By Aaron Sarma and Dr. Sivapalan Vivekarajah April 26, 2020
- Proposal for 200 startups to receive US$700k funding each within 12 months
- Future of startup ecosystem & Malaysian economy is forever changed by Covid-19
Following on from Part 1 where we focused on what the government can do to help startups survive, and offered our ideas through four recommendations, today we turn our attention to how our startups can THRIVE.
5. Remove Sales Tax for online services
The online sales tax has been a sticking point for a lot of e-commerce and digital companies in Malaysia for some time now. Now is not the time for the 6% sales tax for (SST) online services. The overall income from this for the government is not high but conversely it has a big impact on technology companies that use services like Google and Facebook ads, cloud services etc.
It also affects e-commerce sellers including the micro sellers or the e-Usahawan. The savings in tax can be repurposed to drive marketing efforts to help grow revenues – which is more critical as a means to manage the downturn.
Our recommendation is to remove the SST for technology services for 2020 and 2021 and only restore it in 2022 once the economy recovers.
6. Provide funding for Venture Capitalists to invest
One of the most frequent concerns raised by the startup ecosystem over the last few years has been the lack of funding by local VCs in the ecosystem. While there have been numerous efforts over the years we have not seen a significant shift in the funding environment. Even more so in this Covid-19 environment, many VCs are holding on to cash and bracing for portfolio companies who make a capital call. This environment might result in even good companies not getting funding. This will stunt their growth and will slow down the tech ecosystem in the country just when we need more tech adoption.
We don’t advocate for this funding to be traditional funding where the government expects long term upside. Instead it should be provided on a friendly basis where VC funds are allowed to “buy-out” the government investment at a low interest rate. Our neighbours down south have tried a model like this to great success.
We recommend that the government provide matching funds of 5:1 (that is, government funds: private funds). As a reference the Singapore government has provided 7:1 matching in the past so this is not unprecedented.
The total value of government funds would be US$115 million (RM500 million), with matching of US$22.9 million (RM100 million) in private sector funds. This will inject a total of RM600 million into the ecosystem. We propose that this program be spread over 10 funds of RM60 million average per fund which can be administered by licensed venture capital firms who are registered with the Securities Commission. This way more VC funds can benefit from this funding. A buy-out can be allowed at any time at the rate of 3% p.a. non-compounded. We are proposing a buy-out because this will also allow the funds to be returned to the government to be then recycled for future funding. The buy-out should be at the option of the VC fund.
[RM1 = US$0.23]
To stimulate disbursement, the funds must be invested within 12 months, and any un-invested funds must be returned to the government. This will give the ecosystem a shot in the arm and would be an immediate improvement over the RM370 million (US$85 million) venture capital funding for the total of 2019.
We further propose that we cap funding per company to RM3 million to ensure more startups receive these funds. This will benefit 200 Startups in the next 12 months.
Our recommendation is for implementation of this stimulus to be carried out by Malaysian Venture Capital and Management (Mavcap) under a fund-of-fund structure as recommended by the previous Technopreneur Funding Task Force.
(disclaimer: Dr Sivapalan was the Chairman of this task force).
All existing VC funds can apply as well as Corporate Venture Capital and Side-Car Funds supported by Malaysian Business Angel Network (MBAN) with a requirement that all funds are set-up or based in Malaysia.
(disclaimer: Dr Sivapalan is a Past President and current council member of MBAN)
7. Provide matching funds for Angel investors and Accelerators
We propose that a similar scheme be provided for Angel Investors and Accelerators. This is to ensure that startups at the earlier stage get support as well. From the angel investor standpoint this incentivises individuals who might be holding on to their cash reserves to back early stage companies in a meaningful way.
Accelerators on the other hand can expand their reach to support more companies or invest further in the companies they are already working with.
We therefore propose the same matching funds of 5:1 for accredited angels and accelerator investments. The total fund amount we propose is RM100 million. With matching this will amount to RM120 million and spread over 10 funds of RM12 million each with, as per the proposal for VCs, a buy-out allowed at any time at the rate of 3% p.a. non-compounded.
