Why Malaysia’s Nexea believes corporate VCs themselves are not creating enough value

Corporate VC happens to be just one of the tools to achieve corporate innovation goals; by itself, it usually ends up not creating enough value because the subject matter of corporate innovation itself is quite complex

“Everybody wants to be a billionaire, but 99 per cent of people are not willing or capable to do what it takes,” says Ben Lim, Venture Partner at Malaysia-based angel startup accelerator-cum-angel-investor-network Nexea.

Since Grab’s entry into the coveted “Unicorn” startup club sometime in 2016, no other Malaysian-born companies have made it to the list. There are quite a factors contributing to a company’s elevation to the coveted club, and the size of a company’s targeted market is all the more important factor. Given the small size of Malaysia, companies targeting only the local market are unlikely to be a unicorn.

But does this mean Malaysian firms stand no chance to become a unicorn?

To get a clear picture of the current startup and investment scene, e27 sat with Ben Lim and Noomi Fessler — venture partners at Nexea which has accelerated and funded more than 30 startups in Southeast Asia.

Below are the edited excerpts:

While VC firms are on the rise in Malaysia, startups are still relying more on equity crowdfunding platforms (ECFs). Why do you think this trend exists? Is it because startups don’t really trust VCs?

Lim: Nexea has actually backed a few startups as a lead investor including ParkIt, which has raised money on PitchIn. We see equity crowdfunding (ECF) platforms as being complementary, more than being an alternative. If a startup solely wants to raise money, ECF is a good option to do that.

VCs and angel investors tend to bring in more strategic value in knowledge, experience and networks in comparison. They actively support the company, for example, through mentorship and introductions. However, VCs must invest according to growth and exit opportunities, which most businesses cannot meet.

Also Read: Uber officially sells Southeast Asia assets to Grab, including food delivery service

Retail investors are not bound by that, thus they can invest in both scalable startups and more traditional businesses – which we see a lot on ECF platforms.

From my conversations with several angels in Malaysia, I have learnt that services-based startups are getting more attention than product startups. Why so? Do you see the trend to reverse in the near future?

Lim: If we define product startups as such that have a physical product to manufacture and sell, it is a more traditional business model – with heavy investments in assets and workforce required to grow. The startup capital for that is much higher, making their take-off harder.

Also, manufacturing plays an important role in physical products, and that gives Chinese players stronger cost and market size advantages.

Nexea's Venture Partner Ben Lim
Nexea's Venture Partner Ben Lim

Nexea’s Venture Partner Ben Lim

At Nexea, we focus on investing into highly-scalable startups. Platforms/marketplaces and SaaS companies are the most common. Those startups don’t necessarily invent new products or technologies. They leverage on existing technologies and build a new business model around it.

We do not see a strong reversal trend coming up, as Malaysia’s economy is moving towards services, and most of the recently emerging unicorns globally tend to be service-based anyway.

It is only natural because their cost-to-scale is much lower.

Despite having a huge mobile internet population, Malaysia is trailing other markets in the region in terms of the growth of tech startups? What could be the reasons for this relatively slow growth?

Lim: Many startups that we see in Malaysia are not precisely targeting the entire mobile population in the country. For example, we have a market where users prefer many different languages. This makes Malaysia a tougher home ground to conquer.

Supply and demand plays a role too. In Singapore, for example, there is a huge number of VCs with a limited number of good startups — and this leads to more startups being funded.

There is a similar effect in Indonesia as well, because the market size of Indonesia attracts a huge number of foreign VCs.

Over time, we should see this level out across the region as VCs establish themselves deeper into each country.

Fessler: That being said, Malaysia Digital Economy Corporation (MDEC) is doing a great job in bringing more VCs into the country. This means more money per round for great startups and a higher chance of getting funding for the rest. The government is looking to implement RM20 million (US$5.12 million) tax incentives for corporates, who invest in VCs, so we expect to see more startups being funded in the near future.

Where is the startup ecosystem in Malaysia heading for? What sort of startups have the potential to become unicorns like Grab? Do new-age technologies like AI, IoT and blockchain hold any potential in the country?

Lim: To become a unicorn, a key requirement is that the market being challenged is big enough. We see SaaS companies and marketplace business models having better market opportunities as they can scale cross-border quicker.

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I am not too excited to say that we currently get a small number of startup funding applications, who leverage narrow-AI, IoT and even blockchain technology to solve real-world problems.

What is Nexea? How is this accelerator-cum-fund different from other early-stage funds in Malaysia and Southeast Asia? What is your average ticket size? What is the investment philosophy?

Fessler: Nexea’s first investments were done by individual angel investors. That’s where our roots are in angel investing. Today, we are a startup fund and accelerator, but we are still backed by over 20 highly experienced investors and mentors. Several of our startups wouldn’t be where they are today if it wasn’t for the mentorship and connections provided by our angel partners. We are very thankful to have them and work on providing them with more good co-investment opportunities in the future.

Nexea's Venture Partner Noomi Fessler
Nexea's Venture Partner Noomi Fessler

Nexea’s Venture Partner Noomi Fessler

As to your question to our ticket size: We fund anywhere between RM50,000 (US$12,800) and RM1 million (US$260,000). What works well for Nexea is to fund startups via our accelerator programme and to continue to back the successes afterwards.

