Officials hope that splashing the cash will eventually make Malaysia an attractive base, but in the meantime are aiming to pull the purse strings

As Vietnam, Indonesia and Singapore – the big boys of Southeast Asia’s start-up scene – jostle to be crowned the region’s undisputed hub for the sector, the movers and shakers of the industry in Malaysia are asking: do we even want to be in that tussle, and are we too far behind?

Malaysian government officials involved in promoting start-ups, along with private equity players and even local start-up founders, say the best way to play catch-up and make up for lost time would be to attract more capital and become a venture capital (VC) hive.

The insiders say that while it would be ideal for Malaysia to be the birthplace of the next generation of Southeast Asia’s mega tech companies, such as Grab or Tokopedia, there is equal – if not more – opportunity in being the country that substantially owns the fastest-growing start-ups.

If Malaysia-based capital becomes more involved in the scene, there could be dividends at home, giving the country more leverage to persuade these companies to set up operations within its shores and employ and train locals – a multiplier effect for both capital and jobs, say industry players.

And while Malaysia’s investment scene has long been staid – partly due to endemic risk aversion in a nation home to large pension and sovereign wealth funds that need steady returns – there is a consensus among young local players that Malaysia can, with the right political will, make this dream happen and tap into the surging value of Southeast Asia’s internet economy.

A report released this week said the sector was worth an eye-watering US$100 billion, and is only set to grow.

One reason for cautious optimism in Malaysia is the government’s dramatic overhaul of how it involves itself in the VC scene, promising to put in place initiatives it hopes will invigorate the sector.

Just ask Yeo Bee Yin, the charismatic technocrat who leads the ministry in charge of energy, science, technology, environment and climate change (Mestecc) in Prime Minister Mahathir Mohamad’s administration

Chief among her plans is a 2 billion ringgit (US$476 million) war chest of state money which will be used for grants that match private capital injections.

The government will encourage local and overseas VC firms to finance regional start-ups by implementing a “fund of funds” model – a pooled investment fund that invests in other types of funds – to push for greater participation of private cash in everything from green tech to fintech, especially from smaller investment funds.

First mooted late last year, the initiative also includes a substantive upgrade in tax incentives for private companies or even individuals who invest up to 20 million ringgit in private VC firms.

“Previously we did not have a strong regulatory framework, incentives or an ecosystem that attracted enough private VCs to invest in Malaysia,” Yeo said in an interview last month

Her administration took office from the government of now-deposed prime minister Najib Razak, which had saddled the country with massive debt and was engulfed with corruption allegations.

“But now we will go into the fund for funds model, funding VCs who will find and fund start-ups.

We will let the private sector do it and then leverage off their network and expertise to build our entrepreneurs,” Yeo said. She added that part of the government’s push to level up the VC scene included the privatisation of two of five government funds under her ministry.

Kumpulan Modal Perdana and the Malaysian Technology Development Corporation will be sold, while the remaining three – Cradle, Malaysian Venture Capital Management (Mavcap), and Malaysia Debt Ventures (MDV) – will oversee early-stage funding, venture capital and venture lending, supporting emerging firms with high growth potential and high risk.

Co-investing with private and international VC firms would allow the government to streamline the process while also focusing on attracting private funds – fresh signs that it is serious about reviving an old cooperative policy labelled Malaysia Inc, a symbiotic industrial strategy to enhance public-private partnerships.

Yeo said the government’s VC initiatives would allow Malaysia to focus on nurturing a start-up ecosystem in a region where such firms are fast blossoming, rather than scrambling to select profitable start-ups: something she admits the government “is not good at”.

Mestecc data shows that, on average, Mavcap sees a return of 65 cents for each dollar in the first round of direct investments.

But these initiatives were not “free money”, Yeo said. “There will be strings attached, especially for international VCs – if not, there will be no loyalty.

However, the scene in Malaysia is not limited to local start-ups because talent can come from anywhere and we don’t want to lose out to other countries.

We will open up for foreign talent, but there will be some requirements on local ownership.

But saying no to all foreign talent will bring no meaning as we will lose out to many countries. We must attract them to Malaysia, build an ecosystem, let them hire, operate and grow here.”

The government will also scale up funding for research and development, streamlining the start-up process while thinking of new ways to attract more private funds.

Although Malaysia’s internet economy, valued at US$5 billion this year, continues to grow at a steady 20 to 30 per cent annually, neighbours Singapore, the Philippines and Thailand are matching this pace, while Indonesia and Vietnam “lead the pack with growth rates in excess of 40 per cent a year”, according to the e-Conomy SEA report released by Google and Singapore state investment firm Temasek Holdings this week.

Singapore remains a main funding gateway and the home of the region’s first “decacorn” – Malaysia-founded, Singapore-based transportation, delivery and digital payments giant Grab Holdings, which is valued at US$14 billion. A decacorn is a company valued at more than US$10 billion.

Meanwhile in Malaysia, funds are experiencing a slowdown, with US$140 million raised in the first half of this year, falling short of 2018 levels – possibly attributable to its lack of home-grown unicorns.

Below : Yeo Bee Yin, who leads Malaysia’s ministry in charge of energy, science, technology, environment and climate change.