Cradle_Fund_group_CEO-Nazrin_Hassan

Cradle Fund Group CEO Nazrin Hassan

In the first part of this interview series, Cradle Fund Group CEO Nazrin Hassan talked about how the startup ecosystem in Malaysia has evolved over the 14 years of the fund’s existence and the challenges faced by entrepreneurs. In this part, Hassan throws lights on the different initiatives the government has been working on to take the startup ecosystem to the next level.

Edited excerpts:

What are the different initiatives the Malaysian government is working on to take the startup ecosystem to the next level?

There are quite a few initiatives the government has already taken up. Do you know that 60-plus per cent of venture capital in the country is still supported by the government? So, the question is not whether the government is contributing to the growth of the ecosystem, but what is the involvement of the private sector.

Over the last one to two years, there has been growing interests coming from the private sector to engage the startup ecosystem, partly because they realise that without engaging the startup ecosystem, traditional business are being disrupted in many ways — be it services, logistic, F&B, or retail. If you look at the retail outlets, they have been closed simply because the buying behaviour of customers has shifted to online purchases.

A quiet revolution is happening here, especially with the new young generation. Businesses, especially large ones, realise that they get to adapt to the changing environment, be in the finance or other domains. With that, we hope more corporates to come into the game and start funding startups, or at least give them the market access and exposure like a local bank does.

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If there is private sector involvement, it will help our local startups to scale and mature far faster. If you look at the ecosystem in Silicon Valley, the reason why it is better is not because the startups are better, but because the supporting environment is better. It means they have strong linkages with the traditional businesses in traditional economies. I think as more and more traditional businesses come into this and understand the disruption better, they should help the startups ecosystem to achieve the next level of growth.

Does the government provide any incentives to corporate VCs?

There was some incentive last year in Budget 2018 for corporates to invest in startups, either directly or via contributing to venture funds. That incentive is currently being worked on by the Security Commission. We should hear something on that front in the second half of this year, hopefully. I think that has generated quite a bit of excitement and corporate are interested, but how the incentive is eventually structured will be important.

How is your Cradle Fund different from Cradle Seed Ventures? Are the objectives of these two funds the same?

Basically, we have the developmental arm at Cradle Fund which I head. And on that side, we provide grants and developmental equities.

Grants is straightforward enough and is self-explanatory, and that is funding the prototype stage, where most early stage and still feel the threat. Nobody wants to fund prototypes, so there will always be a need for grants there, at least for people to get to the next stage by having prototypes.

Then, we have developmental equity, where we take equity in a company and we fund them out with 100,000 ringgit (US$25,000). We call it developmental equity, partly because unlike a closed-end venture fund where there is a finite number of deals, for this one we fund in large numbers. So, for instance, in early stage, we fund anywhere between 12 to 14 deals. Let’s says if it’s 50 million, then probably we fund anywhere between 12 and 14 deals over the lifetime of the fund. In developmental equity side, we do about 13 to 15 deals a year. So we’re more like 500 Startups than a typical venture fund.

Of course, Cradle Seed Ventures is a purely commercial arm and is a subsidiary of Cradle Fund. It is headed by a separate COO, but her mandate is purely commercial. It is a closed-end fund and the corpus is MR 40 million (US$10 million) for the first fund. So the mandate is different, the amount is different, and it is a closed-end fund and if it’s going to continue, it will have to raise funds II from the market

Do you have plans to set up another fund?

Cradle Seed Ventures is currently in the mode of fund raising. And it’s looking forward to having its fund II. It’ll probably happen in the last part of this quarter, or the first quarter of next year.

This fund will cover the MR 1 million to MR 3 million (US$25,000 to US$75,000) segment, which is our local Series A. It fills up the gap, mainly for players who are looking for Series A.

