Funding, talent poser in the making of unicorns

Malaysian start-ups that have reached valuations of a few hundred million US dollars usually come head-to-head with barriers 


TALK unicorns to your heart’s content, but Malaysia is far from the go-to zone for these potential giants in the making. To be fair, Malaysia has produced a handful of major start-ups, with serious money now starting to flow to a number of them.

But the regional numbers tell us a different story. More than 80% of unicorn companies in Asia are concentrated in Singapore and Indonesia. Vietnam is fast catching up. Malaysia did finally see a homegrown unicorn. In January 2022, used-car e-commerce platform Carsome became the country’s first unicorn after a US$290 million (RM1.24 billion) funding round that gave it a valuation of US$1.7 billion.

Malaysia was also the original home of regional ridesharing giant Grab Holdings Inc, which was founded as MyTeksi in Kuala Lumpur in 2012 before relocating its headquarters to Singapore in 2014. It is home to a sizeable body of new technology companies, nearly 4,800, according to start-up data platform Tracxn49.

On the scene is Aerodyne Group, a start-up that may just be Malaysia’s second technology unicorn after Carsome. At this juncture, the company is reportedly looking at raising between US$100 million and US$200 million this year, with an eye on an IPO next year. 

Aerodyne provides DT3 enterprise solutions. It stands for drone technology, data technology and digital transformation. It claims to be leading the global tech curve in the use of drone data and artificial intelligence (AI)-powered analytics to resolve complex industrial challenges, enabling organisations to rapidly scale, digitally transform, operate optimally and increase productivity.

Under the leadership of founder and CEO Kamarul A Muhamed, Aerodyne has seen a rapid series of mergers and acquisitions (M&As) and partnerships, with the latest announced last month. On Jan 10, Aerodyne said it linked a strategic partnership with Astralution AS to offer to lead Drone-as-a-Service (DaaS) and Software-as-a-Service (SaaS) solutions in the Scandinavian region.

In December 2022, Aerodyne acquired a controlling interest in Grupo DR1, professional drone operators and service providers in Brazil. The Rio de Janeiro head-quartered company claims a 90% market share in offshore drone inspections in Brazil with the national oil company, Petrobras a major customer.

With time, more such start-ups may grow in size and reach, with some actually acquiring unicorn status.

A unicorn is a private company valued at more than US$1 billion without being listed on the stock market. They are the dream of start-ups, especially those in the technolog y businesses. If that company subsequently goes public or is acquired, it is no longer referred to as a unicorn.

As for Malaysia, what are the impediments? What is being done on the ground?

What We Lack 

Although Malaysia has a high market maturity of digital economy, it does not see many unicorns. One of the reasons is the lack of follow-up funding after series A. Then there is the perennial issue of talent, or more precisely, the matching talent. 

Investment banker-turned-investor Ian Yoong Kah Yin said Malaysia has immense potential for more unicorns. It has a large pool of capable entrepreneurs but under-performed due to lack of funding and the experience and knowledge needed to expand regionally to other Asean countries. 

He believes that Malaysia should focus on the growth of industry clusters. Islamic finance and healthcare administration have gained traction over the past decade. However, Malaysia has a major disadvantage in nurturing emerging unicorns. 

“We lack the funding infrastructure that Singapore has built. Malaysia lacks the infrastructure to assess and provide series B, C and D funding. We have institutions that provide seed funding and that’s it. The start-ups are expected to secure bank financing. Many start-ups in Malaysia will turn to venture capital companies (VCs) offshore,” Yoong told The Malaysian Reserve (TMR). 

He said Malaysian start-ups that have reached valuations of a few hundred million US dollars usually come head-to-head with barriers. 

“The next level is of course regional expansion. The main obstacles are financial, human resources, management and most importantly, the motivation to grow beyond one’s borders. 

“Start-ups in Indonesia are able to secure series B, C and D funding as many VCs are drawn to the largest consumer market in Asean represented by Indonesia’s 275 million population, the fourth-largest in the world. More importantly, the large Indonesian market enables start-ups to scale into unicorns,” he said. 

