As Malaysia reopens its economy amid COVID-19, how can it protect and nurture the tech sector?

As Malaysia reopens its economy amid COVID-19, how can it protect and nurture the tech sector?

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Supahands' Core Team at work in the company's HQ in Kuala Lumpur. (Photo: Vincent Tan)

KUALA LUMPUR: Supahands co-founders Mark Koh and Susian Yeap wanted to set up a data labelling company that would help businesses refine their data sets and train their artificial intelligence (AI).

The process to get up and running was relatively simple. They lodged an application with Cradle Fund Sdn Bhd, the government-linked, early-stage funds disburser for start-ups, and obtained some money to begin exploring their idea. 

The start-up also received a very helpful advisor from Cradle who guided the new company through potential pitfalls and how to achieve growth with the funds already disbursed. 

After raising seed money from early-stage backers Axiata Digital Innovation Fund and 500 Startups to expand further, things hit a snag when it came to boosting their market presence in the region.

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A trio of AI training start-up Supahands' Core Team carrying out quality control for the data labelling work carried out by the start-up's network of freelancers across Southeast Asia. (Photo: Vincent Tan)

For one, training AI and labelling the relevant data so that the machine could “learn”, was a relatively new concept for potential investors in Malaysia.

“AI is not just lines of code. This doesn't work well in reality, the machine won’t be able to think the way a human would think or react, so we provide training data,” Mr Koh told CNA.

“How do you teach this camera or programme to interpret what an object actually means?”

The start-up laboured for a few months in its efforts to raise funds in their Series A funding for further expansion. Luckily, Patamar Capital, a venture capital firm with a philanthropic bent and focus on poverty eradication, stepped in last year. 

This capital injection, which came out of Patamar’s Investing in Women Fund, was especially timely as Supahands was over 50 per cent female, and worked with over 2,000 “SupaAgent” freelancers, the majority of whom are women, across Southeast Asia.

Nowadays, Supahands works with 14,000 SupaAgents in assisting companies across the world, with clients in Singapore, the US and even South Africa with training their AI models.

Supahands’ experience in raising funds for expansion is not exactly unique. Other start-ups operating in more highly regulated sectors in Malaysia, such as drone technology, face even more difficulties due to the multiple jurisdictions and regulatory frameworks. 

READ: From hobby to analytics - Malaysia’s dronetech companies scale up for the future 

The stories of these companies highlight how Malaysia's start-up scene, while by no means uncompetitive, does have certain challenges that might hinder it from producing the next Southeast Asian unicorn, defined as a start-up valued at US$1 billion or more. 

CNA interviewed various stakeholders in the ecosystem, from start-ups, to financiers and government agencies, where issues such as funding, the regulatory framework and even ease of setting up a business, were highlighted as some of the ways Malaysia’s tech scene could be improved.

While COVID-19 and the resulting movement control order (MCO) hit the Malaysian economy hard, this has also brought home the need to speed up digitalisation and automation, as well as to better nurture the country's tech scene.

READ: Malaysia’s recovery movement control order extended to Dec 31, tourists still not allowed in, says PM Muhyiddin

IMPACT OF COVID-19 ON  MALAYSIA’S TECH SCENE

In the wake of the pandemic, there emerged both winners and losers, especially during the strict phase of the MCO when all non-essential, including intra-state travel beyond 10km, was banned and many business activities were shut down. 

Dr Sivapalan Vivekarajah, an angel investor and co-founder for a business accelerator noted the different fortunes of start-ups he had invested in different sectors. 

“One online attraction-booker we backed saw their revenue dry up overnight, while others, like food delivery and logistics, were well-supported because of the increase in e-commerce, and more people ordering from home,” he recounted. 

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Dr Sivapalan Vivekarajah does angel investing and also runs a business accelerator. (Photo: Courtesy of Dr Sivapalan Vivekarajah)

For drone technology company Poladrone, revenue during the MCO period dropped by over 80 per cent, said its founder and CEO Cheong Jin Xi.

“However, we’re experiencing a strong rebound at the moment, where the MCO forced many of our potential customers to rethink their operations, and explore ways to automate and digitalise their workflow,” Mr Cheong said.

During the lockdown, drones were actively used by the Royal Malaysian Police and Civil Defence for crowd control and public messaging, heightening public awareness on the various potential applications for drone tech, Mr Cheong added. 

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For technologies such as drones, regulations play a role in ensuring safety, but also limiting their use. (Photo: Vincent Tan) 

In contrast, Supahands’ Mr Koh said the MCO had not impacted its operations.

“We were always built for remote work from Day One, the infrastructure has always been distributed,” Mr Koh said, as Supahands’ Core Team of 50 could still work from home, and oversee the data labelling work carried out by 13,000 freelancers across Southeast Asia.

“The pandemic has accelerated the (automation) trend, made people aware that it is crucial to have a tech element to your business, especially for something like retail. It’s a perfect example, physical stores are shut, but you can quickly go online,” Mr Koh said. 

