On a Cradle mission to boost private investment in Malaysia

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Cradle CEO Nazrin says many Malaysian deals are forced to go abroad due to lack of funding opportunities. Cradle CEO Nazrin says many Malaysian deals are forced to go abroad due to lack of funding opportunities.

By Sharmila Ganapathy

It’s the classic Malaysian dream: entrepreneur meets venture capitalist (VC), secures the funding he or she desperately needs and the company makes a successful exit. The entrepreneur is happy, the VC is happy that the investment paid off and everyone lives happily ever after.

Although it sounds like an ideal situation, the reality is that the VCs in question are based outside of Malaysia, causing deals to leave the country when they should (ideally) remain in Malaysia.

“About 10 years ago, there were about 30-40 active VC firms [in Malaysia]. On the private investment side, venture capital has somewhat dried up. Even if they are investing, they choose to do so at the later stages and this applies even to government-owned venture capitalist companies,” says Nazrin Hassan, chief executive officer of Cradle Fund Sdn Bhd (Cradle).

The current situation is quite dire, Nazrin points out. “We have 9 [VC] companies; five of them are government-owned and the other four take money from the government in one way or another. No one in the venture capital side is really investing. So many of our deals are forced to go abroad to secure funding. We want to stop that tide; we feel that if we can fund them at the venture capital level, we can keep more of the deals in Malaysia, including the deals that Cradle itself has created,” says Nazrin.

The issue is that local investors claim there are no quality deal flows in Malaysia. The lack of funding then drives local companies to secure funding abroad.

“In the end they get funded by Singapore, Hong Kong, and Indian VCs. So obviously, there are people on the international circuit who see quality in our deal flows. The fact that our local investors don’t see it can be attributed to one of two things: Either you’re not assessing them properly, or, two, you cannot see their potential because you cannot value add to them. Other people can help value add to them and help them scale.

“If you cannot value add to them because it’s too much work, then the easiest thing to say is that there are no quality deal flows. But the thing is this: Deals don’t come ready to your expectations, deals come raw and you have to polish them up to a level where they get good. That’s the process of funding and nurturing a startup,” says Nazrin.

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Cradle plans to bridge the funding gap via its very own venture capital arm, which is set to debut in October this year.

(For the uninitiated, Cradle is an agency under the Ministry of Finance and a non-profit organisation that has managed the Cradle Investment Programme since its inception in 2003. The programme was initially allocated RM100 million and a further RM50 million under the 10th Malaysia Plan.)

“This is the challenge now. At a time when we should become less dependent on government funds, we have instead become more dependent. Not because the government has done more, but because the private sector has done less,” Nazrin told Business Circle in a recent interview.

“The private equity side is growing; the venture capital side has shrunk. That’s a real challenge, because it means that, to access capital, the entrepreneurs, particularly those who have graduated from the early stages, will be forced to source funds outside of Malaysia unless we boost the private investment capacity over here, which is why Cradle plans to fill the gap with our venture capital arm,” Nazrin adds.

The soon-to-be-introduced venture capital arm is not the only measure Cradle is taking to boost domestic private investment. The non-profit has also had some success with its Coach and Grow Programme, introduced in 2011. The initiative is a mentoring programme for entrepreneurs that brings together angel investors, VCs and government agencies, parties Nazrin believes can value add to the ecosystem.

“What we did was ask the VCs to coach and mentor these companies for a period of one year, with no obligations to fund [these companies]. Usually people go to VCs at the point of when they want funding, so people are constantly asking for money. So the VCs have to decide there and then either based on a business plan or a pitch whether these guys make the grade or not. Here what we’re saying [to VCs] is you come and guide, you see them grow and how they execute, you know them as people and their execution abilities, and chances are that, by the end of the 12 months, you will see there are quality companies and management teams that can execute business plans,” explains Nazrin.

He points out that this is how venture capital funding is done in the United States, where it’s not always about how good the entrepreneur’s pitch is or how well he writes his business plan. “You want to know how well he executes, you want to know him as a person, you want to build that relationship. Over here, it still doesn’t happen naturally, it is still very much the formal ‘you pitch to me, I judge you and I decide whether I want you or not’,” says Nazrin.

“That relationship portion is missing, which is what happens most often in Asia where VCs apply a very Western structure to it [investing]. Then the investments do not happen. What I’m happy with is that after some of the hardcore VCs came into the programme, they were very pleased with it. And they said that there are quality deal flows around. And I said yes, if we come in and huddle together and build these deal flows instead of just waiting for them, of course we will realise there is quality,” he adds.

Although convincing local venture capitalists will clearly take some time, Nazrin is confident that Cradle is headed in the right direction. “Our actions have consistently shown that we are positioning ourselves to be the primary early stage player in the country and here we want to be an ecosystem influencer. We’re handling the funding, coaching, the angels, the globalisation part. We support and facilitate the private sector, so at the end of the day it is better for the ecosystem.”

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