Funding is said to have started to reach a significant level. Total committed VC funds hit US$1.2 billion in 2021, up 20% in 2020, and nearly five times more than Malaysian start-ups raised in 2019, according to Securities Commission Malaysia (SC). 

Funding Series 

A start-up’s initial investment is usually known as seed funding. This is then followed by various rounds of funding, known as Series A, B, and C. Each funding round usually will result in a new valuation, determined by factors like market size, company potential, current revenues and management. 

Let’s take one of the rounds. Series B financing is one of the stages in the capital-raising process of a start-up. Essentially, the series B round is the third stage of startup financing and the second stage of VC financing, according to information on the Corporate Institute Finance website. 

Similar to the previous stages of financing that include seed and series A financing, it noted that the series B round is a type of equity-based financing. In other words, investors provide capital to a company in exchange for the latter’s preferred shares. The majority of the deals include anti-dilution provisions like in the series A round. This means that a company usually sells preferred shares that do not provide its holders with voting rights. 

However, the shares often come with a convertibility option, for example, the holders of the preferred shares can convert their shares into common stock at a future date. 

Series B financing is appropriate for companies that are ready for their development stage. They are companies that generate stable revenues, as well as earn some profits. Also, such companies generally come with solid valuations of more than US$10 million. 

The proceeds from the series B round are primarily utilised to support the company’s growth to the next level. The capital raised can be used in various ways, such as sales, marketing, talent acquisition and developing new technologies, according to the note. 

No Shortcut 

Folks at government agencies involved in this space are very much aware of the funding and talent issues. 

Malaysia Digital Economy Corp (MDEC) CEO Mahadhir Aziz acknowledged that talent development and access to funding continued to be the main challenges to building unicorns in Malaysia. 

“There is no shortcut to talent development but the establishment of Penjana Kapital is a big step towards strengthening the funding ecosystem in Malaysia. 

“Ecosystems that nurture unicorns have a few critical success factors that are hard to replicate, for example, abundant talent and an open, learning culture,” he said. 

Talent development and access to funding continued to be the main challenges to building unicorns locally, says Mahadhir

MDEC aims to facilitate the entry of talent through various means, including the Malaysia Tech Entrepreneur Programme (MTEP) for founders and Future Knowledge Workers (FKW) for employees. 

On this, MDEC is working with ecosystem players such as accelerators, investors, incubators, co-working places, large corporations and universities to create more platforms for networking, competition, hackathons and proofs-of-concept. 

“Malaysia is, in fact, a fertile breeding ground for unicorns. However, a good start-up ecosystem is really about the mindset of start-ups and other players. 

“It is said that in Silicon Valley, people are not afraid to share ideas up to a point, but what will make the difference is the ability to execute. However, in an Asian context, ideas are often held close to the chest, for fear of being stolen. 

“That said, the maturity of the ecosystem is more about mindset, rather than anything else. The key is having an orchestrator in the ecosystem that allows local and foreign start-ups to exchange ideas and collaborate,” he said. 

Scaling Up 

A report by an international firm found that although Malaysia is good at generating start-ups, what is harder is for the more successful of these companies to find the right staff for scaling up. The report suggested that people in Malaysia understand the technology and how innovation works. Hence, there was no shortage of good ideas. 

“But companies sometimes find it hard to get the guidance and business support they need to grow. Though whether that will prove a major obstacle remains to be seen,” said KPMG Malaysia’s head of technology consulting Alvin Gan in a report entitled “Emerging Giants in Asia Pacific 2022”. 

While many Malaysian start-ups remain focused on the local market, he said the ones to watch tend to have a regional outlook from the start. He provided some examples. They included Aerodyne; FashionValet — an e-commerce fashion platform with operations extending to Singapore and Brunei — and CompAsia, a second-hand electronic devices business now operating across nine South-East Asian countries. 

