“Malaysia’s first priority is that local startups do well; we don’t mind diversity of other international startup/telent, but the focus has to be on local startups”
Cradle Fund CEO Nazrin Hassan
When Cradle Fund was launched about 14 years ago, the startup ecosystem in Malaysia had not kicked off. Thanks to the hard work of the government and private sectors, the ecosystem began to take shape. Cradle, arguably the oldest fund in the country, was at the forefront of this evolution.
This government-backed fund has thus far invested in 700 deals and is one of the early investors of Grab, the cab-hailing unicorn. The fund has also witnessed to the brith and growth of several other million-dollar companies and remain to a key player in the ecosystem.
e27 recently talked to Cradle Fund CEO Nazrin Hassan to delve deep into the Malaysian startup and funding scene.
Excerpts:
Cradle is one of the oldest funds in Malaysia. How, according to you, has the country’s startup landscape changed over the 14 years of your existence?
It has changed tremendously from the time Cradle was born. Prior to Cradle’s birth, there was zero funding –be it from the government or from private sector. For idea development and prototype debt, especially commercialisation, there was little to none on that.
Perhaps only three categories of people invested in startups –family, friends and fools. There were no real angels. I think the angel movements had quickly died in 2004, and there were no private sector money coming.
The venture capital was all playing at a later stage. But they wanted companies to have revenues and traction. It is like an inverted pyramid, where you have very few primary schools but you have a lot of universities. That was the situation prior to Cradle’s birth.
So, we came in and started providing prototype funding, and in 2010, we proceeded with commercialisation funding which was the next stage. In 2011, we started the angel investor movement which included the passing of the Angel Tax Incentive in 2013.
In 2014, we started equity side co-investment with fellow VCs. In 2016, we went into full equity mode, including having a fully-operated VC arm with Cradle Ventures. We have gone from grants to developmental equity to venture capital, and have gone from zero to covering anywhere between zero to RM 3 million.
So, pretty much the whole of the early-stage funding has been covered by Cradle. The environment has completely changed. I would say right now for an entrepreneur, he has many options. He can go for government funding, he can also go for angel funding which is slowly growing. There is also equity crowdfunding (ECF). The VC scene is thriving as well.
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There are many VCs in Singapore, who are looking for opportunities in the region, for two reasons — cheaper valuation and hardworking entrepreneurs. So the environment has changed greatly. One of the region’s unicorns, Grab, was Malaysia-born and it was funded by Cradle in the early-stage. Grab is now raising hefty sum.
There is a growing appetite coming from the public as well. And there are now quite a few sophisticated investors.
But why still most startups in Malaysia are relying on ECF, and not on VCs or angel funds?
There are quite a few VCs in town, but they prefer to play in later stages, I mean, Series B onwards. Right now, growing number of VCs are coming into investing in Series A. Given the fact that regional VCs are coming in from Singapore, Japan, the US, India and China, I don’t think there is real shortage for funds.
There are many VCs who are willing to fund Malaysian companies, particularly in Series A level. It means there are many Series A level startups in the country.
When it comes to Series B, we are fall off a cliff, from an availability perspective. When I say Series B, I mean regional level Series B. The local Series B is about MR 5-20 million. When it comes to regional Series B, there is not much money available.
As for angels and seed stages, investors are coming. There are almost 200 registered angels and six ECFs. As you said, ECFs are becoming more popular. What entrepreneurs like about them is that it is easy access to large amount in fairly short amount of time. Dealing with VCs over here takes anywhere between three to nine months, but when you deal with ECFs, it can be as soon as three months.
Despite having the largest mobile internet user base in Asia, Malaysia is still lagging behind several other markets in the region in terms of entrepreneurship? What according you are the reasons for this relatively slow growth?
There are several reasons for that. I think in Singapore, there are certain natural advantages: it is an international financial centre. In Asia, it is second to Hong Kong as far as parity and competition are concerned.
The other reason is that Singapore is a very open economy, which allows foreigners to come in and dominate the market — be it in employment or entrepreneurship.
I think it is harder for its neighbouring countries to do so, because we are still protecting our local market, employees and entrepreneurs. Even if we are taking about VC, there are only three places in Asia — India, China and in Singapore.
Having said that, however China and India have natural advantage as being continents from a size and population perspective. Singapore is because it is the lead in Southeast Asia with a 650 million population.
To me, I have never looked at beating Singapore. People are themselves based in Singapore because of attractive tax regime and also it is a good place to base yourself when you also need matching funds from government. This makes Singapore very attractive space to base your VC firm in.
However, the spill-over effect can be felt all over the region because, even though they have seven times more VCs than Malaysia, all these VCs need to look at regionally to deploy their money. They need to look to Malaysia, the Philippines, Thailand and Indonesia.
