The role of incubators in entrepreneurship and innovation

STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS

Copyright S.Ong and S.Hassani 2011 1 of 84

An assessment of the influence of incubators on the entrepreneurship environment for innovators in Malaysia

Final Report

June 2011

Authors :

Prof. Stephen Ong, MINDS

Ms. Sahar Hassani, Multimedia University



Table of Contents

Executive Summary 3

Chapter 1 : Introduction 4

Chapter 2 : Technology Parks and Incubators in Malaysia 10

Chapter 3 : Incubators and Innovation Funding in Malaysia 25

Chapter 4 : Evaluation of the Incubators of Innovation 70

Conclusion 83

Appendix – Incubators Survey Questionnaires 84



EXECUTIVE SUMMARY

This study was undertaken to assess the impact of incubators on the commercialisation efforts

of innovators under incubation in Malaysia. The study involved the detailed background

research of twenty-seven (27) incubator organizations, and the active participation,

interviews and responses from twenty-one (21) incubator organizations. These incubator

organizations are deemed representative of the incubator activities in the national innovation

eco-system.

The findings of this study give a firm base of evidence and understanding to support our

recommendations of forward-looking strategy measures to improve the rate of successful

commercialisation of innovations and business survivability of innovative start-ups in

Malaysia through a more focused framework for business and technology incubation

activities and organisations.

The strategy measures recommended address three broad areas, principally –

1. The establishment of a national agency as a focal point and mechanism for the

coordination of incubation activities and the continued management of the innovation

eco-system;

2. The strengthening of human capital in the areas of management, entrepreneurship,

commercial competence, technical expertise and financial capabilities among players

in the incubation industry;

3. The deepening of financial involvement among innovators, successful entrepreneurs

and investors through global networking; and the broadening of capital marketplaces

and instruments to facilitate investment flows to readily support innovative activities.



CHAPTER 1 : INTRODUCTION

Overview

Since the late 1990s, business and technology incubation in Malaysia has been actively

promoted by government national and state agencies, universities and the private sector. To

date, the National Incubator Network Association estimates that there are 106 incubators in

Malaysia, of which 24 incubators provide third generation services that include facilities

management, business advisory services and acceleration labs to innovators planning to

commercialise their innovations as tenant companies in the technology incubator parks.

However, few companies under incubation have achieved global commercial success.

Research Study Approach

This study on the role of incubators in Malaysia - “An assessment of the influence of

incubators on the entrepreneurship environment for innovators in Malaysia” – was

commissioned by Unit Inovasi Khas (UNIK) to identify improvements to the existing

incubator models and practices that affect the rate of successful commercialisation of

innovations in Malaysia. Over the course of this eight week study, the research team set to establish answers to the

following questions :

1. What are the challenges that incubators and innovators face today?

2. What are the entrepreneurship characteristics of incubators and innovators?

3. What alternative models and practices can be observed from existing global

incubation clusters that can be introduced?

4. What are the strategy measures that can be recommended to improve the rate of

successful commercialisation of innovations and business survivability of innovative

start-ups?



Methodology of Study

The study was conducted through several self-administered questionnaires; selected one-to-

one structured interviews; and directed discussion at focus group workshop sessions. The

workshop sessions organised with UNIK, consisted of key government representatives,

incubator managers, and fund managers of funding programs. The list of organisations from

the public, university and private sectors that participated actively in the study are listed in

Exhibit 1. The information on other organisations that are included in this study was through

available public information sources, previous studies and other survey data.

Additionally, a survey of Malaysian innovators participating in the annual International,

Innovation & Technology Exhibition (ITEX 2011) was carried out through a self-

administered questionnaire and selected one-to-one interviews to provide a basis of

understanding of the characteristics of innovators, innovation capacity and growth in

Malaysia.

Exhibit 1 : Active Participating organizations over the course of this study.

Organisation Stakeholders Engagement

Technology Park Malaysia Government, MOF Survey, Interview,Workshop

Plug & Play Technology Garden Sdn Bhd, KMP

Government, MOF Survey, Workshop

Kumpulan Modal Perdana Sdn Bhd (KMP)

Government, MOF Workshop

MAVCAP Government, MOF Workshop

MTDC Government, Khazanah Workshop

MDEC Government, MOSTI Survey, Workshop

SIRIM Government, MOSTI Survey, Interview,Workshop

MARDI Government, MOA Workshop

Furniture Industry Technology Centre Sdn Bhd (FITEC)

Government, MRRD Workshop

MARA Government, MRRD Workshop



USAINS Group, Universiti Sains Malaysia (USM)

University Survey , Interview

Sanggar Sains Sdn Bhd, Universiti Sains Malaysia (USM)

University Survey

UKM Technology Sdn Bhd, Universiti Kebangsaan Malaysia (UKM)

University Workshop

Innovation and Commercialisation Centre, Universiti Teknologi Malaysia (UTM)

University Workshop

Technology Transfer & Commercialization (TTC), Universiti Teknologi MARA (UiTM)

University Workshop

MAD Incubator Sdn Bhd Private Survey, Interview, Workshop

ICT Incubator Centre Sdn Bhd Private Survey, Workshop

Expedient Equity Sdn Bhd Private Workshop

Teak Capital Sdn Bhd Private Workshop

Astra Partners Sdn Bhd Private Workshop

CIMB Private Equity, CIMB Group Berhad

GLC, Khazanah Workshop



Summary of Key Findings and Recommendations

INNOVATION ECO-SYSTEM

CHALLENGES RECOMMENDED STRATEGY MEASURES

Role of Technology Parks and Incubators

Lack integrated and comprehensive services to grow sustainable business enterprises

Establish Global Industry Innovation Centres of Excellence between multinationals and universities in Key Sectors

Government incubators have limited budget and qualified personnel

Establish a National Centre for Incubator Management

Private incubators established to enjoy incentives (MSC status) have failed to execute incubation programmes

Incentives for Investment in Incubators and Technology Parks in Key Sectors.

Entrepreneurial leadership and Management capacity limitations

Incentives for Business Mentors; Retired experts and Returnees

Limited managerial and financial resources to support business start-ups at seed and early stages

Incentives for smart partnership with Angel investors

Role of Innovation Grants

Improve National Innovation Funding Strategy

Agency is required to shape the national public sector funding strategy and act as a portfolio manager to track performance

Streamlining grant funding vehicles to be specialized, either according to sector focus or recipient type

Reduce the number of early stage innovation grants to three

Overcome gaps in the fund disbursement process and performance.

Implement a systematic performance management measurement metrics and scorecard across all funds

Role of Venture Capital

Overcome gaps in industry specific investment capacity

Re-establishing the proven public-private partnership model through incentives for foreign venture capital partnership and corporate venturing



Improve accountability and performance of government funding in priority areas

Committing public sector financing based on clear developmental and technology transfer assessment criteria

Increase private sector funding exposure

Mitigate risk and investment allocation in high risk venture capital funds by savings institutions through dividend income tax rebates.

Access to capital markets for high-tech start-ups

Establish linkages into global capital markets for high-tech start-ups

Role of Private Equity

Lack of focus for private equity investors on developing capacity in present or future sunrise industries

Focus PE funding strategy on three key sectors to build innovation capacity

Lack of Malaysians with cross-border PE skills in hi-tech industries

Require experienced Malaysian managers to be joint-venture partners of the Fund Management team

Orphaned hi-tech projects will turn into “Problem children” without government support

Implement management turnaround and consolidation strategy through the Funds

Role of Debt Financing

Gaps in the credit evaluation and monitoring system

Implement community based credit assessment and monitoring

Valuation and collateralization of intellectual property

Encourage the establishment of community of professional IP and Technology Valuers

Poor asset management and recovery of intellectual property of defaulters

Establish an Intellectual Property Technology Exchange with global networks

Role of Angel Investors

Limited managerial and financial resources to support business start-ups at seed and early stages

Incentives for smart partnership with Angel investors and a central data base of angel networks



Increase involvement of business angel investors

Incentives for Angel investors and Angel networks.

Mitigate the high risks of angel investment activities

Support a capital market framework for angel investments



CHAPTER 2 : TECHNOLOGY PARKS AND INCUBATORS

Overview

The rationale for technology incubators is to give business support to techno-entrepreneurs

who may have the technology business idea but lack the know-how and access to facilities to

make it a reality. Technology incubators typically offer a nurturing environment for resident

companies – providing assistance in forming a company, training and mentoring,

management, business planning, market analysis, technical and legal assistance and

facilitating access to finance, networking, IPR-related assistance, equipment and

infrastructure facilities of the host institution and other shared services. Most residents

graduate out after two to three years.

Technology Parks also provide more than physical facilities. The most successful provide

state-of the art research facilities such as labs and virtual information centers connected to a

host of academic institutions around the world. The Parks also solicit venture funds, host

incubators, prepare business pans and assess market opportunities for up-and-coming firms.

Examples include Hsinchu Science Park in Taiwan, ICICI (Genome Valley) in Hyderabad in

India.

Spin-offs from Universities and public research institutes often locate themselves in

technology parks. These consist of researchers at universities and public research institutes

that leave to set up new high-technology companies. In China over 2000 high technology

companies have spun off from universities and public R&D centers.

Malaysia’s program for Incubators and Technology Parks have had mixed results. Many

provide facilities and some business advice. But most lack the capability to provide

comprehensive services as provided by other best practice institutions in its class.

Challenges

i) Lack integrated and comprehensive services to grow sustainable business

enterprises

ii) Government incubators have limited budget and qualified personnel



iii) Private incubators established to enjoy incentives (MSC status) have failed to

execute

iv) Entrepreneurial leadership and Management capacity limitations

v) Limited managerial and financial resources to support business start-ups at seed

and early stages

Challenge 1: Lack integrated and comprehensive services to grow sustainable business

enterprises

Generally, the government and university run incubators offer an office space at subsidized

rates; general administrative services; outsourced business support services and basic

training. The staff at these incubators lack commercial experience; have weak relationships to

industry and supply chains; and limited knowledge of global markets. Furthermore, managers

at these incubators who have either civil service or academic backgrounds, tend to be

administrators, rather than entrepreneurial. Yet, they are expected to perform the initial

screening of incubatee applications for admission to their incubation programmes. As a result

of this “blind leading the blind” system, the lack of successful entrepreneurial characteristics

in the incubatee is not recognized early on and eventually leads to business failure in the

absence of appropriate countervailing measures.

Over the past few years, another disconcerting trend has emerged where universities have

formed their own investment holding subsidiary to assume full ownership and control of

incubatees in commercialization projects after they either failed to license or collaborate with

industry partners, particularly in global marketing. This approach utilizing university funds

has been taken in spite of clear evidence showing that very few academics have

entrepreneurial leadership and the university organizational culture does not support

entrepreneurial decision-making.