For us, the accelerator is all about providing the maximum support for the six months, to help to validate the business, and to make our startups investable. We are currently running our third accelerator batch — with the current one in partnership with Sunway iLabs. In both previous rounds, we funded some founders right after the accelerator.

That’s really our goal for the programme. Without follow-on funding, startups can’t scale — and then what’s the point of an accelerator programme?

To date you have backed over a two dozen startups. How many more are you planning to fund? Any new deals in the pipeline?

Fessler: We’ve invested in 30-plus companies to date. At the moment, we are working closely with our new accelerator startups. For those that succeed in validating their business model, we are happy to back those companies with more investments.

Apart from that, we are evaluating approximately 50 startups every month, and the deal flow is constantly increasing. There’s no lack of deals. But what really matters to us is that we invest in companies that can scale fast and where we can add value to grow the business faster.

That’s where we have become more selective, compared to our earlier days. Since last year, we focused on highly scalable tech startups. That’s really where our expertise is, and where most mentors are experienced with and are able to help most. To support scalable startups, we have also partnered with Amazon AWS and Microsoft Azure to provide huge value for them.

Does any startup of your portfolio have the potential to be a unicorn?

Fessler: A majority of the startups we invest in have the right fundamentals to be one. The key is a big enough market size and the right business model — or a business that’s able to expand globally, or at least, regionally.

Given the small size of the market, do you encourage your startups to explore large Asian markets like India and China?

Lim: The market size in China is attractive, but the competitive landscape is such that, let’s be frank, most smaller foreign companies don’t stand a chance. The list of companies that got burnt in those markets is long and includes cash rich, huge MNCs from around the world.

We usually encourage startups to stay in their home country before going for the rest of Southeast Asia. The home country serves as a ground to test and validate the business. Southeast Asia is an attractive region to play in, and still relatively untouched, for example, compared to China. However, that’s just our general observation. The expansion strategy must, of course, fit the startup and business model.

From your experience of incubating and investing in several startups, what are the greatest strengths of Malaysian entrepreneurs, compared to their counterparts in other Asian markets?

Fessler: Malaysia’s diversity is an advantage. From day one, entrepreneurs can learn to address different markets in the same country. Regional expansion can be done with less friction.

Some founders leverage on this opportunity even more and bring on board team members from diverse backgrounds. Such teams tend to do better over time. The team would have more experience to pull upon when solving unique problems. They also understand a broader range of different types of customers.

Lim: And second, as Malaysia is catching up with developed markets, we are able to understand both types of markets — developing and developed. This gives us a natural advantage in operating in both environments when expanding. Foreign companies from developed markets have had issues setting foot in developing countries precisely because it is hard for them to understand the differences in the maturity of the market.

What is lacking in entrepreneurs in Malaysia? Is the fear of failure more rampant among startups?

Lim: Globally, there’s not enough awareness among founders on how likely a startup is going to fail. The startup industry is an exciting space to be in – disrupting, fast pace, and with endless opportunities. That is exactly why many people are attracted to it.

Everybody wants to be a billionaire, but 99 per cent of people are not willing or capable to do what it takes. It requires extremely hard work and persistence, but also natural resourcefulness and entrepreneurial talent. It also requires a good understanding of business fundamentals – many founders lack that but are not willing to continue to learn every single day.

Where is the Malaysian startup ecosystem heading for? What does the future hold for it?

Lim: The quality of the average startup has improved tremendously over the past years. Business plans are becoming more solid. More founders are coming out of their previous job or company, and they are starting to tackle very specific problems in a market they understand well. And there are huge opportunities for entrepreneurs in Malaysia.

Also Read: Malaysia partners with global ecosystem partners to boost tech ambitions

Malaysia offers different cultural test markets, low costs of operations, a strategic geographical position, and a growing market. It’s relatively easy to start a business, and the government has been very supportive in pushing both startups and investors to grow. It’s really the perfect place in Southeast Asia to start a business, and we expect a lot more startups to emerge from our ecosystem.

How is the angel investment ecosystem growing in Malaysia?

Fessler: Until today, many deals are done privately, and it is hard to get accurate figures. The Malaysian Business Angel Network (MBAN) has 200 registered members, but there is a much larger number of non-registered angels. However, we see a strong trend of investors registering with associations like MBAN, or joining companies like Nexea.

It just offers a lot of advantages. Joining us means getting a much larger deal flow, and spreading the risk through co-investments. Many investors join us to learn, too, and they become very sophisticated in evaluating startups and adding value to them. We provide a process for that.

We also have angel investors approaching us that are company owners or part of a family fund to learn about startup investments.

How is the corporate VC industry shaping up in the country? Do you look to partner with private companies to launch CVCs?

Lim: Corporate VCs and accelerators happen to be just some of the tools to achieve corporate innovation goals. By themselves, they usually end up not creating enough value because the subject matter of corporate innovation itself is quite complex.

In corporates, we have what we call natural antibodies to innovation where their natural KPIs will always conflict with innovation goals. Therefore, there needs to be a strong methodical approach to foster the right environments for innovation to thrive within the corporate space. Innovative structures can be created to grow new revenue streams, to attract and retain entrepreneurial talent, and even to attain an innovation culture.

Corporates are already approaching Nexea to talk about ways to get their hands on next-generation businesses — or even to find ways to innovate internally.

The post Why Malaysia’s Nexea believes corporate VCs themselves are not creating enough value appeared first on e27.

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