Nurturing A Robust Ecosystem with Taufiq Iskandar and Safuan Zairi
Endeavor kicks off Season 2 of the Thought Inspire Series with Penjana Kapital’s Taufiq Iskandar and MRANTI’s Safuan Zairi on the topic of Nurturing a Robust Ecosystem. With a wealth of experience in the fund management scene, Taufiq serves as the CEO of Penjana Kapital, where his main role is to stimulate and accelerate Malaysia’s innovation economy through the Dana Penjana Nasional Program. Focusing on the commercialization of technology, with Malaysia’s drone technology ecosystem being one of his initiatives, Safuan leads MRANTI as the Chief Ecosystem Development Officer. Together they share with us on whether or not Malaysia’s ecosystem is moving fast enough compared to our regional counterparts, what’s hindering the growth and how to create more liquidity in the startup ecosystem here in Malaysia.
Where do you think Malaysia is realistically at, on the technology roadmap versus our peers?
A slow but steady progress
Referring to Malaysia being on level 36 of the Global Innovation Index 2022, Safuan remarks, “I wish we could have done better”. Looking at our neighbors, Indonesia and Singapore, Malaysia is still far behind when it comes to producing our own unicorns. Nevertheless, he praised the growth of the ecosystem in Malaysia, with it being more vibrant compared to before, “Ecosystem wise, I am proud of what I'm seeing now in terms of the alliance we have here in Malaysia’s entrepreneurial ecosystem”. Safuan states that there are many agencies offering programs and funds but with closer collaboration with companies, agencies are putting themselves “in the shoes of the entrepreneurs, the SMEs and the startups” - to provide better support for aspiring high-impact entrepreneurs with high-growth startups.
A steep hike, but there is hope
With Malaysia making headway with the Multimedia Super Corridor in the 1990s, it is important to see how much we have advanced since then, with Taufiq admitting that “This is where the disappointment starts clicking because we haven't made enough progress and there are few gaps that still need to be filled”. In terms of funding, Taufiq touched on how Malaysia has not progressed due to its low venture capital and equity of only about RM14 billion. In relation to that, he included that Malaysia has only 344 registered investment professionals with over four years of experience – a far cry from 9,000 professionals in South Korea. Venture capital is low as well, at 0.1% to 0.2% relative to Malaysia’s GDP, compared to Indonesia’s 1.2% and United Kingdom’s 8%.
Technology is still very new in Asia, Southeast Asia specifically. Where can we pick up the fruits of ecosystem development up to this stage and really take it forward?
Build on the fundamentals
“If we speak about the culture, one thing that I have observed is that we still have this fear of failure. That is prevalent in not just startups, not just entrepreneurs, but it's just that we don't celebrate failure enough” commented Safuan. He added, startups must move on, learn from their mistakes and try a different angle as long as they believe in the problem they are trying to solve. Solving a problem requires one to think about the customer in mind, and is a prevalent issue not just to startups but to researchers as well, “Sometimes we are not clear, rushed and we tend to sprint into developing new product solutions without clear understanding in terms of who we are developing it for.”
In America, although venture capital and angel funds are cognizant of risk, they are willing to put money into 20 startups and see just one succeed and be happy with 19 failures. In contrast, funds in Malaysia tend to be quite risk averse. Is that altruism, necessarily?
Liquidity does not necessarily support innovation
In capital funding, Taufiq lists two ingredients – availability of capital and accessibility to capital, “Risk taking activities are a result not only of the availability of capital, but also how it is formed on the formation side”. With Malaysia’s venture capital market roughly RM15 billion and the equity market at RM1.7 trillion, Taufiq was of the opinion that “we have a lot of capital but it is not risk averse”. Although the debt market is more dominant in Malaysia compared to the equity market, debt as capital however, is not a reliable source. The industry leaders added and agreed that we have a lot of liquidity in the system, but unfortunately it does not translate to the system being necessarily supportive of innovation. Innovation to Taufiq, requires enablers or platforms to show conviction through action, as idealists would always need executors. He stressed on how we can ease the process of revolutionizing the industry, only if the people with power share its access.
Information asymmetry and the need for intermediation
There are three types of capital or resources. Taufiq mentioned, “to me, the ecosystem needs three types of capital or resources. We need financial capital, human capital and network capital.” When it comes to finance, the ecosystem deals with one big problem and it is called information asymmetry. Taufiq highlights the need for intermediation by specialized professionals to solve investors’ information asymmetry as most investors are not capable of carrying out proper due diligence. This conundrum boils down to the lack of investment professionals in Malaysia.