Recommended Strategy Measure: Establish Global Industry Innovation Centres of

Excellence between multinationals and universities in Key Sectors

The Agency should coordinate a strategic industry-academia research partnering programme

between multinationals operating in the region with local universities to set up Innovation

Centres of Excellence funded by each party on a 50:50 basis. The Centres will house both

industry and university researchers as well as technology facilities. The effort will help

university management to strengthen networking with industry and increase exposure to

global supply chain requirements.

This Global Industry Innovation Centres of Excellence programme should focus on the

twelve (12) National Key Economic Areas, namely - Oil, Gas and Energy; Palm Oil;

Financial Services; Tourism; Business Services; Electronics and Electrical; Wholesale and

Retail; Education; Healthcare; Communications Content and Infrastructure; Agriculture; and

Greater Kuala Lumpur/Klang Valley (i.e. Infrastructure & Construction; and Transportation).

The Agency will identify suitable multinational companies operating in Malaysia for this

partnering programme with local universities. This programme will elevate the focus of R&D

and commercialization of innovation to a global level, which should drive out a higher

quality of innovation from local researchers to meet the needs of global businesses. It will

also force greater effectiveness in the use of university funds in the commercialization of

their innovations. A successful programme will create spin-out companies with higher quality

innovations and market relevant business propositions.

The programme should be incorporated in the list of pioneer status privileges to attract

follow-on investments by multinationals in R&D and innovation activities to supplement

their current production/services operations in Malaysia; and promote the setting up of the

multinational’s global product/service innovation hub.



Specific programme incentives can include extension of pioneer status of multinational for

another ten (10) years on corporate income tax exemption; five (5) year tax holidays or lower

personal income tax rates (similar to the 15% income tax rate for knowledge workers in

Iskandar Malaysia) for full-time knowledge workers from the multinational and the local

university employed in the Centre (on an unconditional, non-discriminatory basis); access to

employment of foreign knowledge workers; duty free imports of capital equipment and

consumables for the Centre; exemptions from government service tax and withholding tax on

technical and consulting services provided to the Centre; and access to the Agency’s human

capital development innovation grants to subsidise fifty percent (50%) of salaries of PhD or

technical specialists.

The Agency will have a strategic matching service to assist Universities to team up with

Angel investors to co-manage their available funds to invest in spin-outs from the Centre or

other faculties. This Seed Capital Fund can be on a one to one (1:1) matching basis between

the Agency and the University-Angel Capital Partnership. Angel investors will drive

assessment of business viability and survivability of innovation spin-outs; lead commercial

negotiations and investment decisions; provide mentoring, build management teams and be

ultimately accountable to stakeholders for investment returns. Where a single university’s

innovation output lacks critical mass, the Fund can be partnered with several universities or

research institutes with innovations in the same sector.

In general, the university should the Agency to own a small minority stake or less than

twenty-five percent (25%) of the spin-out company as compensation for developing the

intellectual property (based on a cost recovery valuation formula), allowing the balance of

equity to be utilized to raise working capital and to incentivize management.

This strategy measure will refocus university strategic role in incubation of innovation and

reinforce relevance on its commercialization efforts in the global marketplace through smart

partnership with multinationals; encourage technology transfer and best practice synergies

between partners; and strengthen entrepreneurial leadership and decision-making in the

organization.



Challenge 2: Government incubators have limited budget and qualified personnel

There is too much variation in the management and performance of government incubators.

Many face similar problems and challenges such as; obsolescence of facilities due to

budgetary constraints, lack of management capabilities (i.e. unsuitable personnel with limited

technical and commercial expertise, unable to execute plans, lack business linkages, agency

conflict of interest issues, co-ordination issues with other government and public funding

agencies, etc.). Generally, the value proposition and service offering are not valued by

incubatees.

The incubator projects also face a host of similar problems; unable to commercialize

products, lack of demand from venture capitalist, lack of endorsement for products and

contacts for international markets, etc. Some of the more specialized technological incubators

require enhanced specific infrastructure e.g. bio-tech/pharmaceutical and ICT.

Around the world most incubators receive public subsidies. However, there should be

incentives to make them increase their sources of revenue so that they are self sustainable

especially on the operating expenditure side.

Recommended Strategy Measure: Establish a National Centre for Incubator Management

This national center should be an independent entity to put in place best practice incubator

management practices across all government run incubators. It should promote a model “one-

stop” incubator program where a comprehensive set of services are provided as practiced in

the other world class incubators.

It should develop extensive international linkages so that it can bring linkages to all

incubators. Establish alliances with foreign incubators so as to promote technology transfer as



well as exchanges of personnel. It should prepare and obtain all approvals of incentives

necessary to promote Malaysia as a new location for foreign incubators to operate.

The Centre should also put in place standard operating procedures, performance management

systems, service offerings, control measures to prevent conflict of interest and appropriate

targets and associated KPIs to promote better management and success of incubators in

Malaysia.

The Centre should have immediate oversight of all new development projects currently

undertaken by government run incubators with MoF development grants. It should manage

the transformation of the development project with new stakeholders and incubator

management organization in line with this strategy measure. Given the present state of public

incubators, their inexperienced managers are unlikely to execute in accordance to the new

mind-set.

The Centre should also create a national data base of experts (technical and commercial) who

can act as mentors and consultants to incubators and other start-up firms. In order to recruit

business mentors and coaches, it should design promotional campaigns with incentive

packages to convince target corporates in key sectors to commit fifteen percent (15%) of their

management time to innovation-related activities.(a.k.a. the 3M way)

The successful entrepreneurs and general managers who commit up to fifteen percent (15%)

of their time mentoring the Agency’s approved incubatee, will enjoy an equivalent

percentage (up to 15% of their salaries from permanent employment) of personal income tax

relief, on condition the mentor does not hold any shares or stock options in the incubatee.

Mentors that hold shares or stock options are already incentivized to ensure the success of the

incubatee.



The Center should create programs to leverage government research institutes and institutions

of higher learning for technological expertise and scientific equipment. Additionally, it

should be the “one-stop” agency to promote and coordinate the recruitment of foreign retired

experts or Malaysian experts resident overseas under the various government programmes,

i.e. Malaysia My 2nd Home (MM2H) and Talent Corp., and match these experts to the

incubator programmes.

It would provide independent yearly evaluation of all programs and activities of incubators

and the performance of incubatees. It will be the “one-stop” agency to qualify and certify

private incubators, mentors and angel investors for tax incentives covering both corporate

double tax relief and personal income tax relief, thus creating the Agensi Inovasi Malaysia or

“AIM Status” approved incubator. Poor performing private incubators should also be

removed from the MSC and BioNexus approved status listings which will reduce confusion

in the eco-system.

The Agency will manage a ten (10) year soft-loan based Fund of Funds programme to create

incubator seed funds at the public and private incubators on a one-to-one (1:1) matching

basis. To form the Seed Capital Fund, public incubators can match from their retained profits

achieved through rentals, while private incubators can source from their own capital and third

party investors.

The Agency will have a strategic matching service to assist incubators to team up with Angel

investors to co-manage their available funds to invest in incubatees in the seed and early

stages. This Seed Capital Fund will be on a one to one (1:1) matching basis between the

Agency and the Incubator-Angel Capital Partnership. Angel investors will drive assessment

of business viability and survivability of business start-ups; lead investment decisions;

provide mentoring; strengthen management teams and be ultimately accountable to

stakeholders for investment returns.



Finally, the Centre will prepare government run incubators for privatization within a three (3)

year timeframe. In the strategic re-alignment programme, government run incubators and

technology parks will be re-organised to be cluster and location specific in their scope of

activities. Privatisation will include a partial sale or complete disposal to existing

management; private or foreign incubators; or public listed companies. In situations, where

the technology park or incubation centre is situated on strategic land owned by the

government or university, the privatization should only involve the incubator management

company to avoid investors with a property agenda.

This strategy measure will transform government run incubators through best practice

development; implement greater oversight and accountability measures; expand the

availability and access of expert human capital resources; make available financing of seed

and early stage ventures; and strengthen entrepreneurial leadership and decision-making in

the organization in preparation for a more market oriented culture as a private entity.

Challenge 3: Private incubators established to enjoy incentives (MSC status) have failed

to execute incubation programmes

The growth of private incubators is associated with MSC development in the country. The

key benefits to incubator operators include; access to world class telecommunications

infrastructure, employment of foreign workers, income tax exemption, tendering for MSC

infrastructure projects. Most of the tenants are early stage growth firms. The private

incubators provide shared facilities and limited business advisory support.

Many of the private incubators are also facing similar issues as public incubators. Their

shortcomings include – a lack of focus and core competences, limited financial partnerships,

weak linkages with incubators overseas, low leveraging on existing industry players, lack of

experienced account managers to mentor and manage incubatees, etc.



Several private incubators set up by large Malaysian public listed conglomerates to take

advantage of pioneer status tax exemptions have also failed to collaborate and execute

successful incubation programmes, but instead pursued narrow internal agendas exclusively.

Recommended Strategy Measure: Incentives for Investment in Incubators and Technology

Parks in Key Sectors.

The private sector should be encouraged not only to invest in incubatees but also in owning

incubators and technology parks as businesses. There are several incubator revenue models

where royalty sharing arrangements can be made with incubatee graduates; or where

incubatees are provided with capital in exchange for equity stakes and the proceeds from

successful investments can be used to subsidize future capital expenditure of the incubator.

This initiative should focus on developing private incubators in the twelve (12) National Key

Economic Areas (NKEA), namely - Oil, Gas and Energy; Palm Oil; Financial Services;

Tourism; Business Services; Electronics and Electrical; Wholesale and Retail; Education;

Healthcare; Communications Content and Infrastructure; Agriculture; and Greater Kuala

Lumpur/Klang Valley (i.e. Infrastructure & Construction; and Transportation).

Each private incubator cluster will be anchored with a leading public listed company

providing the incubator facilities developed based on tax incentives; with formal linkages to

one or more supporting Universities/Research Institutes with technical expertise focused on

innovations specific to the sector; and managed by the private incubator management staffed

by managers or retirees with industry experience.

The Agency will identify suitable Malaysian public listed companies as anchors to the sector

cluster. This programme will drive the commercialization of innovation to meet the needs of

the industry, and kick start the growth of industry led corporate innovation activities.



