Research

The number of venture capital companies (VCC) totalled six in 1990 and rose to 13 by 1992. The number of VCC almost doubled to 23 by end of 1998, but it was not until 1999, that the pace of venture capital development significantly accelerated with the launch of MSC Ventures, which was allocated a fund of US$31 million.

In 2001, US$131 million was allocated to Malaysia Venture Capital Management for information and communication technology (ICT) investments and in 2002, US$20 million was allocated to MIMOS, a government-owned, research and development (R&D) organisation specialising in the areas of ICT and microelectronics, and US$50 million to Kumpulan Modal Perdana, a government-owned company to administer and manage the venture capital for Technology Acquisition Fund. In the 2003 Budget, a further US$260 million was announced for non-ICT investments.

Historically Malaysia's venture capital industry was dominated by local venture capital players and lagged behind developed countries like Japan, Singapore, Hong Kong, Taiwan and Korea. However, in the past two to three years, the emergence of independent venture capital firms in Malaysia marked another significant development in the market. In the past, a majority of the VCC were either government- or bank-owned and in almost all cases, have chosen to manage their own funds rather than outsourcing to professional fund management companies.

Current Developments

Further expansion was recorded in 2004, in terms of the total size of funds, total investments from both local and foreign sources, number of venture capital fund management companies and number of investee companies.

Figure 1: Key Statistics on the Venture Capital Industry

		As at end 2003	As at end 2004
Venture capital funds (US$m)		557.4	596.3
Total investment (US$m)*		231.2	278.4
	Local sources (US$m)	202.4	233.6
	Foreign sources (US$m)	28.8	44.8
No. of venture capital companies/funds		43**	38
No. of venture capital fund management companies		31	34
No. of investee companies		31	34
		During 2003	During 2004
Total investment (US$m)		59.9	76.2
	Local sources (US$m)	50.7	65.4
	Foreign sources (US$m)	9.2	10.8
No. of investee companies		115	139
* Including divestment activities ** Based on Bank Negara Malaysia's definition
Source: Securities Commission

The government remains as the major source of provider of funds. The contribution of funds for VC investments coming from domestic private sector entities recorded a significant increase of 35.1% in 2004. Funds received from foreign sources have also increased substantially to US$44.8 million.

Figure 2: Sources of Venture Capital
(% share, as at end 2004)
Total US$596.3 million

In terms of stages, VC investments in 2004 were mainly focused on the expansion, growth, bridge/mezzanine/pre-IPO and the early stages.

No. of investee companies	139
Business stage	US$m	% share
Seed capital	4.2	5.6
Start-up capital	5.1	6.7
Early stage	12.9	16.9
Expansion, growth	27.8	36.6
Bridge, mezzanine, pre-IPO	17.7	23.2
Management buy-out	5.1	6.6
Cashing-out (secondary purchase)	0.2	0.2
Other types of investment	3.2	4.2
Total	76.2	100
Source: Securities Commission

In terms of investments by sector, the sectors that received most of the VC investments were the ICT sector, followed by the manufacturing and life sciences sectors. However an apparent or rather interesting development is the shift in investment preference. The domestically sourced VC investments were more focused on the ICT sector, moving away from the manufacturing sector, while the foreign VCs shifted their preference from the ICT sector to the life sciences sector. This apparent shift by both local and foreign VC's are in line with the potential growth in these areas coupled with the government's initiatives for projects in these areas.

	As at end 2004
	US$m	% share
Information and communications technology	117.4	42.2
Manufacturing	70.8	25.5
Life sciences	51.2	18.4
Education	10.1	3.6
Electricity, power generation, gas and water	4.6	1.6
Wholesale, retail trade, restaurant and hotels	2.7	1.0
Financing, insurance, real estate and business services	1.8	0.6
Construction	-	0.0
Transport, storage and communications	-	0.0
Others	19.7	7.1
Total	278.3	100.0
Source: Securities Commission

As of August 2005, a total of 89 venture-backed companies were listed, of which 30% were on MESDAQ while the remaining 70% were either on the Main Board or Second Board. In 2004 itself, a total of 14 venture-backed companies were listed, ten of which were on MESDAQ, two on the Main Board and two on the Second Board of Bursa Malaysia. Amongst the IPOs in 2004 were Jobstreet Corporation Berhad, MEMS Technology Berhad and Air Asia Berhad.

Challenges in the VC Industry

Undeniably, the venture capital industry landscape in Malaysia has changed tremendously especially with the emergence of new names on the local scene such as the MAVCap and its four outsourcing partners.

Despite gaining increasing recognition as an alternative source of funds for investment, the industry faces several problems. This includes limited sources of funds for VCC due mainly to the high risk and long-term nature of their investment. Moreover, comprehensive information on the industry is not readily available. As a result, there is a general lack of awareness and misconception of the role of venture capital financing (VCs like to take control of companies).

Also, entrepreneurs generally felt that there is limited access to experts who can guide them and their companies to the next level.

The industry also faced several situations where VCs were unwilling to offer funding and of entrepreneurs not understanding the business requirements of venture capital investments. This concern is also apparent in Europe and elsewhere. From 2003, there have been fewer entrepreneurs venturing into business due to declining appetite for risk as well as VCs now looking for more solid business proposals.

Future of Venture Capital Industry in Malaysia

Amid the challenges faced by the VCC, several measures have been introduced to promote the development of VCCs. Amongst efforts carried out were the tax incentives introduced in 1992, whereby the VCCs are exempted from the payment of income tax in respect of the statutory income on all sources of income, other than interest income arising from savings or fixed deposits and profits from Shariah-based deposits.

In addition, losses incurred by VCCs arising from disposal of shares were allowed to be set off against aggregate income and total income.

The establishment of MVCA in 1995 to enhance greater awareness of the industry, the launching of MESDAQ in 1997 to provide an avenue for high growth and technology companies to raise equity capital as well as to promote the VC industry by providing an exit mechanism for their investments in such companies. The industry had also conducted several education programmes to address the misconception on VCs role.

The encouraging statistics recorded in 2004 reflects a continued and consistent growth and the successes of the VC industry are indicative of the demand for VC funding. The impact of VC funding and benefits to the Malaysian economy is immense and the VCs in the industry look forward to working with entrepreneurs to deliver greater success.

The development of VC in Malaysia will continue to be keenly promoted in view of its significance in nurturing new growths areas. Further efforts will be directed towards greater capacity building in terms of skills upgrading and access to private sector financing. Constraints in the supply of innovations would be addressed with the improvement of deal flows through the development of a critical mass of high growth-potential investees. In order to assist the cultivation of better entrepreneurship culture, efforts are being directed at providing the necessary business and regulatory environment, ensuring access to financing at the earlier stages of innovation and reviewing existing policies relating to the commercialisation of ideas.