In a dynamic ecosystem, balance is required for sustainability and for a virtuous cycle to kick in.
BEAM 2 Feb, 2017
IN NOVEMBER 2016, the Malaysian Business Angels Network (MBAN) joined forces with various Southeast Asian angel groups to form the Asean Angel Alliance.
The objective of this affiliation is for the angel networks of member countries – Malaysia, Vietnam, Cambodia, Myanmar, Thailand, Singapore, Indonesia and the Philippines – to work together to ease cross-border investing and knowledge sharing.
A month earlier, MBAN and Hong Leong Bank announced a collaboration that will see the bank supporting the Malaysian startup ecosystem in the technology space through mentorship and developmental programmes that include grants for selected startups.
Tie-ups such as these are steadily driving the Malaysian startup ecosystem forward; support from angel investors, themselves an integral part of the ecosystem, is vital for its overall health.
There is no doubt that the startup space in Southeast Asia still has room for more ideas, innovation, disruption and business, and that investment opportunities are abundant. But who are angel investors and how do they pick what to invest in? Where is angel funding in Malaysia at? Is it at the nascent stage, matured or still taking its tender baby steps?
“Angel investing is something of a trend now. People hear about Uber or Airbnb and want to be the investor in the next big thing,” says Noomi Fessler (pic, below), venture partner at Malaysian angel investor club Nexea Angels and one of the few women involved in this space.
Jumping on the bandwagon only works some of the time; when it comes to angel investing, it is essential that the startup and investor match. Seasoned entrepreneur and rookie angel investor Wei Chuan Beng says that a common understanding of the values and the culture of the startup by the investors is very important, as well as the nature of its intended growth, whether slow or quick. “This is a core ingredient for successful investment,” he opines.
“Some synergy is needed between the investors and the startup team. Besides criteria such as timing, market traction, product viability etc, this is one of the most significant factors that allows the angel to really benefit the startup,” agrees Fessler.
According to Alan Lim, Nexea’s principal advisor, the ideal angel investor is one who has successfully completed the first half of his or her life where the focus is on winning and is now in the second half of life where the goal is no longer money but rather doing something significant such as contributing back to the community in the form of knowledge and expertise.
MBAN president Dr Sivapalan Vivekarajah (pic, above) adds that many investors choose to become angels not only because they want to diversify their investment portfolio, but also because they find entrepreneurs who work in areas that interest them.
“They could invest for financial reasons or, as it often happens, for philanthropic reasons. Some angles invest because they want to support specific areas such as education, and they do it via investing in entrepreneurs,” he elaborates.
It is an accepted fact that startups need angels not just for their financial investment but also for the mentorship. By definition angel investors are generally seasoned business people who are able to give advice and share experience. “Good startups have no problem finding money but they do have problems finding good mentors,” says Ben Lim, a Nexea venture partner.
Lim reveals that most startups that Nexea takes on approach the club more for the support in technology expertise that it offers – Nexea has a dedicated technology development team – and the access to expertise in other areas such as finance, human resources, sales and even people management.
To ensure that they can provide these needs to startups, angel clubs such as Nexea try to recruit angel investors who not only have the requisite skills but also the time and inclination to contribute to building a new startup and aiding entrepreneurs in their growth.
In Malaysia, early stage investment from the private sector into the technology space is encouraged by a government-approved tax incentive administered by the Angel Tax Incentive Office, a unit under Cradle Fund Sdn Bhd. The investment made must be approved and endorsed by the Ministry of Finance.
“At this moment, we think the incentive is great,” says Sivapalan, adding that angel investing can be a good tax planning tool for high income individuals; it is another reason people become angels.
However, Lim (pic, above) says that though the tax incentive is attractive, it is often not the deciding factor in becoming an angel investor.
Alan concurs that by itself, the tax incentive is not enough to attract more private investment into the tech startup space. In Malaysia, most support is given to startups in the form of matching or co-investment grants outside of the first funding stage, so more can and should be done to encourage investors to come in at this angel stage.
“One of the most effective methods in the world is co-investment by government arms. This benefits investors, startups and the ecosystem,” adds Lim, citing Japan, where certain government-backed co-investments do not require equity share in the startup, as an example Malaysia can follow.
Alan explains that this method involves the government co-investment arm giving the grant to the investor instead of to the startup directly, leading to the investor having a vested interest in seeing the best use of the investment.
Alan and Lim themselves have invested into Japanese startups with co-investment from government arms, and reveal that the co-investment and the fact the funds are given to the investor were major factors in the decision to invest. “It really reduces the risk to the investor, and risk is always the one thing we are worried about,” says Lim.
Alan says that though Malaysia’s government-backed co-investment and matching grants are effective investment tools, they do not reduce the risk to the investor because of the equity stake the government takes.
Alan, Lim and Fessler all agree that the method Japan uses not only does a lot to encourage private sector investments but also really boosts the ecosystem’s growth. The grants in Malaysia offer a lot of support to startups but sometimes leave investors in the cold. “In our market, we have spurred the growth of startups very well but this is not matched by growth of investor numbers,” says Lim.
“Entrepreneurs are more incentivised to start startups than investors are to invest,” adds Fessler. “If a grant makes a startup independent of an investor, there is disconnect later when the grant money is finished or the startup has completed the accelerator programme and needs to find an investor. They are not pushed early on to connect with investors.”
What then can be done to balance out the growth on both sides of the startup-investor relationship?
Sivapalan says that MBAN is planning to lobby for more government initiatives that will benefit investors. MBAN is looking into diversifying the type of companies that qualify for the current tax incentive – it is currently limited to nine investment focus areas. It is also working on allowing investments to be made via private companies owned by accredited angles; currently, investments must be made personally by the angel.
According to Alan, the Malaysian government seems to be wary about providing grants to private investors whose main reason for investing is financial gain – those who are in it to win – suggesting that grant money given to angels who invest for more benign purposes, such as contribution to society, will be more efficiently and effectively used.
One way to ensure that this happens is to carefully curate the investors that are given the grants. Currently, startups that apply for co-investment grants are curated; Fessler says that this process could be extended to investors as well.
“It can be done. It’s being done in Japan and South Korea is starting to do it,” says Alan.
Besides a lack of incentives, another problem that the angel investor scene in Malaysia is facing is the lack of awareness of what angel investors are and what they do.
Spreading awareness is something MBAN is actively working on; it already has the tax incentive under its belt and hosts monthly pitching sessions. Partnerships such as the one with Hong Leong Bank also help move things along. And MBAN further promotes angel investing through public and private presentations to groups of high network individuals.
“Awareness is still not at the level we would like it to be but angel investing is still very new to Malaysia,” says Sivapalan. Nexea, for example, only came into being a few months ago.
“Hopefully these efforts plus those of the angel groups will take us to where Singapore is and eventually Silicon Valley. We are hopeful because we see things moving forward, even if it is at a slow pace,” says Alan.
Startups are moving quicker than investors, he continues, because of the lack of awareness and education of what investors are, and lack of interest in becoming investors. “Investors need to catch up. Startups and investors must come together to allow the whole ecosystem to move faster.”
Sivapalan remains positive about awareness levels increasing, his hope stemming from international examples. For instance the UK angel investor network London Business Angels took more than 10 years to create optimum awareness – and mind you, this in a sophisticated market.
With the steady pace of growth in the Malaysian startup ecosystem, only a balance between the two main players – startups and investors – can ensure sustainability. It remains to be seen when this balance will occur though the quicker the better for Malaysia’s digital economy.
This article was first published on Digital News Asia