Specific programme incentives can include pioneer status of anchor public listed company

for ten (10) years on corporate income tax exemption; five (5) year tax holidays or lower

personal income tax rates (similar to the 15% income tax rate for knowledge workers in

Iskandar Malaysia) for full-time knowledge workers employed in the private incubator

cluster (on a unconditional, non-discriminatory basis); access to employment of foreign

knowledge workers; duty free imports of capital equipment and consumables for the private

incubator cluster; exemptions from government service tax and withholding tax on technical

and consulting services provided to the private incubator cluster; and access to the Agency’s

human capital development innovation grants to subsidise fifty percent (50%) of salaries of

Ph.D or technical specialists.

The programme should adopt a “carrot and stick” approach to mobilize the Malaysian large

corporate sector to build up innovative capacity to compete globally. An innovation tax

equivalent to one percent (1%) of revenues will be imposed on Malaysian public listed

companies (similar to the MPOB palm oil cess for funding R&D) in all the 12 NKEA sectors

and Gaming sector. The innovation tax proceeds will be administered by the Agency for

funding the NIP programmes. (similar to the utilization of UK’s National Lottery proceeds.)

Any Malaysian public listed company can qualify for tax exemption from the innovation tax

through utilization for capital and operating expenditures related to the setting up of R&D

facilities at a technology park or incubation centre; and by way of procurement of product

innovations or technology licences from the private incubator clusters or local universities.

To set the pace for the private sector, Government-Linked Corporations where Khazanah

Nasional has substantial stakes in, will provide the initial ten (10) private incubator clusters in

the following sectors – Agriculture; Automotive & Transportation; Basic materials; Financial

Services; Healthcare; Infrastructure & Construction; Media & Communications; Electronics

(Wafer); Retail; and Utilities (Energy).



In the private incubator clusters where Malaysia faces intense global competition and lack

critical mass in innovations, foreign incubator management companies will be actively

sought through incentives, joint ventures or acquisition to set up operations locally. The six

(6) sectors that need special attention are : Oil, Gas and Energy (including Renewable Energy

and Cleantech); Electronics and Electrical; Healthcare (including Biotech, Pharmaceuticals

and Medical Devices); Communications Content and Infrastructure; Business Services; and

Wholesale and Retail. The foreign incubator management companies’ role will include

strengthening collaboration and facilitating technology transfer between incubatees in their

home countries with incubatees in Malaysia; as well as leveraging Malaysia’s comparative

advantages as an outsourcing partner.

This strategy measure will develop innovation capacity in key economic sectors; mobilize

domestic industry investment into innovation activities; create a self-funding mechanism for

innovation programmes; build core competencies of private incubators in focus sectors;

encourage transfer of foreign incubator expertise to enhance global competitiveness of

product innovation; and unleash under-utilised domestic expert and entrepreneurial human

capital.

Challenge 4: Entrepreneurial leadership and management capacity limitations

The lack of experienced account managers to mentor and manage incubatees by incubators

has led inevitably to the low survival rate of start-up businesses. Evidence confirms that the

overwhelming majority of innovators, especially from academia, lack successful

entrepreneurial characteristics and leadership potential. Without the support of experienced

mentors and managers from industry, the chances of survival of any business formed to

commercialise an innovation are extremely limited.

The availability of mentors and managers from larger companies is constrained due to time

committed to developing their businesses; and the absence of a reward system aligned to the

overall CSR mission.



Recommended Strategy Measure: Incentives for Business Mentors; Retired experts and

Returnees

In order to recruit business mentors and coaches, the Agency should structure incentive

packages to convince target corporations in key sectors to commit fifteen percent (15%) of

their management time to innovation-related activities.(a.k.a. the 3M way)

The successful entrepreneurs and general managers who commit up to fifteen percent (15%)

of their time mentoring an the Agency approved incubatee, will enjoy an equivalent

percentage (up to 15% of their salaries or compensation from permanent employment) of

personal income tax relief.

The Malaysian retired expert who mentors an the Agency approved incubatee, will qualify

for a tax holiday in terms of personal income tax relief for the duration of the contract.

The retired foreign experts for any key sectors will be eligible to work as a permanent

resident under an augmented MM2M programme. The foreign experts working in any the

Agency approved programme will qualify for a tax holiday in terms of personal income tax

relief for the duration of the contract.

The Malaysian returnees under government programmes, such as Talent Corp., who mentors

an the Agency approved incubatee or works in any the Agency approved programme, will

qualify for a tax holiday in terms of personal income tax relief for the duration of the

contract.



The income tax relief provisions are subject to the condition that the mentor does not hold

any shares or stock options in the incubatee. Mentors that hold shares or stock options are

already incentivized to ensure the success of the incubatee.

However, full-time or contract employees who are eligible for employee stock options in the

incubatee will not be excluded from qualifying for their tax holidays. This is to enhance the

attractiveness of the employment conditions at high risk business enterprises.

This strategy measure will transform corporate culture to align with innovation prerogatives;

improve corporate social responsibilities to nurturing infant industries; and unleash under-

utilised domestic experts and incentivise brain gain efforts to recruit the Malaysian diaspora.

Challenge 5: Limited managerial and financial resources to support business start-ups

at seed and early stages

The early efforts of Government venture capital agencies to develop a venture financing eco-

system for seed and early stage businesses through direct investments and outsourcing to

investment professionals have met with limited success. The government venture capital

capacity building programmes (under MTDC and MAVCAP) concluded that financing of

seed and start-up businesses have resulted in significant investment losses and a high rate of

business failure. The bitter lessons learnt demonstrate that neither top-down driven direct

investment in priority sectors, nor outsourcing to smaller private sector teams of qualified

investment professionals can improve business survival of start-ups at seed and early stages.

Neither managers of government agencies nor private sector venture capital funds have the

commercial experience to assist and mentor business start-ups irrespective of the strength of

their innovation or technology platforms.



Furthermore, a new strategy by way of co-investment by government (through Khazanah,

MTDC) as limited partners of foreign managed venture/seed capital funds (MLSF,

SpringHill) focused on life sciences have to-date yielded little impact in terms of technology

transfer, knowledge spill-overs, domestic capacity development, jobs creation or investment

returns. The problems lie in the wrong choice of competent partners; poor enforcement of

obligations; lack of critical evaluation and monitoring; limited transparency and

accountability; and failure to ascend the learning curve. The government’s failure is in stark

contrast to Singapore’s qualified success in a similar programme (Bio*One Capital)

implemented at around the same time.

To date, all financial investors involved have lacked successful entrepreneurial characteristics

and leadership; as well as experience as entrepreneurs.

Without combining funding with relevant mentors from industry, the long term survivability

of these businesses formed to commercialise innovations is destined to fail.

Recommended Strategy Measure: Incentives for smart partnership with Angel investors

While it is necessary for the Agency will coordinate and maintain a directory of mentors and

experts as a resource facilitator, most mentors in current incubator programmes are rewarded

through low, risk-free basic compensation on terms dictated by government grant schemes,

such as CIP.

Such risk-reward compensation structures are unlikely to attract the “best of breed” mentors

and insufficient to incentivize passionate commitment to grow incubatees.

Mentors drawn from Angel investors remain the most balanced risk-reward formula for

successful business incubation support. Since angel investors have a direct financial exposure



to the business survival and growth of the start-up, motivation and commitment to business

success remain high.

The Agency should structure tax incentive packages for Angel investors to invest some seed

capital and their time mentoring an the Agency approved incubatee. Their investment will be

entitled to one hundred percent (100%) deduction as personal income tax relief.

The Angel investor who mentors an the Agency approved incubatee will qualify for a tax

holiday in terms of personal income tax relief for the duration of the contract.

The Agency will manage a ten (10) year soft-loan based Fund of Funds programme to create

incubator seed funds at the public and private incubators on a one-to-one (1:1) matching

basis. The Fund of Funds programme will seek to develop smart partnerships with Angel

investors for each of the NKEA sectors.

The Agency will have a strategic matching service to assist Angel investors to team up with

incubators or Universities to co-manage funds to invest in incubatees in the seed and early

stages. This Seed Capital Fund will be on a one to one (1:1) matching basis between the

Agency and the Incubator/University-Angel Capital Partnership. Angel investors will drive

assessment of business viability and survivability of business start-ups; lead investment

decisions; provide mentoring; strengthen management teams and be ultimately accountable to

stakeholders for investment returns.

This strategy measure will align financing with business expertise; expand the availability

and access of experienced entrepreneurs; accelerate the rate of success of seed and early stage

ventures; and strengthen entrepreneurial leadership and decision-making in incubators.



CHAPTER 3 : INCUBATORS AND INNOVATION FINANCE

Overview – Cross-cutting challenges

Malaysia has evolved in the past 15 years a range of risk capital instruments in the form of

grants, equity or loans. There are gaps in providing a comprehensive innovation funding

landscape so that firms can obtain capital through all stages of its life-cycle. If gaps persist,

firms will fail.

Access to finance for innovation is an important link in the innovation cycle. Early stage

financing is a big challenge even for economies with well developed capital markets. The

perceived risks arising from introduction of unproven products and business models into

markets makes financiers less comfortable. Risk capital is typically provided by government

grant institutions, angel investors and venture capital (VC). Late stage funding is provided by

private equity (PE), debt financing and public equity market.

Government funding has played an important role in Malaysia’s early-stage technology

development. However, it has not achieved the desired output. There is considerable scope in

strengthening the capital market instruments for innovation funding. Malaysia’s risk capital

base appears to be more weighted on start-up and seed financing. The government has

attempted to fill the gap in the private capital market for supporting knowledge creation and

commercialization in the form of grants, soft loan, equity and government-funded incubators.

Financing from wealthy individuals, early stage private VC, corporate venturing, insurance

and pension funds has been lacking in early stage funding. International early stage capital

funds have not witnessed significant presence may be because the demand side, it terms of

quality deal flows has not been attractive. In the best practice early stage capital market

model, governments provide 25 to 30 per cent, angel investors 20 to 25 per cent, and venture

capital about 5 to 10 per cent.



The supply from other funding sources for different stages of the innovation lifecycle also is

conspicuously underdeveloped. PE, project financing, debt financing, loan guarantees and

public equity markets for innovation-driven firms are less developed. Innovation strategy will

address the shortcomings in all these innovation funding instruments.

There should seamless connectivity between the different components in the innovation

funding ecosystem. This should also be supported by a healthy rate of firm formation with a

well populated pipeline of potential ‘quality deal flows’ that ensures that the funding

ecosystem is nourished in a virtuous circle. Risk capital and late stage funding are equally

important.

Risk capital instruments are extremely important to fund firms from start-ups through to

commercialization. Well before they have revenues, entrepreneurs seek funding to conduct

the R&D needed to demonstrate the value of their idea, build prototypes, conduct trials,

obtain patents and launch their products or technologies into market-ready products and

applications. At the stage of pre-revenue and pre-commercialization, risk capital plays a

crucial role in selecting viable value propositions, nurturing them into commercial engines of

innovation and economy growth.

