on board. The VCs make sure of that.”

How does one scale up successfully? “They need to get it right in one place and then attack the next one. In order to attack the next place, they need to know someone there and understand enough about it,” she says.

“They (many Malaysian start-ups) just don’t know how to do it; they don’t know how to internationalise. It is a skill; it can be learnt. But they don’t manage their time very well and they tend to be fairly closed about what they are doing.”

Magid has a problem with companies that refuse to open up. “If you are not sharing information about your business, about what is working and what is not, then you don’t get good investors, you don’t get mentors and coaching, you don’t get help from other people.”

The culture in Silicon Valley is the opposite. “People over there share information all the time, which means they help each other. And it is a natural thing for people to do,” she says.

Start-ups in Malaysia tend to be more guarded because they operate under the fear that their ideas will be stolen. But Magid does not think this is something they should be worried about.

“The truth is that there are few things in the world that are really new. Most business models have been tried elsewhere. If this company that had its business plan stolen does a really good job of differentiating, showing its value and executing really well, if it has the right team and it goes after the market, it will win. It is all about execution,” she says.

What are VCs investing in these days? “The industries have changed a lot. One of the things that has happened is that there are industries that used tech in not very interesting ways; they would use tech for human resources and back-office systems to do their accounting and procurement, to pay their employees, and other things like that. Now, people are using tech deeply into their business. And that is transforming the industries,” says Magid.

So, there are more investments in start-ups that are coming up in industries such as construction and education. “One of the really hot growth areas that I am excited about is agriculture, which is very important in this region. There is a lot of investment, a lot of start-ups in what we call AgTech and food tech,” she says.

According to TechCrunch, an online publisher of technology industry news, investments in AgTech were relatively flat before 2013. Most tech innovation in agriculture was narrowly concentrated in biotechnology and seed genetics, and both investment and innovation was limited to players with close ties to the agricultural sector.

Then, in 2013, there was a shift. AgTech grew 75% to reach US$860 million across 119 deals. Investments in the sector grew 170% in 2014 and continued to show strong growth early last year.

TechCrunch attributed this shift to three underlying trends — a groundswell of macroeconomic trends that tipped the balance between supply and demand in agriculture; shifting consumer tastes; and a confluence of new hardware technologies that freed computation from the desktop and automated the collection of big data from many sources.

Magid says a lot of AgTech has to do with increasing crop yields and saving resources. “So, you can have drones fly over a field and transmit resources. You can also have drones fly over a field and transmit data.

“It is basically an Internet of Things (IoT) kind of network. And the drones can tell you with imaging if the plants look healthy or if they are diseased and not getting enough water. Or you can put sensors either at the surface or deep in the ground, which tell you how much moisture there is.

“So, you do not irrigate if the ground has enough water. You only irrigate and use water when it is necessary so that you are not wasting water in places that might have drought.”

She adds that connected healthcare is a very important sector of IoT. “There is a lot of investment in that. There is also investment in things like predictive maintenance. Sensors can tell if the railroad tracks are bad and need maintenance or they can tell if a turbine is not performing as well as it used to and needs maintenance before it fails. You can save a lot of time, money and resources if you catch these things ahead of time.”

These are the things that excite investors. “They are interested in technologies that can disrupt the way things are happening, inducing a lot of change, possibly becoming really big business and having a somewhat international market,” says Magid.

An international market could mean just in Southeast Asia, she clarifies. “That would be a huge market, right? Or it could be Europe and the US or whatever is appropriate. So, they look for things that have scale and reach.”

The other area that is like catnip to investors is financial technology (fintech). “It is one of the sectors that attracts the most investment. Last year, according to data and research firm CB Insights, there was US$19 billion worth of venture capital and angel investments in fintech start-ups globally,” says Magid.

“Financial services is Asean’s biggest business and we are all very excited to see all these start-ups doing new things. Some of them will complement what the banks are doing and partner those that are trying to take business away from traditional institutions.”

She says IBM will be engaging more with start-ups in Malaysia. “I visited our IBM office and our managing director is very excited about doing more with the start-up and entrepreneurial community here. I think we will have more ongoing presence with that community, with the accelerators. We already have a relationship with Malaysia Digital Economy Corporation, but we need to work more with StartupMalaysia, Malaysian Global Innovation & Creativity Centre and other organisations.”

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