Changing the Start-Up-Venture Capital Funding Narrative

Start-up Funding in Malaysia Faces Challenges

The past few years have been difficult for start-ups and the venture capital industry in Malaysia, primarily due to the impact of the Covid-19 pandemic. The onset of the pandemic led venture capitalists to hold back on investments, resulting in a significant decrease in start-up funding and valuations. As a result, many start-up companies were forced to cut costs and faced difficulties in raising funds. Some even experienced down rounds, where they had to offer more equity interest to investors in order to secure funding at lower valuations. Additionally, a considerable number of start-ups were unable to raise funds and were forced to shut down their operations.

The adverse effects of the funding winter have changed the perspective of investors. Consequently, start-up founders need to adapt their mindset in order to succeed in the coming years.

Shift in Start-up Growth and Funding Narrative

After 25 years of involvement in the technology ecosystem, Dr. Sivapalan Vivekarajah, co-founder and senior partner at Scaleup Malaysia Accelerator, has recognized the need for a major overhaul in the start-up growth, funding, and exit narrative. Since Malaysia’s establishment of the Multimedia Super Corridor, the country has followed the Silicon Valley start-up narrative as the standard model, not just within Malaysia but also throughout Asia. According to this narrative, founders must raise large amounts of money over multiple rounds to sustain revenue growth, even if it entails incurring high losses. The aim is to sell the company at a high valuation, with investors holding the majority of the stake and founders retaining a small equity interest. However, this model has proven to be ineffective in Malaysia and Southeast Asia, where very few large companies acquire start-ups, and when they do, the prices they offer are usually low.

In view of this, a new narrative is needed for Malaysian start-ups.

Proposed Changes for Malaysian Start-ups

In crafting a new start-up narrative for Malaysia and Southeast Asia, Dr. Sivapalan suggests the following five proposals:

1. Build an enduring business: Founders should shift their focus from the build and flip model to building an enduring, multigenerational business. This requires a change in mindset and a stronger mission-based outlook.
2. Change the growth model: Start-ups need to change their financial model from being purely revenue-driven to being profit-driven. While revenue growth is still important, founders should concentrate on building a solid financial foundation with strong gross margins and solid net profit margins over a three- to five-year period.
3. Limit the amount raised: Oversupply of funds can have negative consequences for start-ups. Founders should avoid raising excessive amounts of money, which can lead to unnecessary spending and dilution of ownership.
4. Spend time on the business, not fundraising: Instead of constantly seeking funding, founders should focus on running their operations and building successful and profitable businesses. This will result in happier founders and more successful start-ups.
5. Consider an IPO as a better exit: Founders and investors should consider initial public offerings (IPOs) as the preferred exit strategy. An IPO enables investors to get a good return and founders to retain control of the company while continuing to build an enduring business.

Dr. Sivapalan believes that Malaysia needs to create a new start-up narrative to foster purposeful, enduring, and profitable start-ups. He hopes that this new narrative will lead to more successful and lasting Malaysian start-ups in the future.

Analyst comment

Negative news: Start-up funding in Malaysia faces challenges. The pandemic has led to a decrease in start-up funding and valuations, forcing many start-ups to cut costs and shut down. Venture capitalists have held back on investments, resulting in a difficult funding environment.

Market analysis: The start-up market in Malaysia is currently facing challenges due to the impact of the pandemic. Start-ups will need to adapt their mindset in order to succeed in the coming years. It is recommended that start-up founders focus on building enduring businesses, shift their growth model to be profit-driven, limit the amount raised, spend time on the business rather than fundraising, and consider an IPO as a better exit strategy. These changes are needed to foster purposeful, enduring, and profitable start-ups in Malaysia.