There are several innovation funding challenges to that need to be overcome for the country

to achieve an innovation economy. These include;

• Decrease Government role as provider of risk capital

In Malaysia, the end goal of innovation strategy is to have the private sector assume a

leadership role in innovation funding. The aim of innovation strategy is to facilitate the

development of private-sector led risk capital. Currently, there is minimal private funding at

the early stage. The desired aim of the strategy is the emergence of a comprehensive

spectrum of risk capital with specific roles by the government in the early stage and with a



declining role at the later stages. Hence, role of government as a player, facilitator and

regulator should have an optimal balance.

Presently, the bulk of risk capital is sourced mainly from the government. Going forward, the

strategy focus is to accelerate the growth of private sector capital in innovation funding.

There is a need for a broader investor base and to incentivize financial institutions and private

sector corporations to invest. Wherever possible, even at early stage funding, private sector

involvement should be invited.

• Eliminate the Structural Issues Hindering Deployment of Risk Capital

There is inadequate private capital to fund nascent firms. There are structural issues within

the VC industry that limit the growth of the industry and the extent of risk taking. The

establishment of angel network to finance seed stage has not happened. The other alternative

risk capital instruments such as private equity, debt back guarantees, debt financing

(convertible soft loans) and exit markets have not developed despite government initiatives to

foster their development.

• Limited Impact of Innovation Funding

The government has invested a sizeable amount in early stage grants but this has not resulted

in commercially viable products/processes. The recipients of these grants have a low

commercialization rate. It is crucial that all innovation funding programs should identify

within its mandate priority areas taking into account the leverage from Malaysia’s core

strengths where it has a sustainable competitive advantage. Currently heavy focus is on ICT

and biotechnology. There are concerns that the sectors that generate meaningful impact on

the economy are not well covered by existing early stage innovation funds.



• Improve Management of Funds

Another challenge facing Malaysia is in the quality of innovation funding management. Risk

capital, be it a VC fund or grant program, should be managed by a team with strong

capabilities. They should be skilled in financial matters, possess domain expertise,

capabilities in nurturing skills and experience in bringing early stage innovation-based firms

all the way through to commercialization success. Most managers have strong financial

background but lack competencies in other areas.

There is inadequate linkage support from innovation funding to recipients. The linkage

support to foster growth is an essential part of early stage financing. The range of linkage

support starts with idea development (i.e. linking to academics, industry specialists, etc). It

then leads to capability building (i.e. commercial mentors, etc.), and access to infrastructure

(i.e. hard-asset tools such as laboratories or IT systems, etc.). Finally the most important

component is commercialization (i.e. potential customers, prospective investors or ‘exit’

partners). These linkages areas need considerable improvement by innovation fund

institutions.

• Improve Accountability and Performance

The funding vehicle should be designed to match the risks and cash flow profiles of the

recipients in each stage. It is also important to mitigate potential moral hazards where

innovators in the R&D stage typically have no cash-flow and limited financial resources to

contribute to the funding. They have also have limited assets on their balance sheets to be

used as collaterals, making it hard to access private sector funding. Thus, herein lays the

difficulty for public funding agencies to use matching grant. However, there must be a

strategy in place for funding vehicles to move from pure grant to matching grant to soft loan



to equity financing. Fund recipients should also be gradually required to make funding

contributions (‘skin in the game’).

There should sufficient incentives within each fund to be performance driven. There should

be disincentives when milestones are not met. Independent audits by third parties should be

used to conduct ex-ante, intermediate and post-project monitoring.



INNOVATION GRANTS

Overview

Effective funding of grants by the public innovation organizations is one of the key factors

that will define the success of the national innovation agenda. Individuals, businesses,

educational and research institutions, and even government agencies all need access to

adequate early stage funding to help catalyze commercialization.

Early stage funding is one area where market failure prevails as private sector funding

inadequately addresses the needs of innovation agents. The government has realized the

needs and benefits of innovation grants and funding to help plug the funding gaps

insufficiently addressed by the private sector. It has allocated RM2.45 billion across fourteen

funding programs along the entire innovation lifecycle, to be utilized over a period of two

years from 2011 and 2012.

Challenges:

i) Improve National Innovation Funding Strategy

ii) Streamlining grant funding vehicles to be specialized, either according to sector

focus or recipient type

iii) Overcome gaps in the fund disbursement process and performance.



Challenge 1: Improve national innovation funding strategy

The national grant funding strategy should have a clear focus on sectors where Malaysia can

potentially develop sustainable competitive advantage. The limited resources need to be

prioritized to leverage Malaysia’s core strengths in the past and in the future. The national

grant funding strategy must also align itself to the overall national economic strategy.

Recommended Strategy Measure: Agency is required to shape the national public sector

funding strategy and act as a portfolio manager to track performance

EPU and MOF should continue their role as the country’s economic and finance master

planner and for disbursing budgets related to innovation grants. The National Research

Science Council (NRSC) will identify, monitor and evaluate priority fundamental/scientific

research areas and expenditure at the national level. MOSTI and MOHE would continue to

plan and execute the Science and Technology (S&T) agenda of the country.

In addition, there is a need to for a specialized agency to plan, drive and monitor the

government’s innovation funding strategy across multiple government ministries and

agencies. This agency could be Agency Innovasi Malaysia (the Agency).

There is also the need for continuously improvement of the public innovation funding

organizations. Internal organizational reform is vital to ensure it is stakeholder driven with

alignment with national strategic interest. Improving linkages across the funding ecosystem

(public and private) is equally important.

Implementation evaluation tools such performance metrics and innovation scorecards need to

be established for each agency and its funding programs. With appropriate key performance

indicators (KPIs) in place quarterly/annual tracking of the performance of public innovation



funding agencies should be undertaken. It is equally important to assess their impact on

stakeholders and society at large. Independent third party audit and evaluation across all

funding programs and projects should be the norm.

Coherence in strategy design and implementation is a prominent characteristic of all

successful innovation funding initiatives. In Malaysia there is a need to execute better what is

planned. The apex agency should have a high-powered strategy monitoring and evaluation

board (with inter-ministry and inter-industry private sector representation) where all

evaluation reports are tabled for remedial action. With all these mechanisms in place the

reform and transformation agenda of innovation funding should flourish.

Challenge 2: Streamlining grant funding vehicles to be specialized, either according to

sector focus or recipient type

As a result of mapping of the existing programs against their industries of focus and stages

along the innovation lifecycle the following problems were observed:

i) Existing funds target a few sectors (ICT and Biotech). There is limited funding

provided to all stages in the innovation lifecycle across all sectors. Those sectors

that are critically important (i.e. electronics, resource based industries such as

palm oil, rubber and wood, etc.) lack public funding support at the early stage.

ii) Multiple agencies are providing funds to a particular sector (such as ICT). These

agencies are unable to have cohesive accountability or responsibility to generate

the desired impact on the particular sector.

iii) There is more than one funding agency targeting the same group of recipients.

iv) Within certain sectors or sub-sectors, there is a problem of disjointed funding

effort from one stage to another in the innovation. This is especially prominent



between the pre-commercialization and commercialization stages. There is the

absence of seamless access to funding from one stage to another to foster the

growth of the firm.

The transformation of the existing government grant funding institutions cannot be done in a

piece meal. Simply maintaining the existing funds and eliminating overlaps will not lead to

any significant improvement in the efficiency and effectiveness of public funding for

innovation. A comprehensive overhaul is required.

The real effective option requires the reduction and re-organizing of the funds to overcome

all the shortcomings in the present grant funding landscape. The limited national resources

should be better deployed in a cohesive manner so that there is greater impact on a sector and

stage in the innovation life cycle.

There are several strategic principles that should be observed;

i) When creating sector specific fund, the fund managers must have domain

knowledge to nurture development of early stage firms.

ii) Targeted funding should be where Malaysia can create present or future

sustainable competitive advantage. Given the resource constraint, it is unlikely

that Malaysia will be able to dedicate a fund or a cluster of fund to every sector of

the economy. Hence the sector selected must be able to exploit the existing

economic base (i.e. electronics and resource base) and its core strengths to build

new industries. Alternatively, it could focus on new industries where the prospects

for future sustainable competitive advantage can be realistically created (i.e. ICT

and agri-biotechnology).

iii) The fund should provide comprehensive innovation funding along different stages

of the innovation lifecycle.



iv) In the event the fund is focused on a specific stage in the innovation life cycle (i.e.

pre-seed stage, etc.) across all sectors, linkages to next stage of funding should be

effectively be in place. It should enhance the efficiencies in the funding process as

it is dealing with recipients with similar profiles and needs.

Recommended Strategy Measure: Reduce the number of early stage innovation grants to

three

The number of funds should be reduced to give greater depth and scope in funding. The

mandates should also be re-scoped to eliminate overlaps in sector focus, target recipient

groups and fund all stages along the innovation lifecycle.

It is recommended that the three funds be structured in the following manner;

i) Bio-Medical Fund

This is a sector-specialized fund similar to the Biotech Corp’s Biotechnology

Commercialization Grant Scheme (and its cluster of sub funds). As this is a highly technical

sector it should continue to remain a technically competent agency like Biotech Corporation.

The fund should be managed by domain experts who have deep technical knowledge and are

business savvy. This fund provides cross-stage (pre-seed to commercialization) funding to

ensure seamless transition from one stage to the next within this sector. Since this is a ‘green-

field’ sector with higher risks, it attracts low-private sector funding. It should also model after

the Malaysian Life Sciences Capital Fund (MLSCF) where some of its sub-sectors can be co-

managed by Malaysian VC/PE together with a globally recognized firm/group of individuals

in the bio-technology sector. The foreign partners must be linked to global networks that can

enhance the quality and quantity of deal flows. The sub-funds must be structured as private

entities; investments are decided in an independent, transparent and consistent manner.



ii) ICT and IT Technology Enabling Fund

The fund would have the same characteristics as the above bio-medical fund accept it will

focus on the ICT sector and to IT technological enablement across all sectors. It would also

provide end-to end funding with a sub-funds with a public-private sector funding (seed

fund/VC/PE) partnership model. ICT as a sector requires a lot of sector-specific expertise.

There is also no funding program with a dedicated focus on technological IT enablement.

This fund will cluster all previous funds that have a focus on IT. By having one fund

dedicated to the ICT sector (rather than multiple funding as present) will ensure

cohesiveness, accountability and impact for this sector.

iii) A General Early-Stage Fund

This is a general end-to-end fund that will focus on all sectors apart from bio-medical and

ICT. This fund is also a merger of three existing funds namely; MOSTI’s Pre-

Commercialization Fund, MTDC’s Commercialization of Research and Development Fund,

and MTDC’s Technology Acquisition Fund.