The venture market is dominated and too dependent on the government
Taufiq states that 48% of venture capital comes from government agencies and the government whereas about 20% comes from sovereign wealth funds. There is a need to invite the private sector, “there's a huge amount of capital available in the market, but they are in the private sector. We need to entice this private sector to come and invest and undertake risks”, expressed Taufiq. This is the reason why Dana Penjana Nasional administered by Penjana Kapital was introduced, whereby the government would match every dollar that we put into a venture fund on a one to one basis.
7 out of every 10 dollars available for venture funding in Malaysia comes from the public sector. From your point of view, what is the most critical area that you are looking at that will attract these funds?
Big funds come with solving big problems
In working with startups, Safuan accredited that although most of them are solving big problems, they are still tied down locally. Startups are filled with potential, but it needs more than that to make a global impact. Entrepreneurs would need to ask themselves, whether or not they can fill in gaps in other countries as well, with Safuan adding that “Solving big problems and attracting global funds require commercialisation”.
So which one comes first, the chicken or the egg? Should funding come first for opportunities to make its way or the other way around - by creating our own opportunities, will funding be easier?
A pattern of both, a structural effort between the two
Risk taking is not only an investors' job. The government's structural intervention is to be able to create a better venture market, one with intermediaries for a better intermediation process, moving capital to productive investment for innovations and fast growing startups. Taufiq added that, “the actual goal is to match commitment from the government, find ways where we can co-invest with private sectors, hoping that Malaysia can diversify our risks and also most importantly find ways of bringing down the risks to investments”.
Take risks in areas other than tech, expand our eyeview
In encouraging entrepreneurs to solve a bigger problem, Taufiq added that, “we have good talent here, we have good entrepreneurs, but why do we need to produce many more platform businesses in a market that is 33 million in population?”. He then expanded on the idea that we have a competitive advantage in other areas as well but are too focused on the digital economy. To him, we must not forget that Malaysia has a bigger economy that is the green economy, with a focus on agriculture and energy that are ripe for innovations and disruptions. By saying this, Taufiq was also of the opinion that risk taking is not only on part of the government or private sector, but on the entrepreneurs as well, “risk taking is not just capital and it's not just financial capital. Risk taking is bigger than that. It's actually a social capital. It is a mindset”.
We talk about not dreaming big enough or not getting our ideas to a bigger market. How are we positioning ourselves within ASEAN to make sure that we are actually getting a healthy pipeline?
Energy opportunities in Malaysia
Taufiq referred to Malaysia’s clear competitive advantage in agriculture, palm oil and natural gas. Although Malaysia used to be an agricultural commodity superpower in the past, the country still has a role to play in the global economy to a certain extent. However, moving forward into this ecosystem, we should look into our history but even more, beyond it - we should tap into solar based energy, wave energy and hydro energy more, especially due to our climate and waterfronts or rivers here in Malaysia. Taufiq stressed on the need for more innovation and ideas to be based on our natural resources. To get the right pipeline, we must nurture its environment. Malaysia needs to move into this space as soon as we can to lead the game.
Drones in agriculture and transportation
One technology sector that Safuan is passionate about is drones. He mentioned how it can be used to automate agriculture and commercialize and expand technology even further. Beyond agriculture, Taufiq suggested drones for transportation, touching on whether we can commercialize it for the masses and use the technology for deliveries and sending parcels. However, it is still a black box that needs solving. He also added that Malaysia is a sweet spot for development of drones, as the country is not as dense as Singapore, and not as porous as South Korea. With that, he mentions that there is a bigger market and opportunity for drones beyond agriculture.
For entrepreneurs, it's always about sustaining their business. How can entrepreneurs ensure their business is relevant across time?
Structural and Cyclical: Understand the business model and capital structure
When a business has proven product market fit yet they fail, businesses must know two things – the structural issue and the cyclical issue. Firstly, the structural issue here is to understand our business model. We still have businesses, big businesses, unicorns, decacorns, that are still not generating profit because of the business model, they have not yet established the economic mode for them to create the stickiness. To do so, Taufiq affirmed that, “we need to explore different business models, what business model should we adopt and how can we create that economic mode fast enough after we establish product market fit”. Secondly, the cyclical issue looks at the capital structure, with Taufiq suggesting, “We need to ask this question: Can I last for another six months? Can I last for more than six months, 12 months? We need to anticipate the capital needs, and know the instruments we may need in order to get to where we want to be.
What are the lessons that entrepreneu