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Supahands' CEO and co-founder Mark Koh (left) and chief revenue officer Greg Meehan (right) explained that while revenue during the MCO was somewhat impacted, the worldwide pandemic had in fact led to an increase in clients as companies looked overseas to continue data training for their AI models. (Photo: Vincent Tan)

“In our space, automation is also a big thing, rather than using simple labour, by automating certain things or using AI, that might help a business in sustaining through a pandemic or crisis,” he added. 

From a client perspective, Supahand’s Chief Revenue Officer Greg Meehan said the company had managed to bring on more international clients, especially when data training and labelling outfits in countries hit by the pandemic began looking for other partners, such as Supahands with its distributed network and competitive pricing, to continue their AI training.

READ: Commentary - Malaysia’s youth face some of the bleakest economic prospects

OPERATING IN THE NEW NORMAL

The government has moved to help start-ups affected by the pandemic.

In May, Malaysia’s Ministry of Finance allocated RM100 million to fund the Technology Start-up Funding Relief Facility, to assist tech start-ups affected by the pandemic and lockdown. Then, Minister for Science, Technology and Innovation (MOSTI) Khairy Jamaluddin reportedly said that the financing programme was expected to benefit between 60 to 80 local start-ups.

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Minister of Science, Technology and Innovation Khairy Jamaluddin. (File photo: Bernama)

Ms Surina Shukri, the chief executive officer of the Malaysian Digital Economy Corporation, a lead government agency in driving Malaysia’s tech ecosystem development, noted that since the MCO began, over 400 tech companies have reached out to MDEC for business continuity support as well as partner matching opportunities.

“In fact, over 300 startups have participated in our funding facilitation programmes. All these efforts confirm and reinforce the fact that COVID-19 had largely impacted the local start-up ecosystem,” Ms Surina said in a written reply to CNA.

She added that many corporations had begun accelerating, or were planning to roll out their digital adoption plans to cope with the demands of the new normal. She also said that MDEC had engaged with 62 corporations to identify over 100 issues to be addressed. It has also channelled 719 tech start-ups to develop solutions for these corporations.

The pandemic and lockdown have presented new opportunities for start-ups, said Ms Surina of MDEC.

“Over the past couple of months, various start-ups and tech companies managed to thrive through these tough times.” 

“Operations like Storehub (a cloud-based point of sales provider) and Securemetric (a digital security solutions provider) were quick to identify new opportunities. As a result, they were able to create new revenue streams, whereas innovative start-ups, such as Naluri (a health tech firm), Curlec and Policystreet (fintech companies), were able to gain investor confidence and successfully raised funds this year,” Ms Surina said. 

She added that MDEC was focused on ensuring businesses can address both current and new challenges brought about by COVID-19.

“The goal is to mainly provide them with the ability to digitalise their operations, and continue to engage their customers and expand their capabilities,” she said.

She added that how badly the businesses were affected by the pandemic would depend greatly on their tenacity and perseverance.

“The agility and willingness of start-ups to reinvent themselves, identify opportunities and ramp up their plans on going-to-market are pivotal in determining their success or failure,” Ms Surina explained. 

READ: Asia's factories shaking off COVID gloom, China shines

THE FUNDING GAP

Those interviewed by CNA said that Malaysia’s tech ecosystem is constrained by a funding gap. 

A funding gap refers to a bottleneck in a start-up’s later financing stages, especially after the initial pre-seed and seed investing portions.

During a tech industry town hall on Aug 19, Mr Khairy, the minister, compared the number of deals closed in Malaysia with two of its closest neighbours. 

“In Malaysia in 2018, there were a total of 143 deals, from the start of the funding life cycle to mature companies, comprising US$4.2 billion’s worth of deal flows, that might sound like a decent amount. But in Singapore, there was US$31.1 billion in 717 deals,” Mr Khairy said. 

Indonesia, he added, was fast catching up with US$3 billion in the same year, the minister added. 

He also outlined Malaysia’s less than satisfactory ranking in terms of product innovation. 

“We are currently ranked 41 out of 180 countries in the digital adoption index ... We always talk about innovation in Malaysia ... when it comes to product innovation, we are 130 out of 137, that’s where we are.  We are 71 out of 122 in the knowledge creation index, and 99 out of 137 in terms of start-up skills,” he said. 

Dr Sivapalan defines the quantum for Series B funding as ranging from US$5 million to US$10 million, while Series C would be anything beyond US$10 million.

“If you look at the availability of funding in Malaysia, there are several places you can go to for grants, such as Cradle. But for VCs (venture capital), there are not even 10 at the seed and Series A stage, and for B and C, you’d be hard-pressed to find five at that stage,” he noted.

“US$10 million in Malaysia is RM40 million, how many VCs in Malaysia even have a fund size of RM40 million?  So if your size is below RM100 million, you can’t do the later rounds of funding, you’re stuck and that’s an issue. If the company wants to be a regional player, their only option is to go to Singapore, where most of the regional VCs are based,” he said. 

Before becoming a “unicorn”, Grab’s founders relocated the company’s headquarters from Kuala Lumpur to Singapore in 2014.

