A Malaysian startup’s story of funding gone wrong
Lau Chak Onn is the founder of Malaysian startup Foldees, which crowdsources greeting card designs. Foldees received a grant from a Malaysian government agency, but the funding scheme hasn’t worked out as Lau had hoped. In fact, the scheme appears to be on the rocks, and dozens of Malaysian startups could be left adrift. He tells his side of the story:
In 2007, back when I was just your average white-collar guy looking for an exit, I had a conversation with a friend who was thinking of starting up his own business. He was telling me how a government organisation called MDeC gave someone he knew US$49,000 (RM150,000) to start his own business. The first things I asked were, who his friend knew, and whether or not this friend was a Bumiputera (Editor’s note: long story involving race, religion and affirmative action). Apparently, the friend was an Indian nobody — no offense.
At the time, I had no idea what MDeC was, but had myself been toying around with the idea of starting ‘the Threadless of greeting cards’. I had already been planning to resign from my job selling ads for MSN in the coming months, so I pulled together two friends, and we somehow cobbled together a proposal for a website called Foldees. Four months later, we were the proud third-batch recipients of our own RM150,000 from MDeC, which turned out to be the Multimedia Development Corporation.
Each grant was very specifically to develop a technical prototype of some sort, and protect it. You could use the money for hiring staff, buying equipment, testing your product and even stationery, but under no circumstances was the product to be commercialised or marketed. Your sole goal was to build a prototype and find additional funds to commercialise it later, with seed funds of up to US$160,000 (RM500,000), or VCs in the next stage of the MDeC master plan. In addition to the funds, MDeC also provided specialised training in marketing and financials, of which like any college, classes ranged from decent to bloody useless.
Over the next two years, MDeC funded 22 batches, with 30-40 successful applicants in each batch. As news spread of the fund, more applicants started appearing. Earlier government grants in Malaysia were always seen as crony-related and unattainable unless you were had Bumiputera status or knew someone on the inside, but the MDeC Technopreneur Pre-seed Fund had been awarded to more than a few people I knew – and they didn’t meet either criteria. I even felt a sense of pride about my consultation hit-rate, having guided five companies into receiving funds from subsequent batches.
Overnight, a groundswell of interest in tech entrepreneurship opened up, with events like Barcamp attracting hordes of eager participants, and websites like Entrepreneurs.my and GreyReview gaining traction. While I’m sure it wasn’t just the Pre-seed fund’s doing, I’m just as sure that it played a significant role in planting the interest in tech startups you see in Malaysia today. With the various funds available from an alphabet soup of government agencies (MOSTI, SMIDEC, CIP, MIDA), there was an air of invincibility among us new entrepreneurs. Malaysia was finally turning the right way, and we were spearheading the movement.
And then…
My consultation hit-rate started to drop. That was the first sign. I was five for five in getting startups the MDeC grant, which then turned into five for seven, and eventually six for fifteen. Too many people were applying for the funds, and early in 2010, the last pre-seed batch was allocated, with no further batch requests for applications issued on the MDeC website, . While many of these companies had developed quality prototypes, just as many had used the money as an easy way to bolster their bottom line, or as some development managers at MDeC would tell you – to go on holiday.
MDeC had also failed to materialise the long-awaited RM500,000 seed fund, leaving hundreds of their precious pre-seed companies with brilliant prototypes and no funds left to commercialise them (all grant money must be spent in the allotted on year period). According to industry insiders, many of the former grants (e.g. MOSTI’s technofund, MDeC’s iCON grant) have run dry.
With government funds dry, Some companies tried their hand in the local VC market, but the Malaysian VC market that was just starting to show interest now had a lack of success stories to inspire their risk appetite. Three of the six companies that I helped apply for the funds have effectively shuttered, one startup where I was a partner is currently in limbo, and the countless others that didn’t get the grants were stillborn. You could argue that you don’t need RM150,000 to start a business, but then again, it’s a shot in the arm for a country not exactly known for pulling up its breeches.
The official government agency for small businesses in Malaysia says on their website that MDeC spent US$14 million (RM43 million) funding 297 “ideas”, from which they proudly claimed US$4 million (RM13 million) in revenue, VC funding or investment. First off, that isn’t exactly a great return on three years of pumping out money, and secondly, no one would be surprised if these figures are inflated. Considering that the same article purports that US$26 million (RM81 million) of “potential investment” was sourced from the MDeC-organised investment summit, Innotech 2009, and I am unaware of any of my peers who actually got funded as a direct result of that summit. In general, Malaysian government bodies are too tied up in their precious KPIs and making fairytale figures that they can’t see the real problem – you can’t just throw seed money around and expect a tree to grow. Worse still, in the case of MSC status given to already successful companies, you can’t take a piss on a tree and mark it as something you grew.
In nearby Singapore, things seem to be done a little differently. What I can see is that less funds are distributed to startups as grants, but great efforts are spent instead on building the right infrastructure for a community to get their own funds, getting VCs in, and getting world-class companies to set up proper talent hubs. In the oft-used analogy of learning to fish, Singapore is a properly cultivated tuna farm. Ours is a steamed cod with truffle oil and foie-gras sauce given to a student with no prior cooking experience in a restaurant that only serves chicken.
A few of MDeC’s pre-seed companies have managed to survive, though. I tried looking for a central repository of pre-seed companies so that I could see how many were still running but found nothing. From the ones I know, Socialwalk is now one of the most promising event software startups in the region, while Elevyn is still plugging away, recruiting more wares from more communities in need. Others, like ourselves, bent the rules of the fund, and saved up money during the grant to begin marketing on a small scale, eventually finding means to survive (retail sales for us). There are still funds available, such as from organisations like the Cradle Investment Programme, who eventually came up with their own RM500,000 seed fund known as the CIP500. Other non-government organisations like TeAM are also organising trips to the US and other countries to meet VCs.
As for MDeC, I do apologise if this seems like a rant. It kinda is. But the scariest thing is that MDeC was already a step in the right direction compared to what came before it. Yes, it could have done so much more with that money. But with its more-than-ample funds, and a few committed and passionate individuals, it got me, and countless other nobodies, the means and the initial optimism to build something for ourselves. Yes the learning curve was high, the red tape was thick, and the lack of follow-up or planning sometimes made us feel like abandoned children.
But then again, maybe that’s not such a bad thing. Just ask Steve Jobs or Nelson Mandela.
This guest post is one of a series featuring first-hand insights, experiences and advice from personalities in Asia’s startup scene.
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