Over the past few months, the innovation game in Malaysia has shifted. The MDeC (Multimedia Development Corporation) Pre-Seed fund, which ran for about five years, came to a close after its application final batch in December 2010; then came startup accelerators like Grey Attic and Alphapod, which offered a boot-strap method for ideas to be realised.
And in August last year, the country saw the launch of the Virtuous Investment Circle (ViC) – an angel-investment group sponsored by Cradle Investment Programme (which is an early-stage funding programme under the Malaysian Ministry of Finance) – which had the aim of growing the angel-investment community in Malaysia.
We spoke to Johnathan Lee, the Senior Manager of the Ideas Bank for Cradle as well as an advisor to ViC, about where the latter comes into the country’s innovation ecosystem, the future of startup accelerators like Grey Attic, and what areas local entrepreneurs should concentrate on improving.
What is the state of Cradle at the moment? How many applications have you received at the seed and pre-seed stages?
At the seed level funding from last year till February this year, we’ve approved about 30 applications; whereas for the pre-seeders we don’t have a set target of applications – we fund as and when Cradle comes across good deals to find the best companies to fund.
What’s your success rate for the pre-seed programmes Cradle has supported?
We’ve funded about 400 projects at pre-seed level, of which about 180 to 190 of them have successfully launched a product, and of those, about 55% of them have managed to be commercialised – which mean that the companies have either sold their product on the market organically, or raised subsequent funding.
Our criteria for taking on pre-seed applications is that they need to be innovative products that are commercially viable, so when we talk about innovation, it’s a combination of how advanced the technology is and how it can address market needs.
What about mobile apps? Have you received many applications at the seed stage?
Currently we have not come across companies in the seed-stage yet; most of the companies we fund now are B2B companies or Web 2.0 companies – the closest B2C company we’ve funded is Carlist, a second-hand car listing site. There’s no so much of the “sexy side” of tech, as you say it, because we’re looking out for sustainable businesses; Although the core of Cradle is not-for-profit, we do want help businesses be sustainable and grow them to a scale that they can approach VCs for further opportunities.
Why do you think Cradle attracts more B2B applications than B2C ones?
Although many of the projects we have now are B2B types, we do have a mix of B2C applications in the pre-seed segment has more B2C as well – including mobile app development ideas. For the seed side we’ve funded more B2B programmes because the business plans there are more solid – what we look for are businesses that aren’t bound by one revenue model, but models that that have multiple revenue streams and can adapt to a changing marketplace.
One of the notable failings of the MDeC Pre-Seed grant, as admitted by some grant receivers themselves, was a lack of mentoring. What’s Cradle doing in this area?
There’s quite a bit of hand-holding at the pre-seed level, and Cradle has an advisory unit that consults on almost everything (except tax consulting) required in the business field: advice on marketing strategies, and getting potential contacts and investors. Then we have a mentoring unit, which was started around ’03 to ’04 where we have about 400 mentors – many of them ex-entrepreneurs – in the database ready to give advice on strategies and marketplace.
What’s your take on the likes of Grey Attic, which emulates a tough bootcamp, Y-combinator model to kick out a product within 100 days? Do you think that this mentality and method is required to spur on lazy entrepreneurs here?
To my knowledge, those programmes have worked out well in mature markets like the US, and they’re being tested out in Europe. Where Malaysia is concerned, this kind of model hasn’t been tried yet, so it’s hard to say if they’re successful or not – having said that, some of the entrepreneurs here do need to be kicked into shape. We are supporting Gery Attic – though not officially – but we are talking and exchanging ideas. There’s much to be done in Malaysia, and hopefully initiatives like Alphapod and Grey Attic would support the ecosystem.
So where does ViC fit into the local ecosystem between Cradle and MDeC?
ViC is an independent club made up of a dozen angel investors where we educate potential high-net worth individuals about the nature of giving back and investing in early-stage startups.
These investors would invest in the gap between agencies like what Cradle offers and the higher-end VCs – which is around the RM500,000 to RM2.5 million (USD160-850,000) range. The group itself is not-for-profit, so it doesn’t take any stake in the company. What we do is provide services for the entrepreneur to find angel investors – and for that, we have a RM500 (USD160) charge to vet out the proposals.
Now, a lot of people ask why we’re charging entrepreneurs – the fact is, we’re providing services is for the entrepreneur; it’s not for the angel investors. The RM500 fee – which is nowhere near the USD2,000 fee some US firms are charging to pitch – covers administrative costs, co-ordinating with the right investors, the travel cost to see the entrepreneurs, and so much more.
So we’re merely facilitators of angel investments – we don’t hold any pitching sessions; we just vet through your business proposal, and if we think it’s an attractive enough idea, we’ll forward it to our list of potential investors.
We haven’t received as many as applications as we’d like – which is about 20 to 30 business proposals since we started. And while the ViC is not sector-bias – we accept proposals from software, franchising, and even the manufacturing sector – most of the applications we received do have a tech angle. That could be down to the fact that several advisors, including Microsoft’s Director of Local Software Innovations Peter Tam, Ishi Singh from Google Singapore, and even myself come from a tech background.
Why do you think the Malaysian VC scene isn’t as strong or as prevalent as other countries?
This goes back to a mindset that I find prevalent not only here, but across Asia. I’ll give you an example, like (1) Failure is not acceptable, (2) Parents don’t want their children to become entrepreneurs, but rather prefer that they work in multinational corporations, and (3) the culture of giving back isn’t prevalent.
In the US, early-stage VCs are founded by successful ex-entrepreneurs, whereas in Asia, from my observations, they’re founded by those in the financial sector. Where they come from affects how much risk they’re willing to take. So in the US, they look at 50 to 100 good deals, knowing that nine out of 10 of them would fail and one would succeed. In Asia, they look at 10 good deals and try to pick that one good deal out of the bunch for a 100% hit rate. That’s hard.
Having seen many proposals and pitches, what do you think is the greatest weakness in local entrepreneurs in approaching investors?
It’s the lack of presentation skills – very often they have a great product and good business models, but sometimes they take half an hour to explain everything except their business’s core and USP (unique selling point). If you’re in front of investors and you have only one to two minutes to grab your attention and you fail to do that, then it’s gone.
Editor’s note: Lee and two other VIC members are participating in Echelon 2011 Malaysia Satellite as judges
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