By: Athar Osama

Malaysian Government established the Malaysian Technology Development Corporation (MTDC) in 1992 with a view to “spearhead[ing] the development of technology businesses in Malaysia.” MTDC was created as a Private Limited company under the Malaysian venture capital regulations to allow it to invest in new technology based start-ups and other investments that may facilitate inward attraction of technology into Malaysia. The nascent entity was  initially given MYR 52mn in paid up capital to be invested in technology-based companies (TBCs).

Today, MTDC manages a MYR 1 billion non-ICT venture capital fund on behalf of the Government of Malaysia. The primary focus of this Fund is life sciences / biotechnology, advanced materials, advanced manufacturing and nanotechnology sectors. Since 2004, MTDC has invested more than half a billion Ringgit Malaysia, in high-technology companies both in Malaysia and abroad. It also manages Malaysian Life Sciences Capital Fund (MLSCF) established in 2006 with US$162 million in committed capital. MTDC is majority owned by Khazanah Nasional – the Malaysian Government’s Sovereign Wealth Fund that makes strategic investments in Malaysian entities.

Since its creation, almost 2 decades ago, MTDC has undergone considerable learning and a series of changes have ensued to enable it to achieve its objectives. These were the early days of Malaysian Government’s foray into high technology industry and the infrastructure for the creation of high technology businesses was quite limited as was the experience of Malaysians to fund such entities. MTDC sought to address this capability gap by partnering with Silicon Valley venture firms. It began by creating two funds – one to invest in start-ups abroad where it would act as co-investors and provide its executives to learn alongside experienced venture capitalists of the Silicon Valley and the second for investment in Malaysian firms where it would bring its learning from the first fund – and sometimes foreign connections – to bear on companies based in Malaysia.

In doing so, MTDC ended up becoming one of the front-runners in creating a venture capital industry. By 1999, there were there were more than 30 VCCs, up from a mere six in 1990. However, while the venture capital (VC) funding model had worked relatively successfully for manufacturing companies, there have been problems associated with adopting this model of funding for high-tech start-ups in Malaysia.

Specifically, Malaysian venture capital firms are known to have a low appetite for risk taking. There is also very little available in terms of exit options for venture capital companies to recover a return from their investments within a decent timeframe. Despite the creation of MESDAQ – Malaysian Exchange of Securities Dealing and Automated Quotation – in 1997, specifically designed to allow high risk technology start-ups to list under a lax set of criteria to provide liquidity and exit options to the developing small capitalisation technology market, there has not been substantial improvement on the Malaysian venture capital scene.

There is now a widely believed understanding that a “funding mismatch” exists between the needs of Malaysian “technopreneurs” and the funding criteria of VCs.[1]

Around two decades of MTDC experience has been instrumental in bringing about this learning and consensus – and subsequent policy changes – to Malaysia and learning from its experience can be invaluable for other Islamic countries seeking to do the same.

Three Phases of MTDC’s Development

Norhalim Bin Yunus, the current CEO of MTDC, defines these into three distinct phases, namely, 1992-1997, 1997-2005, and 2005-till present.

In the first phase of MTDC (1992-1997) a number of investments were made in electronics industry-related businesses. Malaysia has begun to make significant headways in electronics industry – particularly in Penang – during the late 1970s and 1980s and there was already the beginnings of an eco-system around that industry. Many of these new startups that MTDC invested in were created by former executives of leading electronics manufacturing companies already located in Penang and these were tightly intertwined with industry within the region.  In short, MTDC found quality deal flow and possibilities of exit from its investments and ended up reaping several times returns on its investments in this phase.

As these investments in electronics companies were made, and exited from, there was a realisation that start-up companies need a lot more than just money to succeed. This was especially true of new Malaysian start-ups in non-electronics sectors that lacked the experience and maturity of electronics industry entrepreneurs. This lead to a series of changes in the MTDC offerings.

In the second phase of MTDC (1997-2002), MTDC rolled out two new programmes, namely, an incubators initiative and a grants programme to assist in commercialisation. The grants programme would require a 70:30 ratio – with 70% provided by the government – to help technology start-ups to succeed. An incubation programme was also set up in collaboration with leading Malaysian Universities. In 1998, MTDC created five incubators in collaboration with universities.

Learning from this round of investments, primarily, in biotechnology and life-sciences companies indicated that the support provided under the phase 2 arrangements were still not adequate to build competitive companies but also that venture capital is a very expensive funding instrument. A third phase of investments incorporated these new insights and learning.

The third phase of MTDC (2005-onwards) initiated a value-added services (VAS) programme at MTDC where a number of additional services – besides venture capital and grants – such as coaching and mentoring, network and experience sharing, access to government procurement market, and soft loans are being provided to technology start-ups. In particular, MTDC seeks to launch another fund later this year that will fund up to 90% of a company’s investment needs through redeemable preference shares (RPS) with very low premium that will burden the start-up with a much lesser cost of capital than a traditional venture capital instrument. MTDC estimates that its RPS based investments will have to pay a  coupon rate of 3.5% against a usual 12% on a venture capital model, on average. These shares will carry an option to redeem starting in the 5th year.

Completing the Equation

What has largely resulted, from two decades of venture investing experience at MTDC, is an understanding that the venture capital instrument cannot exist – and succeed – in isolation with a host of other supporting environmental conditions and policies. Broadly defined now as the “eco-system” for entrepreneurial start-ups, this is found to be lacking in Malaysia in its mature form – although it is in different stages of development in different sectors -  in a broad array of sectors.

