This article first appeared in Digital Edge, The Edge Malaysia Weekly on November 27, 2023 – December 3, 2023
Budget 2024 was in many ways a good budget for the tech ecosystem, from the RM1.5 billion in funding from government-linked corporations (GLCs) and government-linked investment corporations (GLICs) to the extension of the angel tax incentive and exemption from capital gains tax for venture capitalists (VCs). There were also many other good policy initiatives for the ecosystem.
Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim also stated that the government’s aspiration is for Malaysia to be among the top 20 global start-up ecosystems by 2030. This is a big goal to achieve in just seven years. Is this possible or is it just a pipe dream?
The report that most countries use to assess their start-up ecosystem position is the Global Startup Ecosystem Report produced by US-based Startup Genome. In the latest 2023 report, it ranks in the top 30, with Silicon Valley, New York and London as the top three ecosystems in the world, while Denver-Boulder, Atlanta and Vancouver occupy the No 28 to No 30 spots respectively.
The only Southeast Asian nation in the top 30 is Singapore at No 8. A few Asian cities made it into the top 30, including Beijing, Shanghai, Seoul, Tokyo, Bengaluru and Delhi. There are another 10 cities in the runners-up position. The report also ranks “emerging ecosystems”, defined as start-up communities at earlier stages of growth, with Jakarta at No 15 and Kuala Lumpur at joint No 21 to No 30.
Based on the listing of ecosystems, we are currently in the No 61 to No 70 position overall. Hence, achieving a top 20 ranking looks like a major challenge indeed. If we seriously want to achieve this target, then we need to understand the evaluation process for these rankings and then set policies and action in place to get Kuala Lumpur higher up the rankings over the next few years.
The ranking is based on a weighted average of the following six factors: performance (30%), funding (25%), market reach (15%), connectedness (5%), talent and experience (20%) and knowledge (5%). Just performance and funding alone make up 55% of the weightage for the ranking and a deeper understanding of this clearly shows that Kuala Lumpur is at a significant disadvantage to most of the top 30 cities. This doesn’t mean we can’t improve, but we do have a lot of work ahead.
Performance
Performance includes factors like the sum of all exit valuations and start-up fundraising valuations; the number of US$50 million-plus exits and US$1 billion-plus exits; start-up success measured by the growth in number of Series A to Series C start-ups and Series A to Series B start-ups; and finally the speed to exit (how fast companies go from start-up to exit, including initial public offerings [IPOs].
Performance alone makes up 30% of the ranking and Kuala Lumpur fails miserably because there are barely any exits. And even when there are exits, they rarely exceed the US$50 million valuation. There are also very few companies that move from seed stage funding to Series A and then to Series B and C.
Interestingly, Paris at No 18 scored only 1 out of 10 and Tokyo at No 15 scored 4 for performance. So while this is highly weighted, one can get away with a lower score in performance if you have high scores in the other criteria. However, to get into the top 20 ranking, Kuala Lumpur should endeavour to score at least 3 to 4 for performance.
As half of the score for performance is based on the sum of all exit valuations and start-up fundraising valuations, we need to get more start-ups funded in the next few years, especially from Series A onwards. This also helps with the criteria for companies moving from Series A to C. The more companies we get funded, the better our ranking will be.
We are at a disadvantage though, as Malaysia is a tier 2 country when it comes to valuations, behind Singapore, Indonesia and Vietnam. Our lower valuations in relation to our neighbours handicap us as does the poor US dollar to ringgit exchange rate. This can change if more start-ups get sufficient funding to become regional players, as that bumps up valuations to tier 1. Exits are a bigger challenge, but if we can build more Series B and C start-ups that are regional, the exit potential also increases.
While we are in a weak position currently when it comes to performance, seven years do give us sufficient time to fix this problem.
Funding
Under the funding criteria, the main data point is early-stage funding volume, which includes the number of deals and total amount of funding. A smaller weightage is placed on the total number of VCs and corporate VCs (CVCs) and the total number of investors with US$100 million+ assets under management.
Going back to our benchmark cities, Paris scored 9 and Tokyo scored 7, demonstrating that a high score here can bump a city into the top 20 level.
Our VCs need to do more deals and provide more funding for us to score better here. We also need more VCs and CVCs. This is where the RM1.5 billion committed in the budget needs to be strategically deployed, with the most effective system being the fund-of-funds (FoF) model utilised by Penjana Kapital and Malaysia Venture Capital Management Bhd (Mavcap). The GLCs and GLICs that are supposed to contribute this sum should (and I strongly recommend this) let Penjana and Mavcap manage the money under an FoF model so that it can be matched 1:1 with private capital as was done under the last Penjana matching programme. This matching with private capital immediately increases the amount of funding available to RM3 billion.
Imagine what a boost this gives to the ecosystem, with the added bonus of helping Kuala Lumpur score much higher in this category and giving us a fighting chance of getting into the top 20. On every measure, from the amount of funding to the number of VCs, ensuring this is done via FoF is the best way to deploy these GLC and GLIC funds.
