People cross a street during morning rush hour at Kuala Lumpur, Malaysia, February 24, 2023. (Photo: REUTERS/Hasnoor Hussain)

People cross a street during morning rush hour at Kuala Lumpur, Malaysia, February 24, 2023. (Photo: REUTERS/Hasnoor Hussain)

Malaysia’s Ample Start-up Funds Need to Be More Accessible and Accountable

Published

Malaysia has established numerous funds to nurture start-ups, but must do much better in simplifying the current system, reporting relevant data, and assessing policy outcomes.

Start-ups are young companies offering new, innovative, and untested but scalable business ideas that require considerable funding to bring them to fruition. These companies’ lack of long-term track records and the uncertain returns on their ventures constrict their access to conventional financing. Consequently, governments have intervened by providing public funding to enable start-ups to obtain the funding needed to grow exponentially. Likewise, Malaysia has established numerous funds to nurture start-ups as it hopes to groom 5000 start-ups by 2030, five of which should be unicorns valued above US$1 billion. Currently, Malaysia has 3363 start-ups and in 2021 Carsome became the country’s first unicorn.

Unfortunately, there is no centralised portal for start-up funding, which makes it difficult for those seeking funding to find the appropriate funds that match their needs. At the federal level, several Ministries provide funding, notably the Ministry of Science, Technology and Innovation (MOSTI), Ministry of Communication and Digital (MCD), Ministry of Entrepreneur and Cooperatives (MEDAC), Ministry of Higher Education (MOHE), Ministry of Finance (MOF), and the Ministry of Economic Affairs (MEA). To add to the maze of funds available, each of these ministries may have more than one start-up development agency under its purview. MOSTI, for example, oversees seven agencies that fund start-ups.

The funds are mainly in the form of grants, loans, and incentives. Other sources include peer-to-peer (P2P) funding (or borrowing directly from individuals) and equity crowdfunding, which is collecting smaller sums of money from a larger number of investors, organised by one of these agencies. Additionally, there are also multiple government-owned venture capital firms established to fill in for Malaysia’s underdeveloped private venture market.

Some states, such as Selangor, Penang, and Sarawak, are also actively funding start-up development through their respective accelerator programmes.

The funds focus on different stages of start-up development. Some funds are designated for early-stage start-ups while others seek out mature start-ups seeking growth. Funds may also target specific sectors, such as bio-economy, digital economy, electronics and electrical (E&E) industries, renewable energy, and green technology. Prospective start-ups need to navigate the current maze of agencies, under various federal ministries or state governments, that offer a plethora of funding options. Hence, while funds are available, they are difficult to access.

The system also lacks a proper directory of the start-ups in Malaysia, especially those that have received funding, which is critical for assessing the impact of funding on start-up development in the country. The Department of Statistics Malaysia (DOSM) collects data on small and medium enterprises but not start-ups. Given that start-ups are well-known to have a high failure rate — between 50%-95% for developing countries — it is important to know whether the start-ups have been able to survive and thrive over time. This dearth of data-tracking start-ups and their development over time hampers policy accountability.

The outcomes of the numerous funds are recorded in the annual reports of the respective institutions, but the data are often incomplete. These documents typically only report the number of projects and the amount allocated to approved projects. To illustrate, MOSTI’s Science, Technology, and Innovation (STI) Indicators Report provides some data on the outcomes of the agencies under its purview. Cradle, one of the oldest agencies for funding start-up development in Malaysia, approved 486 projects totalling RM191.94 million from 2011-2020. But the number of applications is not disclosed, and hence the success rate of getting funding remains unknown.

Prospective start-ups need to navigate the current maze of agencies, under various federal ministries or state governments, that offer a plethora of funding options. Hence, while funds are available, they are difficult to access.

Importantly, the data do not indicate the amounts allocated to each agency to fund their respective programs, which precludes rigorous cost-benefit analysis. It is not surprising that Economy Minister Rafizi Ramli’s recent call for a re-evaluation of the effectiveness of Teraju, an agency for advancing Bumiputera development including start-ups, was prompted by questions about the amounts allocated for Bumiputeras and the benefits actually received. This information gap also extends to the other agencies, making it extremely difficult to ascertain the amounts that have been disbursed for funding start-up development over time.

Agencies have also provided scant information on the effectiveness of these funds and the track record of funded start-ups. Did these start-ups grow to the next stage of development or did they die after a couple of years? And what were the causes of success or demise? Did the funding play a role? While it is possible that agencies may not have the resources for analysing their databank on start-ups and tracing their evolution, agencies and universities could forge collaborations to overcome this problem.

Ultimately, a more detailed and transparent assessment of the outcomes of funded projects would help the government to better assess whether the present funding system is helping to create more viable start-ups that can survive to become unicorns, or whether a lot of money has gone down the drain in pursuit of a pipe dream.

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Tham Siew Yean is Visiting Senior Fellow at the ISEAS – Yusof Ishak Institute and Professor Emeritus, Universiti Kebangsaan Malaysia.