It will also adopt all the characteristics of the above parts especially the public-private

partnership model in its sub-sector funds. One of the sub-sector funds will be to shift the

scope of the existing Cradle Fund to provide seed funding to all sectors apart from bio-

medical and ICT. It is important to have a fund specialized for this specific recipient type

across multiple sectors. The strengths and lessons in managing the existing Cradle Fund

should be leveraged upon across a broader range of sectors.

There is a risk of generalization and risk of linkage loss; by focusing on a broad range of

sectors. The Fund risks losing strategic focus or the necessary domain expertise, and may not



be able to add value and nurture recipients into growth firms. In order to mitigate these risks,

the Fund managers must decide on a few priority sectors/recipients based on a bottom-up and

market conforming approach. It should invest where there is demand and the potential for

Malaysia to build its sustainable competitive advantage position. Also prioritization is needed

to create impact and domain expertise.

It is envisaged that within the Fund, there will be multiple sector-specific teams, each with a

dedicated focus on a particular sector or clusters of sectors. This will ensure sector expertise

and to elevate up to a separate funding program once it has become sufficiently large or

strategically important to warrant the establishment of a separate fund – dedicated to that

particular sector or cluster.

Challenge 3: Gaps in the fund disbursement process and performance

There is a need to improve the disbursement of funds across the entire landscape. There are

process gaps and operational challenges. There is inadequate commercial and technical

expertise among staff, lack of linkages between entrepreneurs and the broader innovation

system. There is a need for performance tracking to map outcomes to funds.

There can be considerable improvement in the efficiency and effectiveness in the current

disbursement of public innovation funds. After mapping of all the application evaluation,

fund disbursement and post-project processes across all public early funding programs – it is

evident some funds adopt best practice processes across the entire disbursement process

while in others there are multiple gaps.

Some of the glaring shortcomings include; pre-disbursement stage (insufficient due diligence

conducted on applicants, proposal evaluation is outsourced with funding agency staff having



little accountability), disbursement stage (quarterly monitoring of pre-agreed milestones

undertaken by outsource partners with agency staff with little accountability, limited

capability building support) and post disbursement stage (lack of strong monitoring, no

linkages to subsequent sources of funding). Hence, there is a need for consistence

performance metrics and availability of aggregate data in the public domain on allocation

decisions and performance of all funds.

Recommended Strategy Measure: Implement a systematic performance management

measurement metrics and scorecard across all funds.

A suitable set of performance metrics to track the performance of each fund can be

introduced to effectively monitor the input, throughput and output performance of the fund

disbursement process and the fund managers. The performance metrics will be important as

a management tool to assess operational efficiencies and compliance to the required

standards. Furthermore, the performance metrics should ultimately measure the

developmental impact of the investments on the successful commercialisation of innovations

and high technology enterprise growth in Malaysia. It should be noted that successful foreign

direct investments into high technology start-ups that may give a decent Return On

Investment (ROI) but yields no technology transfer or knowledge jobs through the

localisation of commercial activities in Malaysia should still rate poorly on output

performance metrics due to the lack of an economic developmental impact for the nation.



VENTURE CAPITAL

Overview

Venture Capital (VC) plays an instrumental role in nurturing the next generation technology

and innovation driven entrepreneurial firms. Apart from providing financing, VC provide

other invaluable support services such as management support, advice, mentoring and

linkages to domestic and international partners. They are also important in planning for the

growth of the firm through exit and other value realization strategies.

The challenge is in creating a healthy and vibrant early stage VC in Malaysia. In most

instances, VC does not fund R&D but prefer to support firms that have moved beyond the

product development stage and those with attractive business models. There is a bias toward

later-stage ventures and their reluctance to do smaller transactions.

Venture capital firms in Malaysia are under capitalized.

The impact of funding innovation-based early stage firms on the US economy has been extra-

ordinary. As of 2008, eleven percent of private sector jobs are in firms backed by venture

capital. In comparison, the revenues of these firms contributed 21% to US GDP – evidence of

the high value created per person employed by VC-backed firms.

Challenges:

i) Overcome gaps in industry specific investment capacity

ii) Improve accountability and performance of government funding in priority areas

iii) Increase private sector funding exposure

iv) Access to capital markets for high-tech start-ups



Challenge 1: Overcome gaps in industry specific investment capacity

The government’s efforts spanning twenty (20) years initially through specialized enabling

agencies MTDC and MAVCAP to build up emerging high-tech industries; venture capital

investment capacity; and human capital capabilities have neither created critical mass in this

financial services sub-sector nor developed a portfolio of globally competitive high-

technology firms.

The early success met by MTDC in the initiation stage was primarily due to the public-

private partnership model with large Malaysian public listed corporations’ investor

participation (Sime Darby, Berjaya) as co-funders and the leveraging of foreign venture

capital management expertise through a joint venture. This accountable and professional

management structure strengthened with in-depth business experience, was supplemented by

attractive deal flows from the growth and maturing of firms in the global supply chain in the

export oriented sectors, particularly Electrical & Electronics. In the New Economic Strategy

(NEP) regulated environment then, the venture fund was well positioned to benefit as a

qualified Bumiputra institutional investor, and selected the best mezzanine pre-IPO deals in

the market.

The next generation follow on funding programmes failed to follow the proven public-private

partnership model but instead promoted a “know-who” rather than a “know-how” investment

management process. Due to the growing agency, conflict of interest and lack of transparency

issues by MITI-related parties that resulted in substantial investment write-offs, the

government attempted to redress the strategy instrument implementation with the subsequent

creation of MAVCAP directly under the purview of the MoF. Again, the proven public-

private partnership model was not adopted but instead a top-down directed strategy deployed

through government administrators in the management of the majority (70%) of direct

investments, with the balance of funds outsourced to local venture capital fund start-ups on a

“know-who” basis, evident by the number of outsourcing partners who are related to former

employees of MAVCAP. The recent performance assessment of this venture capital

development agenda speaks loudly of the overall implementation failure evident in the high



number of investment write-offs and the breeding of a “It’s OK to Fail since it’s OPM

(Other People’s Money)” mindset in a deviant version of the entrepreneurial “Not Afraid to

Fail” culture.

Recommended Strategy Measure : Re-establishing the proven public-private partnership

model through incentives for foreign venture capital partnership and corporate venturing

The Agency should implement a strategic initiative to identify the best of breed foreign

venture capital management firms in three (3) high technology areas, particularly Bio-

Medical & Pharmaceutical (BMP), ICT and Renewable Energy, Environmental & Clean

Technology (RECT), from established venture capital eco-systems in USA, Europe and Asia.

In terms of alignment with the National Key Economic Areas (NKEA), innovation projects

undertaken in the following eight (8) sectors will receive attention from the venture capital

funds focused in the three (3) strategic technology areas namely - RECT (Oil, Gas and

Energy; Palm Oil; Greater Kuala Lumpur/Klang Valley - Infrastructure & Construction;

Transportation); BMP (Healthcare; Agriculture;); ICT (Electronics and Electrical;

Communications Content and Infrastructure;) and the developmental agenda will address

capacity building of venture capital services in the Financial Services sector.

At the outset, the incentives supporting this capacity building initiative must differentiate

Malaysia (Kuala Lumpur) as the preferred destination to the current regional investment hubs

like Singapore, Hong Kong, Dubai, Shanghai and Beijing. The opportunity exists as there is

enough pull factors for global venture capital firms from USA, Europe and Japan attracted to

the increasing deal flows of high growth firms in the hi-tech sectors of the emerging markets

of China, India and Indonesia. There are push factors for global venture capital firms already

present in the region who are seeking to expand back-office, due diligence and compliance

support, rising costs of regional operations and deteriorating quality of life in these hubs are

driving “road/sky warriors” to seek out new “oasis” hubs with a comparable quality of living

for expatriate communities; and transportation economies through well connected regional



flight routes to emerging markets of interest (similar to how Ryanair consolidated London’s

position in Europe, Air Asia is Kuala Lumpur’s comparative advantage).

The incentive package will offer pioneer status, corporate tax exemption and double tax relief

for investment write-downs for foreign venture capital management operations located in

Malaysia. Tax holidays on personal income tax will also be offered to principals, fund

managers and general partners resident in Malaysia; as well as a five (5) year tax holiday

applicable to firm employees on a non-discriminatory basis (ie inclusive of Malaysian

residents) the aim is to attract/retain talent and knowledge workers (both local and foreign) to

build up capacity in this financial services sub-sector.

The Agency will manage a ten (10) year soft-loan based Fund of Funds programme to

promote the establishment of the venture capital funds with foreign venture capital

management firms on a one-to-one (1:1) matching basis. Some of the matching funds will

likely be raised from Malaysian provident, mutual funds and life insurance institutions. As a

guiding principle to promote this sector, a soft-loan of RM1.0 billion drawn down over five

(5) years will attract a minimum of three (3) foreign venture funds to be located in Malaysia,

and result in about 30 to 60 investee companies in the first year. However, an attractive

proposition to regional venture capital firms will be to allow up to seventy percent (70%) of

funds to be invested in hi-tech companies residing outside Malaysia but with a proviso that

the investee company will set up a Malaysian operating (R&D or Production) office (similar

to conditions of Singapore’s Bio*One Fund) in any of the new incubator clusters. The net

impact will be at least 10 to 20 homegrown global hi-tech companies backed by domain and

network rich global venture capitalists; and job creation and knowledge transfers from the

balance of 20 to 40 representative offices at incubator clusters.

The Agency can add a second strategic initiative to attract the corporate venturing

subsidiaries of global multinational companies already with business presence in Malaysia.

The overall objective of corporate venturing activities has been to expand their innovative

product portfolios; to enhance existing intellectual property banks; and discover new markets,

business models or disruptive technologies, in order to maintain their competitive position in



global industry. Corporate venturing tends to be exclusive rather than inclusive of the market

demands of other players in their industry (existing competitors or potential competitive

threats from new entrant firms); and is therefore focused on leveraging on strengths of

member firms in their own global supply chain; or acquiring smaller firms and intellectual

property portfolios seen as potential threats to their bargaining position in the industry, thus

promoting concentration of market power.

In order to accelerate corporate venturing, the Agency should offer incentives including a ten

(10) year pioneer status, corporate tax exemption and double tax relief for the parent

company to invest in their own corporate ventures subsidiary or related corporate venture

partner. The parent company will also be able to claim double tax relief on investment write-

downs arising from the corporate venturing activities. Capital gains arising from investment

disposals and dividend income received are tax exempted. A five (5) year tax holiday

applicable to the employees of the corporate ventures arm on an unconditional, non-

discriminatory basis (ie inclusive of Malaysian residents) aimed to attract/retain talent and

knowledge workers (both local and foreign) to build up capacity in this financial services

sub-sector. However, given the extensive global supply chain managed by multinationals

today, there will be no localisation on the investee companies of corporate ventures operating

outside Malaysia.

the Agency will be the central coordinator to pro-actively engage with leading multinationals

in the 12 NKEA sectors to promote the setting up of their corporate venturing arms in

Malaysia; and arrange for additional tailor-made incentive packages for their investee

companies considering re-location to Malaysia, which may cover financing, facilities, capital

equipment, human resources, university/research institute collaboration, trade issues.