So whatever Singapore is creating, the spillover effect is felt in the rest of the region. I never believe in competing with Singapore on that front. I think we should leverage on Singapore because it is a small country which doesn’t have an indigenous population. It is an advantage for the rest of the region for doing this.
You have invested in over 700 startups. What is the success rate?
We measure different products by different metrics. So, for example, the prototype funding it is measured by our commercialisation rate, which means how many of them go from ideas and concepts to actual market commercialisation.
We’ve benchmarked the definition of commercialisation against the US, which means that they know it actually has to reach the market either from a sales and then the sales traction or licensing perspective. As far as commercialisation is concerned, I would try to track from the beginning of the programme till now, which is about 64 per cent and that’s over a period of close to 15 years. So, literally two out of three ideas that come to us actually hit the market. Given that we find in the hundreds of ideas, that’s not a bad number at all.
And as far as for our commercialisation funding, basically more than one out of five of the deals that we funded at commercialisation level actually received VC funding or corporate funding from other entities.
So in that sense, given the shortage of available capital, it’s not bad at all. You know, ever since we’ve done our equity deals we’ve just had a recent exit on a company. I can’t disclose the name of the firm, but we definitely have made more fire, more than five times our money, within a period of two and a half years.
Do you think any of your portfolio companies have the potential to become unicorn?
Well, the thing is this: unicorns are more usually are born in countries with vast population. If you look at countries that produced unicorns, they are either based in countries like the US, India or China where the population is really big and where the ecosystem is fast. Some of the unicorns in the market were born in Europe because they managed to explore the global market. It is still a very elite club. Only one of out of 200 is unicorn.
I don’t think there will be a deluge of unicorns coming from Malaysia, given the size of the population and given the difficulties of startups to penetrate the rest of the regional markets. I am sure Indonesia will probably create far more, given the size of the population.
Having said that, however, we are a bit more like India, where we have started many startups and these startups are eventually acquired by either bigger players. We are much more like India in a sense that the whole bunch of internet millionaires have quietly exited between US$20 million and US$50 million.
When I look at Malaysia, we are probably going to build that sort of companies which are valued at MR 50-100 million. I don’t think thee will be a deluge of unicorns. Grab was an exception. It was born here and eventually moved to Singapore. If there are anymore unicorns, I don’t expect it to be in large numbers.
Do you think opening up the economy can help grow the tech and startup ecosystem in Malaysia?
Well, the government is very proactive in many ways via the Secretary General of the Ministry of Finance and agencies like MaGIC, ourselves and many others.
I think we’ve always been open to the entry of foreign investors. I don’t think we’ve had a protectionist stance in that sense. Foreign investors and PE players are always welcome. I think slowly we’re embracing the fact that startup teams have to be diverse and international. We cannot expect a startup to only be made up of Malaysians, so we acknowledge that the need for diversity in each of these startup teams so we are getting to be more open.
But if you ask me if Malaysia is as open as Singapore, the answer is no. I am being realistic here. I think Malaysia’s first priority is that local startups do well. We don’t mind diversity of other international startup/telent, but the focus has to be on local startups. We don’t want international startups to do well, but local startups don’t, as we have seen in some other countries.
What are some of the key challenges faced by Malaysian startups?
Well, I think the challenges for local startups are manifold.
One, for any startup, to get into much more attractive growth and valuation, it cannot simply remain to be a Malaysian company. It has to be a very regional company at the very least. It must have presence in at least three to four countries around Southeast Asia, if not beyond.
If you have noticed, scaling in Southeast Asia is almost like a black box. Each country is at a different economic stage, each country speaks different language, different political and economic development stage. Some has high corruption while some has zero corruption. In some of our countries, you cannot succeed there without having a local partner. In some others, you can’t succeed without using their national language.
In some other countries, they can pull back the licence from you even you have done business there for years, and make you sell to local firms. So, it is not an easy market to penetrate and scale. When we scale in Southeast Asia, we need to take into account the nature, culture, mannerism, rules & regulations of the respective markets.
Second, there is not many talent. Everyone is fighting for the same talent in the region. As the number of startups grow, the pressure to attain certain level of talent becomes all the more important. I do think that we need an injection of foreign talent and a diversity of global talent, perhaps to support the growth in Southeast Asia because if you want to compete on a product and services level at the level of talent, your needs to have pretty high-quality talent, especially when you go at a regional operational level. And these are things that agencies like MaGIC and ourselves are trying to address as well as our company scaled to the regional level.
It, however, doesn’t come without challenges. Having said that, if you compare it to what it was 10 years ago, I would say that there is a significant number of companies that are going beyond regional with confidence. In the old days they didn’t even dare cross that border.
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