We also recommend to cap funding at RM500,000 per startup. This way 240 startups will benefit from this stimulus. We propose that implementation be executed by Cradle Fund for Accredited Angels, Angel Clubs and Accelerators.
8. Increase funding for ECF and P2P
On the 16th of April 2020, the Securities Commission announced that it would lift the crowdfunding limit on equity crowdfunding (ECF) platforms, and allow ECF and peer-to-peer financing (P2P) schemes to operationalise secondary trading, with immediate effect. In addition to this the Malaysia Co-Investment Fund (MyCIF), which is administered by the SC, has increased its funding matching ratio from 1:4 to 1:2 for eligible ECF and P2P campaigns, to provide additional liquidity into the alternative fundraising space from now until 30th Sept 2020. This is absolutely the right direction for this space.
We further recommend an increased amount of an additional RM100 million, which will raise the matching amount to RM150 million. Funds to be matched at 2:1 (Government: P2P/ECF). Similar to our VC recommendation, as this is a government stimulus package, the government takes on a larger slide of the matched portion.
For ECF a buy-out is allowed at any time at the rate of 3% p.a. non-compounded and investment to be capped at RM500,000 per company. For P2P the interest rate on government funds to be 0%, whereas the private sector portion can be at their normal rate. This will benefit 300 startups in the Malaysian ecosystem.
9. Incentivise corporate partnerships and investments
One way to ensure the survival of startups without impacting the national budget is to provide an avenue for corporates to play a role in providing liquidity in the market for startups.
The approach most corporates have taken is to build technology in-house and while this is admirable most don’t see the results in innovation as expected as structurally corporates lack the creative energy housed in a startup.
Corporates should invest in startups as a means to have access to innovation and talent. Startups on the other hand can benefit from the resources and distribution that can be provided by a large corporation.
In 2018, MESTECC (the former iteration of MOSTI) announced a corporate tax incentive of RM20 million to encourage corporations to invest in venture capital firms. Our recommendation is to extend this proposal so corporates who invest directly in startups also receive this tax incentive. These startups however have to be registered with one of the tech based agencies like Cradle, MDEC or MaGIC and there must be no direct relationships between the corporates and the founders, similar to the rules for the Angel Tax Incentive.
This way corporates have a clear financial benefit in making bets in startups and startups have a clear path to partnerships, investments and potentially exits.
10. Innovation & Commercialisation Grant
During this crisis, it is especially important to incentivise solutions that will directly address this crisis and support the nation. Startups can play a critical role in this process. This is where grants can play a key role in driving the digital economy’s recovery.
We recommend that Cradle Fund be allocated additional funding in two separate buckets:
a. Covid-19 Response Grants to spur solutions to help with the current crisis such as logistics, medical equipment etc. We recommend RM10 million in grants of RM500,000 to back 20 innovations with a path to commercialisation.
b. Economic Recovery Grants for businesses who have solutions to help SMEs during the recovery period. This RM500,000 grant will back 40 solutions for SMEs through an extra fund of RM20 million.
We present these 10 stimulus ideas as recommendations which we believe can help bolster the startup ecosystem. We recognise how some recommendations might seem ambitious. Nonetheless, in these times of crisis lies an opportunity for Malaysia to reshape the landscape of our new economy.
Either way, the future of the startup ecosystem and the Malaysian economy will be forever changed by Covid-19. What exactly that change will be is in our hands. We believe this is the moment for big, bold ideas to grow and flourish.
Aaron Sarma is an entrepreneur, speaker and investor. He is a cofounder and serves as General Partner at ScaleUp Malaysia Accelerator. He is the founder of Touristly/Vidi which was acquired by AirAsia in 2017 and remains Non-Executive Director of AirAsia.com. Visit his Linkedin profile or connect on Twitter @aaronsarma.
Dr. Sivapalan Vivekarajah has a Ph.D in Venture Capital from the University of Edinburgh, Scotland. He is the cofounder and Senior Partner of Scaleup Malaysia Accelerator and cofounder of Proficeo Consultants. He is the author of a book on business innovation – Blue Sky Innovation available online at Amazon. Visit his LinkedIn profile.