When Cradle Fund was launched in 2003, the startup ecosystem in Malaysia had not kicked off. Thanks to the initiatives and hard work both from the government and private sector, this has resulted in a gradual change, towards a much greater focus on support for growth-oriented entrepreneurship. For the past 15 years, Cradle has been at the forefront of this evolution. Incorporated under the Ministry of Finance Malaysia (MOF), Cradle is Malaysia’s early-stage startup influencer with a mandate to fund potential and high-calibre tech startups through its Cradle Investment Programme.
Cradle has thus far helped fund over 700 Malaysian tech startups and holds the highest commercialisation rate amongst government grants in the country. The fund also witnessed the birth and growth of several multi-million-dollar companies, and remain the key player in the startups ecosystem.
e27 recently talked to Cradle Fund CEO Nazrin Hassan to delve deep into the Malaysian startup and funding scene.
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 since our inception in 2003. Prior to Cradle’s birth, there was zero funding – be it from the Government or from the private sector for idea development and prototype development, especially commercialisation, there was little to none of that.
Perhaps there’s only two categories of people invested in startups – family or friends. Back then, there were no real angels. I think the first angel investment movements had quickly died in 2004, and there were no private sector money coming.
The venture capitalists were all playing at a later stage. They wanted companies to have revenues and traction. It is like an inverted pyramid, where you have very few primary schools but you have many universities. That was the situation prior to Cradle’s inception.
We came in and started providing prototype funding through our Cradle Investment Programme, and followed by CIP500, which aimed to help start-ups in commercialisation funding in 2010. In 2011, we started the angel investment movement, which included the passing of the Angel Tax Incentive in 2013, which provides tax deductions for Angel Investments.
In 2014, we started equity co-investment with fellow VCs. In 2016, we went into full equity mode, including having a VC arm with Cradle Seed Ventures. We have gone from grants to developmental equity to venture capital, and have gone to covering anywhere between zero to RM 3 million.
Therefore, pretty much the whole of the early-stage funding segments had been covered by Cradle. The environment has completely changed. I would say right now for an entrepreneur, they have many options. Today, entrepreneurs can go for Government funding, as well as Angel funding which slowly growing. There is also equity crowdfunding (ECF). The VC scene is thriving as well.
There are many VCs in Singapore, who are interested to invest in Malaysian deal flows, for two reasons — first, cheaper valuation and secondly, hardworking entrepreneurs. The environment has changed greatly. One of the region’s unicorns, Grab, was Malaysia-born and it was funded by Cradle at the prototype and commercialisation stage, when it was still called MyTeksi. Grab is now the leading ride-hailing company in South East Asia.
There is a growing appetite coming from the public as well. In addition, there are now quite a few sophisticated investors, in the Equity Crowdfunding scene.
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, from 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, regionally.
There are many VCs who are willing to fund Malaysian companies, particularly in Series A level.
When it comes to Series B, that’s where we 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 RM 5-20 million. When it comes to regional Series B, there is not much money available.
As for angels and seed stages, investors are gradually growing. There are almost 200 registered angels and 6 ECF. As you said, ECF platforms are becoming more popular. What entrepreneurs like about them is that it is easy access to a fairly large amount in a fairly short amount of time. Dealing with VCs over here usually takes anywhere between three to nine months, but when you deal with ECF platforms, 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 neighboring 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 key hubs in Asia — India, China and in Singapore.
Having said that, however China and India have natural advantage, as they are continents from a size and population perspective. Singapore it’s because it is the leading hub in Southeast Asia with a 650 million population.
To me, I have never looked at our ecosystem competency with Singapore hub but rather, we should leverage from them. People are themselves based in Singapore because of attractive tax regime and 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.
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 at Malaysia, Philippines, Thailand and Indonesia.
Anything that Singapore creates or starts, the effect will affect 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 a big indigenous population. It is an advantage for the rest of the region.
You have invested in over 700 startups. What is the success rate?
We measure different products by different metrics. For example, in 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 actually have to reach the market either from the sales traction, sale of the IP or licensing perspective. As far as commercialisation is concerned, I would try to track from the beginning of the programme until now, which is about 64 per cent and that is 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 fund in the hundreds of ideas, that’s not a bad number at all.
For our commercialisation funding, basically more than one out of five of the deals that we funded at commercialisation level, actually received VC investment or corporate investment from other entities.
Therefore, in that sense, given the shortage of available capital, it’s not bad at all. Ever since we’ve started on 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 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 big and where the ecosystem is fast growing. 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 every 200 startups 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, Malaysia is a bit more like India, where we have started many startups and bigger players eventually acquire these startups. 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 the sort of companies, which are valued at RM 50-100 million. I don’t think there will be a deluge of unicorns. Grab was an exception. It was born here and eventually moved to Singapore. If there are any more 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 Tan Sri Dr. Mohd Irwan Serigar Abdullah and agencies like MaGIC, many others and ourselves.
I think Malaysia has always been open to the entry of foreign investors. I don’t think we’ve ever 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 to have diversity of other international startup/talent, but the focus has to be on the success of local startups. We want our local startups to do well.
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 in the Malaysian market. It has to be a 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 notice, 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. In some countries, you cannot succeed there without having a local partner. Others, you can’t succeed without using their national language.
In some other countries, they can pull back the license 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 much 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, you need to have pretty high-quality talent, especially when you go at a regional operational level. These are things that agencies like MaGIC and ourselves are trying to address, as well as getting our Malaysian startups 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 olden days, they didn’t even dare cross that border.