The good part about having more local players here is that even when we look at regional players, who want to invest in Malaysian startups, they will prefer a local player to co-invest in with them. Now, regional players usually do not like to come in and invest a loan in a deal where is in another country, unless they get the deal to move to Singapore, where they are usually based. So but when they’re investing in that particular country, they usually like a local investor to co-invest. And usually we’re either leading or following the deal in Cradle Seed Ventures.

Where is the Malaysian startup ecosystem heading for? What kind of tech verticals have the potential to become big and change the landscape of the startup scene?

I’m always very market driven in my analysis of things, and from what we’ve seen, be it from companies applying or the companies that we have funded, they are all usually either in the e-commerce, software or mobile apps space, and many of them are platform plays. So I think these are the areas, where Malaysian startups will do well.

And because there are many gaps in the service delivery in Malaysia, be it the government or private sector side, there are are many areas where startups can offer to either do better or disrupt in that particular industry vertical, because there are still large segments of inefficiencies in all these verticals.

If you are talking about the scale of success, as I mentioned earlier, I don’t think Malaysia will produce many unicorns. Even if we produce one in every five to 10 years, there will be a great blessing already. But if you look at the number of companies that are capable of reaching the 100-million ringgit (US$25 million) valuation, I think there are quite a few companies which can do that. They will probably be eventually get bought out by bigger players. We are seeing a pattern of that.

I think when it comes to creating/growing to a certain level and then exiting at a good value, which allows for returns of anywhere between two times to seven times for venture capitalists, I think those opportunities are available in Malaysia.

Compared to their peers in other Asian markets, say India or Singapore, what is lacking in the entrepreneurial talent in Malaysia. Is the fear of failure haunting them?

I think there is fear of failure all over Asia and that is part of the hassle, but having said that however there is a general generational shift that’s happening.

What we are observing is that in my generation, when we came back to from where we were is that we were studying abroad, the emphasis was probably joining one of the big four accounting firms, or one of the top investment banks, or one of the top consulting firms, that was the rage back then. That was probably in the late 90s that there was a time when when I was just graduating, but now I would say that for for most of the graduates, working in large corporations is not the first choice anymore. They want to feel passionate about what they’re working on. They want to own the idea that they’re working on. That’s why right now if you look at it, there will be a deluge of either startups or freelancers, because these people would rather work on the stuff they’re passionate about on their own, regardless of the fact that the income is not great or the glamour factor is missing. That’s not what they’re looking for.

And even if they’re looking to be employed, what we’ve found is that there’s a significant number of youngsters interested in working for startups. They find that to be exciting, they would rather come back here and will work for the likes of, say iMoney, rather than work for an accounting firm. So we’re seeing that trend happening.

In that sense, the fear of risk taking is slowly being diluted by this new generation. So, we’re seeing that generational shift happen.

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But having said that however one of the reasons why I mentioned that is the companies in mobile apps, e-commerce, software, platforms that that will succeed is because Malaysia excels in coming up with startups that are services-based. I think the new generation understands what it takes to execute services startups, and they understand the market gaps and they know how to improve on the customer service level, which would make the current new generation of customers happier.

So this is why the disruption is mainly happening in these kinds of verticals, where all industries have refused to up their level of service.

Do I think that we will do better in AI or robotics or some of the other hard-tech areas? I think there will be a smattering of companies a small number of companies, but it’s not where our core strength is. We’ve not developed enough local talent– be the ones studying locally or abroad — to be able to specialise in some of these hard-tech areas. So I think in that sense if there are any companies that are involved in either AI, VR or AR, they will be more on services-based, rather than recreation of hardcore technologies.

What are the greatest strengths of Malaysian entrepreneurs? Do schools and colleges encourage students to take up entrepreneurship after education? How is this change happening?

Ok. I’ll tackle the second question first. For universities, private as well as public, an awareness is definitely growing. They’re starting to realise that entrepreneurship is a real option, which students want, and they are preparing students for it. Everybody is trying to give their students some sort of entrepreneurship exposure, while they are still in university. Regardless of whether they end up as entrepreneurs or not, generally even employees with entrepreneurial exposure make up better employees. They are a lot more dynamic, they think on their feet, and they execute better.