One example is the public procurement market in Malaysia. It is often the case that Malaysian companies who sell within the Malaysian market are first forced to sell to other countries. For example, one of MTDC’s portfolio companies produced a diagnostic kit of Dengue Fever. This was first marketed in Singapore before it could be marketed within Malaysia. In essence, the local market requires a stamp of approval from international sales before it allows local entrepreneurs to succeed. It is not always possible for Malaysian entrepreneurs to be able to do that. It shouldn’t be. There is no a “Buy Malaysia” policy initiative that allows Malaysian manufacturers who can produce products and services of international standards to get a marginal preference over foreign manufacturers.

Norhalim is quite conscious of the possibilities of providing unhealthy support to local players that could shield them from international competition but he believes that there should be some preference to local players. Such practices have helped companies in Korea and Taiwan to succeed and can help Malaysian SMEs as well.

This learning is now enshrined in the new selling proposition for MTDC – i.e. that it offers “the right mix of dedication, knowledge, technology, innovation, conviction, support, investments and nurturing” making it the “complete equation” to create value and accelerate economic growth for the Nation.

In order to complete the equation, MTDC has launched a wide array of different funds and funding instruments. These include, among others, Technology Acquisition Fund (TAF), Commercialisation Research and Development Fund (CRDF1, 2, and 3), Business Growth Fund (BGF), Business Startup Fund (BSF), Value-added Services (VAS), Technology Centers (in collaboration with UKM, UPM, UTM, etc.), and Venture Capital Fund. A Malaysian Life Sciences Capital Fund (MLSCF) co-managed with Burrill & Company of San Francisco invests in early stage agriculture, industrial and healthcare biotechnology companies, to yield superior financial results, advancing the Life Sciences Ecosystem.

Reflections on the Primacy of the Venture Capital Model

Norhalim B. Yunus - the CEO of MTDC

There is perhaps an even more profound insight from Malaysia’s experience in creating a venture capital industry that may be worth remembering as other OIC member countries embark upon creating their own venture capital industries. This particular insight suggests that venture capital may not be the end-all solution for creating entrepreneurship across developing countries and emerging markets. In fact, according to MTDC’s CEO Norhalim, “it may not be a solution for some countries at all”.

“If you don’t have high quality deal flow, you don’t need a venture capital industry at all. The ‘pure play’ venture  capital model simply would not work as it has, thus far, not worked in Malaysia in every other industry except electronics manufacturing where there was both high quality deal flow and potential exit options for historical reasons. Our experience suggests that in these circumstances you need something between a govern ment grant and a conventional venture capitalist,” says Norhalim.

“If you tried to create a venture capital industry under such circumstances, you will find that you have gotten stuck with investments that don’t lead to an exit. Also, conventional venture capitalist requires a very high rate of return from his / her investments. This amounts to about 8-12% coupon rate and a 20-30% rate of return. Again, we have found this to be too high for our start-ups and have thus experimented with grants, on the one hand, to redeemable preference shares, on the other hand,” he adds.

Couple this with the well-accepted empirical finding that venture capitalists only investments in a very small number of companies that they look at (no more than 2-5% and perhaps on the lower end of that margin) and it is quite apparent that venture capital alone cannot address the early-stage capital needs of a developing country entrepreneurial environment.

While there is considerably “folk-lore” around venture capital industry and investing in the west, a substantial part of the “sexy” image that it gets is not well-deserved and the overall contribution of this industry is not as big as it may seem to be. The venture capital industry is dependent upon a whole series of other players and public policy interventions to succeed in doing what it does.

A Long way Ahead for Malaysia and the Muslim World

Despite a couple of decades of experience with – and tweaking of – the venture capital model, there is still a long way to go for Malaysia to achieve its aspirations of becoming an entrepreneurial economy. The steps taken by the Malaysian Government in respect of MTDC to widen and expand the range of financial instruments and to provide value-added services are in the right direction.

However, significant challenges remain and performance is still not upto the mark. Success in the commercialization of public R&D results is severely limited. According to one analysis, of over a thousand projects initiated under the “Intensification of Research in Priority Areas” (IRPA) programme during 9th Malaysia Plan, only 14% or so were identified to be commercialisable  projects, of which only at a rate of 5.1% actually led to commercialisation. The trend is even worrying during 10th Malaysian Plan (2000-2005) when this percentage further dropped to 3.4% [2].

Last year, Malaysian Government recognised the crisis of innovation within the country and launched Prime Ministers Special Unit for Innovation (UNIK) as a private-sector entity responsible for promoting greater commercialisation of research within Malaysia. While UNIK is still to announce how it intends to carry forth its mission, there is some inclination that it seeks to take a more “hands-on” approach and focus on SMEs as the engine of innovation in the Malaysian Economy. It is hoped that UNIK will learn from the experiences of MTDC as it defines its structure, programmes, and operational strategy.

Beyond Malaysia as well, MTDC’s experience with creating a venture capital model specifically tailored to a relatively under-developed capital market and entrepreneurial environment could provide considerable opportunities for learning for OIC member countries. Many of these countries – such as Saudi Arabia, Egypt, and Pakistan – are currently embarking upon similar experiments and others have done so in the past with limited success.

Dr. Athar Osama is a science policy consultant and the Director of Middle East and Asia for a UK-based consulting firm. He is also the Editor of Muslim-Science.Com.

Notes:

[1] Mohamed Ariff and Syarisa Yanti Abubakar, Strenghtening Entrepreneurship in Malaysia, Malaysian Institute of Economic Research, undated.

[2] V.G.R. Chandran Govindaraju, R&D commercialization challenges for Developing countries: The case of Malaysia, published in Tech Monitor, Nov-Dec 2010

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