Gan strongly believes the next unicorns are the ones playing in the space of e-commerce, fintech and technology

The question, he added, therefore was not so much whether Malaysia would produce successful new economy companies, but how many would emerge. 

Given the strong level of government support and the increasing amount of resources being funnelled their way — according to the 83-page report covering Asia Pacific — Malaysia’s start-ups are poised to continue to play a major role in the country’s development in the coming years. 

Malaysia has a strong pipeline of young talent, the report said. The country’s young population hovers with a median age of 29.2, increasingly well-educated. And you had some 600,000 students in higher education in 2020. 

“This would be pivotal if Malaysia were to continue expanding its footprint in the start-up space as the younger generation is pre-dominantly the contributing factor,” he told TMR. 

Taking into account all of the above, Gan said it was only a matter of time before the nation sees more unicorns coming to emerge and there were many promising developments to support that. 

Gan said as the country recovers from the effects of the pandemic, businesses would look to expand their ecosystem through partnering with start-ups such as fintech to help them become more agile, driving growth for their organisations. 

“With regard to industries, I strongly believe the next unicorns are the ones playing in the space of e-commerce, fintech and technology, media and telecom,” he said. 

ESG Play 

The KPMG report noted that Malaysia sees particularly strong concentrations of start-ups in financial technology (fintech), including in Islamic finance, gaming and environmental, social, and governance (ESG)-related services. 

A majority of the Malaysian start-ups identified in the report were from the fintech space. The trend is expected to continue in 2023 and beyond with the booming of the industry, said Gan. 

“Malaysia also has a strong competitive edge in Islamic finance owing to its many digital start-ups that are Shariah-compliant,” Gan told TMR. 

He said the ESG-related start-ups would be making headlines in the next few years as the government appeared to remain committed to prioritising ESG-focused development programmes and projects. This will spur growth in the ESG start-up scene. 

According to Yoong, Malaysia lacks the infrastructure to assess and provide series B, C and D funding

Islamic Fintech 

On Islamic fintech markets, Malaysia is widely regarded as one of the world’s most promising, said MDEC’s Mahadhir. 

“The government has identified Islamic fintech as a strategic avenue to further bolster its global Islamic economic standing and as a source of economic growth. Malaysia is a global Islamic finance leader making it a very attractive proposition for many ambitious Islamic fintech players,” he said.

Referring to the Governance Index for Trusts (GIFT) 2022, he noted that Malaysia’s thriving ecosystem leads in talent, regulation, infrastructure, the Islamic fintech market and ecosystem, and capital. 

“One of MDEC’s key roles includes facilitating market access opportunities for Malaysian-based fintech companies. We have successfully exported Malaysian Islamic fintech solutions to international communities by leveraging Malaysia’s market dominance in Islamic finance and Islamic fintech,” Mahadhir added. 

Meanwhile, MDEC said ESG-related services were also an area of growing interest in Malaysia. The government and private sector were increasingly focused on ESG issues, and there was a growing demand for ESG-related services. 

On its part, MDEC aims to encourage digital tech companies to leverage regulatory programmes, such as Bank Negara Malaysia’s (BNM) low carbon transition facility (LCTF), to help accelerate the sustainability journey of SMEs. 

Then there is also development of resources. One of them is the Malaysian Investment Development Authority’s (Mida) SDG Investor Map. Then there is the United Nations Development Programme will provide insights and tools needed by the private sector to increase their investment toward SDGs. 

“Last year was a foundational year for MDEC in terms of ESG. We have built this through the development of our ESG Policy and by commissioning an independent materiality assessment to better understand the key sustainability matters impacting MDEC and the digital economy ecosystem,” he said. 

In support of the ecosystem, MDEC’s ESG focus in 2022 has been on climate change as we recently launched the Malaysia Digital Climate Action Pledge (MDCAP). It wants to galvanise digital tech companies to commit specific actions in addressing climate change and supporting SMEs in decarbonisation. 

Time will tell if Malaysia sees the emergence of its next unicorn, and the ones after. 

  • This article first appeared in The Malaysian Reserve weekly print edition