So I think what we’re seeing is that universities are slanting more towards entrepreneurship education. What is key here, however, especially for the public universities, is that they open up and build those linkages with the private sector. My worry for the public universities is that there are still insufficient linkages and many of the things that they’re trying to teach is still very much theoretical.

I think we have to evolve to the level, where sort of more advanced universities like Stanford, MIT, or Imperial College, where you can’t tell the difference between who is a university professor and who is an entrepreneur. You know the mix is just so seamless. I think we need to reach that level, so that our university students can have that exposure far earlier on and be better.

Now, answering the second question. This is from the feedback of our fellow regional co-investors and what they find is that Malaysian entrepreneurs are hungry. It means they’re very focused, very hardworking and are willing to put in the hours.

And from a valuation perspective, unless they’ve been corrupted by the valuation perception in Singapore, generally if they are more Malaysian centric, they are willing to take a more reasonable valuation. And they do tend to give investors good value in the long run. This has been from the feedback of many regional investors.

We are also probably one of the most ready as far as going regional is concerned. For some of the other other markets, they are either very reticent in going regional. I think Thai startups find it very difficult to go beyond their own borders. In Indonesia, startups really don’t find the need to go beyond their own borders, because there’s a huge internal market. If you compare it with our startups, we have are more Malaysians than international people. We are probably the most ready in the region to go regional. So that makes them attractive.

Since you are a very small market, do you provide tax sops or incentives to local startups to expand overseas?

Okay. I think you know it’s it’s it’s not so much a tax treatment here that’s important. But yes, we do encourage our startups to think regional from day one, because that’s the only way that they’re going to grow into anything significant enough either for sale or for listing.

So as I said earlier, the issue is how do we get them better access into the regional market. Because every market is different in every sense. And the faster that we can build a fast track of familiarisation with the unique nature of every market and the best entry point for each vertical into those markets, the better our startups will be. So it’s down to agencies like MaGIC, MIT an ourselves and a few others to help the startups get there with the collaboration of our investor partners in those countries and our accelerator partners as well.

So it’s an ongoing thing. I think a lot of people talk about ASEAN, but to be honest I don’t think there’s even a regional newspaper or TV channel that covers or specialises in ASEAN news. I’m not talking about the international publications like CNBC, but I am talking about proper ASEAN channel that can help our people become more regional at least as far as its reading and outlook is concerned.

So, I think that the tough part about this is that the business community that’s leading the way, unlike in Europe when they started the European community, I think it was the government leaders that led the way. It was the government that opened up the markets for each other before the business people ensued. Over here ASEAN, and the regionalization of companies in ASEAN is being led by entrepreneurs and that’s not so easy.

There are quite a few foreign nationals running startups in Malaysia. Does the country offer special tax sops to foreign entrepreneurs to start up in the country? How easy/tough for a foreigners to set up a business here?

To be honest I think I mean I don’t have a grasp of all the available incentives. But from what I know that we do provide easier access for foreign entrepreneurs to come into the market.

As far as foreign VCs are concerned, they are already here and investing in companies, regardless of where their fund is based; it could be based in Singapore to in Cayman Islands, but they are already doing and investing in Malaysian deals. There’s no real issue there.

Malaysia could do better in a sense that we are one of the regional education hubs around. We have a diversity of international students from all over the globe. We probably could do better in retaining some of this talent, especially top talent from other countries, and using them for Malaysia’s benefit. I think that has not really been fully exploited or optimised yet.

But aside from that, I don’t think that we make it really difficult for foreigners to come in. Our incentives may not be as attractive as Singapore’s, at least as far as the matching arrangement of funds is concerned for venture capitalists. But I would say that Malaysia poses no impediment for foreigners to come here and to start businesses at all.