Market reach
Market reach accounts for 15% of the ranking and measures the ratio of start-ups with a US$1 billion valuation to GDP, the number of start-ups with US$50 million-plus exits to the city’s population, the ratio of exits over US$50 million to Series A funding the ratio of start-ups with international secondary offices, the country’s GDP and commercialisation of intellectual property assets.
This is another challenging criterion as we have so few start-ups valued above US$50 million and very few exits above US$50 million. Sufficient funding in Series A to C will help and we have seven years to achieve this, which is possible if we deploy the earlier stated RM3 billion using the FoF model.
Interestingly, Tokyo scored just 1 on this factor while Paris scored 7.
Talent and experience
Accounting for 20% of the ranking, talent and experience are also important factors. The talent factor measures tech talent and includes things like a listing of coders on Github, a service where coders store their projects and network with like-minded people.
The more Kuala Lumpur-based coders there are on Github, the higher the city’s score. It even measures things like how many followers they have on Github. Besides this, it also looks at the salaries of coders (the lower the better), English proficiency scores and the number of science, technology, engineering and mathematics (STEM) students.
The experience factor looks at the number of Series A funded start-ups (on the assumption that Series A funding means there are more experienced founders) and scaling experience based on the number of US$50 million and US$1 billion exits.
This is another factor in which we can score higher by ensuring there is more coding talent, that they are listed and active on Github, and increasing the number of STEM students. More Series A funding will also help the ranking.
Tokyo scored a 9 and Paris an 8, but I think this is one area in which we can score high as well. The next two criteria account for only 5 points each.
Connectedness
Connectedness measures the number of Meetup groups on Meetup.com and the ratio of these groups to the local population. A cursory search on meetup.com showed that there are very few groups from Kuala Lumpur, or even Malaysia. There are many activities and events in Kuala Lumpur but they don’t show up on meetup.com. This can be easily remedied.
It also looks at the number of accelerators and incubators, as well as the number of international investors and tech companies with secondary offices in the ecosystem. Kuala Lumpur should do well on this factor as there are plenty of tech-based meet-ups. They just need to be listed. And there are many accelerators and incubators in Kuala Lumpur.
Knowledge
Finally, we have the knowledge criterion, which measures the volume, complexity and potential of all patents created in the ecosystem, including publication impact, a metric that looks at the production of all research at the country level since 1996.
While knowledge carries a low weightage of 5 points, there is a strong focus on research and patents in the country. But this needs to be better coordinated with a higher quality of valuable patents for us to score higher.
Curiously, Paris scored only 1 on this criteria while Tokyo scored 8.
In a nutshell
As shown above, there are several clear criteria that we need to work on to get into the top 20 ecosystems. Here’s a summary of the top six things we need to do to get us on the way to achieving the PM’s goal.
1. Ensure the RM1.5 billion in funding from GLCs and GLICs is managed by Penjana and Mavcap as an FoF model, with 1:1 matching with private VCs so this creates RM3 billion in assets under management. This will boost the amount of funding for start-ups and the number of VC fund managers, as both factors will help get our ranking higher.
2. This RM3 billion in funds needs to be deployed fast over the next three years for all stages from pre-Series A to Series C so that we can help start-ups grow bigger and go regional, as this will help increase valuations beyond US$50 million. This will also bring even more foreign capital into the ecosystem as foreign VCs are always looking to invest in start-ups with a regional footprint. More regional start-ups will get Malaysia out of tier 2 status and into tier 1 with better valuations for all start-ups.
3. Deploying more funds faster into more companies will accelerate these companies towards successful exits above US$50 million and also help create more unicorns. Both are necessary for a better ranking.
4. We need to increase the number of STEM students and coders. This will also help them get better jobs and higher salaries while boosting the talent pool in Malaysia. The budget proposal to provide visas to foreign students studying in Malaysia will help as well. We also need to get more coders to use and be more active on Github.
5. While there are many tech activities in Kuala Lumpur, they don’t get listed on meetup.com. This is easily solved if we get all organisers to register their events on meetup.com. It would be even better if an agency like Cradle Fund Sdn Bhd takes on this responsibility.
6. Finally, we need to ensure our universities and research institutions do better quality R&D that is not only patentable but has commercial value as well. From my past experience, most of our patents have little to no commercial value. This needs to be corrected. We also need them to publish their research in top quality journals.
We cannot, however, just hope that this happens. We need to make it happen. It is also probably best if one of the agencies picks up this responsibility so it can measure progress, ensure things are done strategically and report on the numbers annually, so that we have a fighting chance of getting into the top 20.
In my opinion, if we do this well and follow my recommendations, we will have a good chance of getting into the top 20 by 2030. It is doable and it is not a pipe dream. There is a lot of work to be done, so it is best we get started immediately.
Dr Sivapalan Vivekarajah is co-founder and senior partner of Scaleup Malaysia Accelerator (scaleup.my) and adjunct professor at Sunway University’s School of Science and Technology. He is also the author of Supercharge Your Startup Valuation.
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