This strategy measure will re-establish a framework for knowledge transfer of global best

practices; bridge the gap between local innovations and global industry with domain specific

investors; and allow private sector to drive informed investment decisions across key

economic sectors.



Challenge 2: Improve accountability and performance of government funding in

priority areas

Over the last two decades, the government has directed the funding of projects in priority

areas through direct allocation to Ministries and indirect financial support through the special

purpose agencies MTDC, MAVCAP and Khazanah disbursed as “@venture capital”. A sober

performance assessment of these past and continuing projects will show that none have

achieved their intended development agenda to build a global champion that will lead a

sustainable sunrise industry. Investment lessons from top-down strategy initiatives in steel,

automotive, wafer, utilities, transportation, financial services, agriculture, ICT and biotech

industries have failed to change the prevailing public sector “Big Brother” mindset. The

earlier success of private sector driven initiatives in resource based industries like palm oil

and wood, E&E, hospitality, gaming, education and business services, have not gained wide

acceptance as a model for future public-private sector partnerships.

Instead, the government has focused on concentrating market power in a portfolio of

Government-linked Corporations. Although, it was commendable that through this

restructuring process, greater management oversight was put in place through CEOs who are

qualified accountants, the leadership of GLCs have focused on rationalization and cost

accounting based performance measurement systems to the detrimental neglect of innovation

and entrepreneurship. The “bean counting” culture has resulted in under investment in

innovation activities and lower innovation output, even at GLC owned universities and R&D

centres. When compared with their global peers, the GLCs continue to underperform in

innovation capacity, and are performing at a level worse off than local research universities.

At this rate, none of the GLCs can sustain their global competitiveness in the longer run,

when their peers from emerging markets are accelerating investments in innovation.

A second unintended effect of continued government preferential support of GLCs

dominance and increased market power in local industry is the crowding out of private sector



investment from competitors who perceive the loss of a level playing field. This will lead to a

continued deterioration of private sector investments in R&D and innovation activities in the

absence of government grant funding. Evidence of “crowding out” symptoms for example is

the growing state of neglect of corporate R&D by the majority of cash-rich players in the

palm oil industry; leaving it in the hands of a government research institute due to the “cess

mentality”; and the low innovation output and under-utilisation of internal R&D funds by a

GLC (Sime Darby).

Recommended Strategy Measure : Committing public sector financing based on clear

developmental and technology transfer assessment criteria

The Agency should form the Innovation Performance Unit (IPU) to implement a performance

assessment system based on international criteria, to review all on-going top-down projects in

priority areas, particularly in the automotive, wafer manufacturing, power generation, public

transportation, agriculture (aquaculture), ICT (e-government), healthcare (biopharmaceutical;

vaccines; diagnostics) and biotech (herbal; MLSF; SpringHill) ; and the GLCs’ innovation

capacity.

The IPU assessment will determine the achievement of intended developmental outcomes

measuring innovation outputs, knowledge transfers, knowledge workers, technology

transfers, new jobs creation, export performance, etc. This assessment will form a fair basis

for decision-making by government on the continuation or otherwise of committed financing;

consider alternative financing structures including privatization; and a re-negotiation of

performance contracts (KPIs) and CSR obligations within the public-private relationship

social contract.

This strategy measure will allow re-alignment of public funding with developmental mission;

demonstrate the need for transparency, accountability and performance; create the

opportunity to re-negotiate the public-private partnership; and re-balance private sector

contribution to innovation capacity building.



Challenge 3: Increase private sector funding exposure

The intended role of government intervention in the development of the venture capital

industry was to be a catalyst in the mobilization of investment funds from the private sector,

particularly long term savings institutions in the financial services sector. While the necessary

regulations have been in place to allow these financial institutions, ranging from public sector

provident, pension, mutual and life insurance funds, to invest in venture capital funds, few

institutional investors are attracted to the present proposition. This is due to a combination of

the perceived high risk/low return from venture capital activities; and the absence of

successful venture capital management teams. Given the recent examples set by the

government run venture funds, such a conclusion by institutional investors is not that far from

reality.

Recommended Strategy Measure : Mitigate risk and investment allocation in high risk

venture capital funds by savings institutions through dividend income tax rebates.

As the Agency will promote the establishment of venture capital funds with foreign venture

capital management firms on a one-to-one (1:1) matching basis, it is important that an

incentive package with risk mitigation measures is in place to mobilize matching funds from

Malaysian long-term savings institutions.

The incentive package will include allowing an income tax rebate on dividend income

payable by the institutional fund equivalent to a hundred percent (100%) of the investment

committed to the venture capital fund. Perceived investment losses from venture capital

investment are fully provided for from the annual tax liabilities of the fund.

Most savings institutions maintain that they are long term investors in the equity market. In

reality, fund managers often turnover a significant portion of their stock portfolios more than

once within the reporting year (a practice known as “churning”) to perform window dressing

of portfolio valuation for reporting purposes. This practice increases market volatility and



increases intermediation costs and is not in the public interest. The absence of capital gains

taxes and transaction stamp duties has reinforced this practice, as well as short-term “hot

money” flows into the stockmarket.

The Agency should introduce an innovation tax on such capital market practices in the form

of an equities capital gains tax. The equities capital gains tax should be imposed on

institutional funds (but not individual investors) that disposed of any stocks and shares held

for a period not exceeding one (1) year (equivalent to real property gains tax provisions).

This will reduce short-term speculative behavior but not completely stamp it out. However,

as a result these tax receipts can be ironically channeled to longer term investments in

innovation programmes for the economy.

This strategy measure seeks to introduce a risk/reward mitigation mechanism to increase

private sector funding involvement; and to re-align investor mentality for the public good.

Challenge 4: Access to capital markets for high-tech start-ups

Over two decades ago, the venture capital community had proposed a plan to the Malaysian

Securities Commission to establish an open marketplace platform that will provide the

necessary liquidity for the shares of unlisted private hi-tech companies invested by venture

capital and angel investors on a market maker system, similar to London’s Unlisted

Securities Market (USM). The eventual proposal mooted by the SC and KLSE after

intervention by several opportunistic stockbrokers to monopolise control, succeeded in

alienating venture capital firms, culminated in an unworkable business model named

MESDAQ. The failure of MESDAQ (now ACE) as a platform to galvanise financing for

early stage hi-tech start-ups demonstrates the lack of understanding by government regulators

and rent-seeking intermediaries of the development financing needs of the hi-tech industry.

Another significant barrier to access capital for qualified SMEs has been intermediation fees

(advisory and listing expenses) charged by investment banks and stockbrokers, where in

many cases the majority of the proceeds have been paid to intermediaries, instead of being

applied to working capital.



In the meantime, Singapore, Hong Kong, Tokyo, Osaka and Shenzhen have all established

electronic marketplaces for early stage companies as part of the eco-system to access capital,

Malaysia lags behind again due to implementation.

While Malaysia should not re-invent the expensive MESDAQ wheel, neither can Malaysia

ignore re-discovering an important missing piece in the innovation eco-system if a vibrant

venture capital and angel investor community is to be established over the next five (5) years.

The recent valuation of Facebook Inc. on alternative private investor electronic marketplace

highlights the important role of a functioning Over-The-Counter (OTC) market.

Recommended Strategy Measure : Establish linkages into global capital markets

for high-tech start-ups

The Agency has a central role as a coordinator for the setting up of an open electronic

platform marketplace for (OTC) trading of private company equities of hi-tech start-ups. The

OTC Market should be organized like London’s PLUS market on a self-regulated basis by

founding members from the venture capital community, and adopt best practice market

regulations.

Given the new globalized economic environment and the proliferation of the internet

connectivity, the OTC Market can be linked into all major OTC markets in the world. the

Agency will seek out alliances and network connectivity with other OTC markets in Asia,

North America and Europe, in order to access deeper pools of investors and maintaining

relevance in the global hi-tech industry.

The Agency will perform as a “one-stop agency” on behalf of the SC, for purposes of

membership of venture capital firms, angel investors, corporate advisory firms and

stockbrokers. However, the old market-making system has been made obsolescent by self-

directed internet trading technology.

The Agency will promote the OTC Market with an incentive package which covers tax

exemptions from capital gains and dividend income arising from both local and foreign OTC



trading. Also, investment losses arising will qualify for double tax relief for funds; or

equivalent to 100% for personal income tax relief.

In order to reduce intermediation costs, the Agency will promote an incentive package for

advisory firms which includes pioneer status and tax exemption for ten (10) years; and a five

(5) year tax holiday applicable to the employees of the advisory firm on an unconditional,

non-discriminatory basis (ie inclusive of Malaysian residents) aimed to attract/retain talent

and knowledge workers (both local and foreign) to build up capacity in this financial services

sub-sector. As an admission condition to the OTC Market, the advisory firm must follow the

fee schedule charges not exceeding twenty-five percent (25%) of the capital raised for the

investee company.

This strategy measure seeks to establish a marketplace for the trading of private company

equities to enhance liquidity and marketability; access a greater pool of liquidity to support

hi-tech start-ups; and to promote access via lower cost intermediaries.



PRIVATE EQUITY

Overview

The government’s early experience in mobilizing private equity was to fund Malaysia’s basic

infrastructure projects in the 1990s. In its early privatization efforts to develop public goods

such as highways; transportation systems; healthcare; energy and water utilities, the

government structured attractive long term (25 to 30 year) concessionaire agreements

yielding high returns with the selected private sector players, supported by government

guaranteed debt; and private equity participation from public pension funds; as well as

liberalized access to capital markets. As a result of this strategy, private equity financing

from Malaysia’s public pension funds, life insurance funds and foreign PE funds (eg. AIG)

seeking predictable long term returns, with low risk (mitigated by government guarantees)

invested in toll roads, subways (LRT), power plants (IPPs) and water treatment plants.

This effort has been lauded by developmental economists as the model for other developing

economies that needed a successful public-private partnership scheme to improve basic

public infrastructure as a platform for higher economic growth.