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File photo of a Grab vehicle on show at a press event. (Photo: Kevin Kwang)

In a 2017 interview with FinanceAsia, Chua Kee Lock, chief executive officer of Vertex Venture Holdings, a VC firm under Singapore’s Temasek Holdings, had backed Grab’s early incarnation with US$10 million in Series A funding (the first major round of VC financing) and persuaded Grab to make the move to Singapore in 2014.

By Oct 2014, Digital News Asia reported that the start-up, now known as GrabTaxi, had raised US$65 million for its Series C funding. 

Currently, the company is regarded as a “decacorn” (a unicorn with a valuation over US$10 billion) at US$14.3 billion, followed by Indonesia’s Go-Jek at US$10 billion.  

MORE GOVERNMENT SUPPORT

Funding is also an issue that Ms Rafiza Ghazalie, the new CEO appointed to lead Cradle Fund Sdn Bhd, and other drivers in Malaysia’s start-up ecosystem is looking into.

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Cradel Fund's recently-appointed CEO, Rafiza Ghazalie. (Photo: Courtesy of Cradle Fund Sdn Bhd)

Cradle Fund, an early-stage start-up investor incorporated under Malaysia’s Ministry of Finance, started off as a provider of grants and has since moved into investing through its VC arm, Cradle Seed Ventures in 2005. It now offers both funding and investment assistance. 

“At the moment, lots of parties are encouraging corporate investors to develop their CVCs (corporate venture capital). If you look at more developed countries, you have research endowments,  corporate participation in VC funding, we want to see more of that,” Ms Rafiza said, without elaborating. 

She also said that the issue with funding gap has resulted in promising start-ups being disrupted or acquired by other faster-moving companies, as they could not obtain further funding from RM1 million to RM5 million onwards, to continue development or scale-up. 

“They get eaten by someone else, they get disrupted. Not many investors are willing to put in money, because that’s one of the riskiest stages.”

“Unlike an accelerator where bets between RM50,000 to RM150,000 are normal, RM2 million ticket sizes are somewhat harder to justify,” Ms Rafiza explained. 

The government, she added, had also allocated RM1.2 billion under its Dana Penjana Nasional initiative, to be invested into Malaysian start-ups as a means of supporting economic recovery and also increasing development following the COVID-19 outbreak.

The initiative, launched by Minister for Finance Tengku Zafrul Aziz on Aug 27, will see RM600 million in direct investment from the government, matched with another RM600 in investment funds from international investors to create strategic partnerships with domestic investors. 

MINDSETS, REGULATORY ISSUES NEED TO BE OVERCOME

The funding issue aside, Malaysia's private sector should be encouraged to think about going global, said Ms Surina.

“Meaning they need to develop innovative solutions that can be adapted globally, as well as increasing collaboration between corporates and start-ups and SMEs, and forming meaningful partnerships with global investors, accelerator programmes and other high-impact entities,” she told CNA.

Recently, MOSTI launched the National Technology and Innovation Sandbox (NTIS) as a means to further drive innovation and creativity, by allowing for new technologies and services to be experimented in a more relaxed environment with safeguards.

With reference to Grab’s early years in Malaysia (as MyTeksi then) and the regulatory challenges it faced, Ms Rafiza of Cradle acknowledged that with innovation came disruption, and many local start-ups were facing regulatory issues. 

For example, Malaysia's drone industry is regulated by no less than four different agencies, ranging from the Civil Aviation Authority of Malaysia, the Department of Survey and Mapping Malaysia, the Malaysian Communications and Multimedia Commission and SIRIM, formerly known as the Standard and Industrial Research Institute of Malaysia.

In Grab's case, the burgeoning start-up faced both resistance from taxi drivers who feared loss of income, and also regulatory issues, as there were no laws then governing the provision of e-hailing services. 

Fintech (financial technology) companies might also find themselves running afoul of the country's money-transfer and central banking regulations as well. 

“Our regulatory environment tends to be a little more structured to address certain risks. Hence, the reason for the new sandbox, where everyone is put together, with respect to the regulators, is they can really understand what is it that we’re trying to achieve, and why these start-ups are facing certain roadblocks,” she said.

By testing in a close-to-live environment, this would make for adoption and time-to-market for tech companies’ products much faster, and accelerate even their scale-up.

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Poladrone founder Cheong Jin Xi noted that the newly-launched National Technology and Innovation Sandbox was a step  in the right direction towards driving Malaysia's start-up and technology innovation (Photo: Vincent Tan)

While the funding aspect was one reason why start-ups lost momentum, Mr Cheong said the ease of setting up a new business, including something basic like opening a new bank account could also be improved.

He compared the relative ease of opening companies in Malaysia as opposed to Hong Kong, where the former (including opening a corporate bank account) took almost a month, whereas the latter just three days. 

“With the current situation and borders closed, it is difficult for startups to set up anywhere and Malaysia is not an exception. Overall, the cost of doing business in Malaysia is still relatively high, not in monetary terms, but the time spent by processes,” Mr Cheong said. 

Editor's note: This story has been edited to remove the amount raised for Supahands’ Series A funding for further expansion. The company subsequently said the information provided was inaccurate and has retracted it.

Source: CNA/vt(aw)

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