By Dr. Sivapalan Vivekarajah October 10, 2018
N MY previous article, I articulated many of the issues facing VC in Malaysia and explained why VC has generally failed in Malaysia. Here I provide 10 suggestions on how we can revive and strengthen the VC industry in Malaysia.
1. Restructure the funding of government-backed VC funds
As these are the biggest VCs in Malaysia, we need to restructure the loans provided to the VCs into investments instead i.e. there is no need to repay the Government the funds until the VC exits its investment. This will take away the risk-averse nature of Government-funded VCs and base the returns on performance instead.
2. Change the incentive structure to make them partners not employees
Once the loans are converted we need to make them real VCs by making the managers General Partners like how a private VC is structured and incentivise them based on positive returns like a 20% carried interest. This makes them competitive and they will hunt down companies with good potential because they make money when they have successful exits. The conventional VC incentive structure works because it’s very performance driven. Partners make money when they have successful exits, hence they will work hard to ensure successful deals and exits.
3. More VCs and more money needed
The number of VCs needs to be increased and so does the amount of funding in the ecosystem. We have too few VCs serving a large number of entrepreneurial ventures and too little money in the system to make a dent in helping companies to grow. Last year five of the biggest Government Linked Investment Corporations (GLICs) and pension funds – Permodalan Nasional Bhd, Employees Provident Fund, Khazanah Nasional, Tabung Haji and Kumpulan Wang Persaraan (KWAP) - agreed to invest RM1 billion into venture capital.
This year, the SC opened a request for proposals and more than 60 proposals to set up VC funds were received and they all pitched to these investors. This is a fantastic initiative to increase both the funds available and number of VCs in Malaysia. However things have gone quiet since but I remain hopeful that they will continue with this initiative. The new Government needs to encourage the GLICs and pension funds to continue this initiative and to make their selections very soon. Time is of the essence.
On top of this the late Nazrin Hassan and I had, together with the Technopreneurs Association of Malaysia (TeAM), pushed for a Corporate Investment Tax Incentive for the private sector to invest in or set up VC funds. After five years of lobbying this initiative was finally adopted last year under the purview of the Securities Commission. This incentive allows corporates to invest up to RM20 million a year over five years (totalling RM100 million) into VC funds and to get a tax credit for this investment.
This will allow VCs to secure funding from the private sector and significantly increase the amount of funding in the ecosystem. The VCs love it as it helps them when they raise funds and the corporates love it because it reduces their risk as there is an instant 24% return because of the tax credit. However, we have not had any news since. We need to speed this up and get all the approvals and mechanisms in place a.s.a.p. so that VC funding can grow again.
With the above two initiatives the Government does not have to fund the industry but it will still enable us to increase the amount of funds in the ecosystem. These are two fantastic initiatives but it has taken us one year and yet we have not seen it come to pass. The Government has to move faster on this. READ MORE >