Fast forward to the end of the concessionaire agreements beginning 2010, the government

has been forced to redress the unequal nature of these concessionaire agreements due for

renewal, which continue to impose a rising social cost on the public, without incremental

improvements of public goods provision. In fact quite the opposite effect of under-investment

by the private sector has led to higher costs, waste and inefficiencies in the provision of

poorly distributed electricity; deteriorating water quality; lower quality of public healthcare

services and uncoordinated public transportation systems. This privatization strategy with

little regulatory oversight and a public accountability framework, had encouraged the rent

seeking behaviour of favoured private sector players without trackrecords, in their

negotiations with ill-advised government officials to create a maze of privatized pubic goods

providers that fuels the present inflationary environment with underperforming social

contract obligations.

With the exception of toll highways and IPPs, private equity investors have largely been

disappointed with investment returns on public transportation systems. Private investors are

thwarted by the ill-conceived awards for public transportation systems projects, particularly



the then three (3), now four (4) Kuala Lumpur centric urban mass transit projects and toll

roads. While Singapore and Hong Kong mass transit systems have all gone public reaping

handsome returns for investors, and are able to re-invest in the continued expansion of their

networks without charging unreasonable ticket prices yet remaining profitable, , Malaysia’s

own systems are still mired in the red, awaiting the fourth MRT system to bail out investors.

Therefore, over the last five (5) years, private equity investors have sought predictable returns

from real estate. With the introduction of new capital market regulations, the government

mobilized private equity funds into real estate asset-backed investment trusts (REIT) to

support an overheated and flagging property market for domestic economic stimulus reasons.

However, this strategy has emboldened public pensions and institutional funds to venture into

REITs and commercial real estate in distressed developed economies seeking arbitrage

opportunities in capital gains over the last two (2) years. These private equity outflows have

little developmental impact for an emerging economy like Malaysia, that still needs to focus

on capacity building and spill-overs for its priority economic sectors from its foreign direct

investment activities.

In the present landscape of private equity investors, Khazanah Nasional represents the single

largest government run private equity investor controlling a portfolio of the largest

corporations in priority sectors aligned to the NKEA, namely – Agriculture; Automotive &

Transportation; Basic materials; Financial Services; Healthcare; Infrastructure &

Construction; Media & Communications; Electronics (Wafer); Retail; and Utilities (Energy).

Similar to Singapore’s experience with SGIC and Temasek, this dominance by a government

agency essentially crowds out any other private sector led PE fund.

The recent attempts by other public institutional and pension funds to create their own private

equity operations (CIMB, Ekuinas, KWP, LTAT) are bound to fail due to the lack of

commercial competence and specific industry management experience which are pre-

requisites for successful private equity investing. The entry of these inexperienced private

equity investors can be seen as opportunistic, as they seek short-term gains in taking over

monopolistic GLCs as Khazanah streamlines its portfolio and embarks on asset reshuffling to

favored public institutions. In short, the current development of the domestic focused private

equity activity is anti-competitive by maintaining market power; and therefore continues the

legacy of declining innovation growth, as already evident in the innovation performance of



GLCs in key industries, ie telecommunications; energy, oil & gas; pharmaceuticals,

healthcare services; palm oil oleochemicals; automotive; and electronics. The dominance of

GLCs in public sector contract awards breeds a less competitive environment where they

operate, leading to management focus on cost based rationalization to improve corporate

profitability, instead of innovation led growth, and foreign market expansion from successful

competition with global peers.

The raison d'être of PE funds is to seek out control of undervalued market leaders in

particular targeted sectors who are “cash cows” (that generate substantial cashflows) facing

declining profit margins, run by poorly performing management unable to respond to the fast

changing marketplace caused by disruptive innovations and intense competition; or who

possess under exploited resources that do not contribute to their competitive advantage. The

new management teams put in place by PE funds are central to the successful turnaround of

their investee companies and subsequent higher valuations upon exit.

Challenges:

i) Lack of focus for private equity investors on developing capacity in present or

future sunrise industries

ii) Lack of Malaysians with cross-border PE skills in hi-tech industries

iii) Orphaned hi-tech projects will turn into “Problem children” without government

support

Challenge 1: Lack of focus for private equity investors on developing capacity in

present or future sunrise industries

The government’s initial strategy initiative to involve private equity investors, both public

and foreign, was successful in channeling funds to Malaysia’s developmental capital needs in

the upgrading of basic infrastructure for a broad base economic growth in the manufacturing



and services sectors. The infrastructure sector was characterized by huge upfront capital

investments, mitigated risks and moderate returns over the long term. This risk-reward profile

matched the investment objectives of many long term investors, particularly funds with long

term liabilities such as pension and life insurance funds.

However, the subsequent strategy support of poorly implemented projects (LRT, Bakun,

Klang Valley highways, PKFTZ, Iskandar), growing agency problems and loss of focus by

forays into real estate, have de-railed much of the attractiveness for private equity investors.

It is timely to re-channel efforts to re-gain the support of domestic and foreign private equity

funds of Malaysia’s broader development agenda of building innovative capacity.

Recommended Strategy Measure : Focus PE funding strategy on three key sectors to build

innovation capacity

The Agency should implement the strategic initiative to form three (3) private equity funds

that have industry sector specific focus, namely -

i) Life Sciences & Bio-Medical Fund

ii) Electronics (E&E) & ICT Fund

iii) Renewable Energy & Clean Technology Fund

In general, these funds will be structured on a tripartite matching basis (1:1:1), with

government fund; anchor GLCs or public listed corporations; and foreign private equity fund

manager. The Agency will coordinate its funding in the form of a ten (10) year soft loan to

establish these funds with competent parties. The private equity funds will be managed by

experienced “best in class” private equity managers with established sector specific portfolios

in the developed economies of USA, EU and Japan; or in the emerging markets of BRIC

(Brazil, Russia, India, China). Due to the deal size of private equity investing, the average

committed capital of private equity funds is in the region of USD1.0 billion. With a draw



down schedule over five (5) years, the Agency will need to arrange a facility of RM600

million for initial matching of the three funds.

The overall strategy of this fund will be to acquire (or be the largest shareholder of)

companies in the developed and emerging markets with on-going product development

pipelines or innovative platforms; product portfolios; manufacturing/services capabilities;

national distribution channels; and niche market supply networks. This investment activities

will augment the innovation capacity of Malaysia’s nascent industry through technology

transfer; knowledge spill-overs and management exchange. The longer term mission will be

to sell these investee companies to Malaysian corporations in order to strengthen their global

competitiveness and market position.

This strategy measure will re-focus innovation capacity building in the human capital

intensive industries; strengthen public-private-global partnership in investing; and

consolidate the nation’s comparative advantages.

Challenge 2: Lack of Malaysians with cross-border PE skills in hi-tech industries

There are but few Malaysian professionals with cross-border PE experience and skills in the

hi-tech industries. The majority of professionals with Khazanah are accountants and

corporate finance specialists who have little entrepreneurial or industry sector experience.

The low innovation performance as a result of the GLC transformation programme bears

testimony to these managerial skill-sets.

Recommended Strategy Measure : Require experienced Malaysian managers to be joint-

venture partners of the Fund Management team



It should be a requirement for the Funds to be run jointly by general partners selected from

the foreign private equity manager with Malaysian general partners. The co-management of

the Funds will ensure sufficient exposure to international best practices, and the

accountability of a Malaysian developmental centric mission. This should avoid the earlier

experiences with the ineffective structure of co-managed funds (MLSCF, SpringHill) where

investment outcomes have had little impact on technology transfer, industry capacity and

knowledge spill-overs.

This strategy measure will strengthen sector specific human capital capabilities; and re-align

investment with the nation’s developmental priorities.

Challenge 3: Orphaned hi-tech projects will turn into “Problem children” without

government support

The lack of coordination of substantial investments by various government agencies and

Ministries have resulted in many on-going government owned projects in the bio-medical;

electronics & ICT; and renewable energy sectors. With the overhaul of government financing

strategy, these projects that have yet to reach commercial maturity are neither able to

compete globally, nor survive on their own without continued government support.

Recommended Strategy Measure : Implement management turnaround and consolidation

strategy through the Funds

In the medium term, the Agency should encourage the Fund to review and take over any

misdirected projects once promoted by various government agencies.



For the Bio-Medical sector, the pet projects of agencies (MOH, MTDC, MLSCF) in

nutraceuticals, herbals, biologics, vaccine, diagnostics, CRO, lab services and genomics,

should be reviewed with the mission to either establish critical mass in their respective core

competences through merger with similar players in foreign markets, or a sale to existing

global players. This strategy is similar to the route taken by Japan to strengthen the global

market positioning of its pharmaceutical and life sciences industry players.

For the Electronics and ICT sector, the wafer manufacturers, smartcard, e-government

software and MDEC funded internet software start-ups should be similarly reviewed. The

Fund may need to consider committing expansion capital to US software start-ups in order to

accelerate technology learning curves of domestic players and revive this sector in Malaysia.

The Fund can also be opportunistic in acquiring existing third party IT outsourcing players

based in other emerging markets to claim Agency a significant stake in this global industry

and fast-track core competencies for Malaysian ICT corporations.

For the Renewable Energy and Clean Technology sector, the Fund should consolidate the

various faltering bio-diesel and biomass energy producers to form an integrated bio-energy

producer platform with distribution channels in the largest biofuel markets overseas. Further,

the Fund can review and acquire the numerous stakes in the US biofuel technology

companies from MLSCF, in order to forge a linkage for technology transfer to Malaysian

producers, a critical collaboration which is glaringly missing despite MTDC having invested

large sums of capital to the US companies’ technology development.

This strategy measure will build up substantial core competencies on innovation capabilities;

and position Malaysian corporations to compete globally.



DEBT FINANCING

Overview

Over the last two decades, the government’s major strategy initiative in debt financing of

innovative start-ups has been disbursement initially through Bank Industri loans; later

through a specialized agency such as Malaysian Debt Ventures (MDV); and recently on a

broader basis through SMIDEC and the SME Bank. A supporting strategy mechanism in the

form of special loan guarantees was introduced through the CGC to mitigate risks of lending

institutions to SMEs.

However, the over-riding lending criteria imposed by the banking fraternity on overall

business viability and near-term visibility of cashflows, demonstrated by secured contracts,

has meant that few innovative start-ups have qualified to access the preferential loans

necessary to ensure their business expansion and survival. Perhaps, on hindsight, rightly so,

given the high default rate of the few firms that did qualify for the loans and whose

businesses eventually failed.

Challenges:

i) Gaps in the credit evaluation and monitoring system

ii) Valuation and collateralization of intellectual property

iii) Poor asset management and recovery of intellectual property of defaulters



Challenge 1: Gaps in the credit evaluation and monitoring system

The continuing high bad debt provisions at government lending institutions and programmes

resulting from the increasing default rates by corporate borrowers who are innovative hi-tech

firms (including ACE listed companies) show that there are gaps in the credit life-cycle

process from initial evaluation to loan monitoring and collection management. While some of

the resultant bad debts may be attributable to misguided top-down government directed

lending to favored hi-tech projects, part of the problem lies in the lack of an innovative

approach to mitigate the high risks in lending to the hi-tech sector.

Recommended Strategy Measure : Implement community based credit assessment and

monitoring

Some lessons that micro-finance institutions (eg. Grameen Bank) can teach specialized

lending institutions to mitigate the high risks of business failure, are to engage the community

early in the credit assessment process; impose accountability through the community on the

borrower; and enhance monitoring through milestone lending and community based

mentoring. The practical implications are that hi-tech start-ups intending to borrow require to

gain the unconditional support of their business incubator/mentor; the collaborating

university or technology partner; and other parties with vested interests, such as customers

and suppliers; as well as their shareholders and investors. While enforcing financial

guarantees from the borrower’s community sponsors may be impractical, the lending

institutions should keep a central national credit scoring database of all parties concerned in

the transaction, as a disincentive to repeated collusive behaviour that will be detrimental to

the lender. The resulting low credit scores of any of these community sponsors should affect

the approval rating of any future loans from new applicants with the same sponsors.This

system will also be able to blacklist and remove the eligibility of serial grantpreneurs in the

eco-system.



Lenders can also introduce innovative financing supporting conditions including

unconditional purchase orders from customers and buy-back guarantees from their equipment

suppliers.

This strategy measure will mitigate the high risks inherent in this class of financing activity;

build up greater accountability and integrity in the lender-borrower relationship; and

potentially increase support for innovative firm survivability.

Challenge 2: Valuation and collateralization of intellectual property

A major hurdle for evaluating the enterprise value of hi-tech start-ups for determining break-

up values or benchmarking private equity premiums is the valuation of intellectual property

developed or held as patents or proprietary processes by the borrower. In the absence of

strategy guidance, current practice has been to ignore such intangible asset valuations and

maintain the status quo focus on business cashflow projections.

Recommended Strategy Measure : Encourage the establishment of community of

professional IP and Technology Valuers

The Agency should implement a strategic initiative to establish a community of professional

IP and Technology (IPT) Valuer firms, similar to those required in the real estate industry.

The professional gap in IPT valuation cannot be filled by accountancy firms as their approach

is based on tangible assets and business cashflow projections. The Agency can initially draw

upon the technical experts and members of NGOs to resource the setting up of valuation

standards for the industry.



The Agency should work with the capital market regulators to amend the admission

guidelines for ACE to include an independent IPT valuer’s report as one of the pre-requisites

for the listing of hi-tech companies, similar to London’s the Agency.

Furthermore, the Agency should require lending institutions to request IPT valuation reports

for all loan applicants of innovative start-ups. As the industry gains acceptance of the

reliability and credibility of such reports, it will encourage the structuring of innovative

finance to collateralize such intellectual property of innovative start-ups, such as practiced by

the Silicon Valley Bank in California.

This strategy measure will introduce an important player in the innovation eco-system to

facilitate a change in mind-set with respect to innovation values; and spur further

innovativeness in lending practices for new technology based firms.

Challenge 3: Poor asset management and recovery of intellectual property of defaulters

In the current climate, the failure of any hi-tech start-up and its subsequent default on the loan

will normally lead to a fire-sale of its tangible assets for debt recovery purposes. Its

intangible assets such as intellectual property, including work in progress and patents

pending, may become a total loss, akin to “a baby thrown out with the bathwater”.

There is a gap in the eco-system for the trading of such intellectual property by experienced

IP or technology broker-scavengers. These players are important in the eco-system as no IP is

an island, but has the potential to be combined, worked on further, or perform as an

interconnecting technology.

Recommended Strategy Measure : Establish an Intellectual Property Technology

Exchange with global networks



The Agency should establish an IPT Exchange (IPTX) with a database of intellectual

property; technology platforms; and specialized equipment or pilot plants available for re-

use, re-sale and licensing on an open platform with linkages to international IP brokers.

The IPTX will assist lending institutions in their attempts to recover and offset the bad debts;

prevent a total write-off of government funded IP development; make available IP for a new

cycle of innovative activity; and maintain traceability and accountability in the innovation

eco-system.

This strategy measure will complete the innovation life-cycle for many players in the eco-

system; and allow knowledge spill-overs and transfers to regenerate a fresh cycle of

innovative activities at the next level.



ANGEL INVESTORS

Overview

The significant and sustained investment into public research to address economic and social

needs combined with the increased pressure on accountability has improved overall

innovation outcomes. Over the last five (5) years, there is clear evidence that innovation

outcomes on basic measures such as early innovation exhibits leading to intellectual property

filings, such as publications and patents, and commercialization attempts have grown at

research universities and newly formed State universities. The only exception being the

continued lack growth of innovation outcomes and capacity declines noticed at private sector

owned universities, including Government-linked Corporations (GLC) backed universities

and government research institutes.

However, increasing innovation outcomes and the resulting pool of pre-commercialisation

ready intellectual property at universities have had limited impact on the sustained

development and survival of SMEs with innovative product or processes. While the

globalization of scientific and innovation networks have broaden the universities’ access to

up-to-date science and technology, the linkage between research and industry has not

strengthened at the same pace.

Therefore, a comprehensive innovation strategy reform is required to enhance this interface

to be more efficient and flexible to meet the demands of global industry, thus positioning

innovation as a enabling force for elevating Malaysia’s global competitiveness.

The attempts to commercialise innovations at universities often involve the formation of new

technology-based start-ups financed by the founder, friends and family, with the assistance of

government schemes such as CIF. The limited availability of bank loans and government



loan guarantees as well as institutional venture capitalists to support growth at this early stage

creates a funding gap.

Business angel networks and business incubators can fill this gap by mobilizing informal

investment by improving information flow. However, such informal matching activities have

had overall little impact to-date on commercialization of innovations, due to several reasons

including the non-existence of any formalised sector focused angel networks; the lack of tax

incentives to cover investment losses; the higher selection preference for revenue generative

projects; and the immaturity (business readiness and expectations) of the inventor-

entrepreneur.

Challenges:

i) Limited managerial and financial resources to support business start-ups at seed

and early stages

ii) Increase involvement of business angel investors

iii) Mitigate the high risks of angel investment activities

Challenge 1: Limited managerial and financial resources to support business start-ups

at seed and early stages

The early efforts of Government venture capital agencies to develop a venture financing eco-

system for seed and early stage businesses through direct investments and outsourcing to

investment professionals have met with limited success in terms of successful firms in the

domestic and international market place.



The government venture capital capacity building programmes (under MTDC and

MAVCAP) for financing seed and start-up businesses have to result in higher rates of

commercialization and business success. Many managers of government agencies have the

commercial experience to assist and mentor business start-ups irrespective of the strength of

their innovation or technology platforms. Top-down driven direct investment in priority

sectors, nor outsourcing to smaller private sector teams of qualified investment professionals

is the best way to improve business survival of start-ups at seed and early stages.

One of the major problems lie in the wrong choice of competent partners; poor enforcement

of obligations; lack of critical evaluation and monitoring; limited transparency and

accountability; and failure to ascend the learning curve.

Without combining funding with relevant mentors from industry, the long term survivability

of these businesses formed to commercialise innovations is destined to fail. These mentors

should have a track record in building successful companies through initiatives in technology

transfer, knowledge spill-overs, domestic capacity development, jobs creation and high

investment returns.

Recommended Strategy Measure: Incentives for smart partnership with Angel investors

and a central data base of angel networks

While it is necessary for a central innovation agency to coordinate and maintain a directory of

mentors and experts as a resource facilitator, most mentors in current incubator programmes

are rewarded through low, risk-free basic compensation on terms dictated by government

grant schemes, such as CIP.

Such risk-reward compensation structures are unlikely to attract the “best of breed” mentors

and insufficient to incentivize passionate commitment to grow incubatees.



Mentors drawn from Angel investors remain the most balanced risk-reward formula for

successful business incubation support. Since angel investors have a direct financial exposure

to the business survival and growth of the start-up, motivation and commitment to business

success remain high.


capital and their time mentoring an the Agency approved incubatee.

Angel investors will be encouraged to team up with incubators or Universities and PRI to

invest in incubatees in the seed and early stages. A specialized sub-fund within the existing

public innovation funding structure should target investments on a one to one (1:1) matching

basis. Angel investors will drive assessment of business viability and survivability of

business start-ups; lead investment decisions; provide mentoring; strengthen management

teams and be ultimately accountable to stakeholders for investment returns.

This strategy measure will align financing with business expertise; expand the availability

and access of experienced entrepreneurs; accelerate the rate of success of seed and early stage

ventures; and strengthen entrepreneurial leadership and decision-making in incubators.

Challenge 2: Increase involvement of business angel investors

It has been demonstrated in the UK and US, that business angel investing is an essential

source of funding and support for a huge number of early stage and start-up businesses.

While business angel investing is risky, but overall appears to generate attractive outcomes.

Tax incentives in the UK and US appear to have a material effect on encouraging business

angel investing. Government should incentivise business angels’ investments by supporting



measures to raise awareness of their importance and act to increase the pool of angel

investors in the nation.

The angel investors operate in different ways primarily on a private individual basis; and

through family held investment companies or trusts; collective angel investment funds; and

through formal business angel networks. The government should strengthen capacity at all

levels through incentive schemes.

Recommended Strategy Measure: Incentives for Angel investors and Angel networks.


capital and their time mentoring an the Agency approved incubatee. Their investment will be

entitled to one hundred percent (100%) deduction as income tax relief.

The tax relief will be in the form of a tax write-off for the full amount (100%) of investment

provided by angel investors making early-stage investments in start-ups and micro SMEs at

incubators, universities, technology parks and other approved clusters. A similar provision

for tax relief should be applicable for angel investors who invest through a collective

investment scheme, particularly those qualifying for the one to one (1:1) matching with the

Agency.

the Agency should perform the “one-stop” agency role of qualifying such investments in

order to establish assurance and remove any later doubts on IRD assessment.

In order to incentivize angel investors to be actively involved with the Agency approved

incubatees, the Angel investor who mentors an the Agency approved incubatee will qualify

for a tax holiday in terms of personal income tax relief for director’s or consultancy fees as

well as stock option grants given throughout the duration of the contract.



Many business angels are very independent and reluctant to join a formal network, in order to

preserve their privacy and to protect themselves from unsolicited demand. Furthermore,

business angels may be more location specific and passive due to pragmatic reasons and on-

going demands of their existing businesses. For these reasons, the Agency should coordinate

with established non-governmental organizations (NGOs), such as national trade, industry, or

invention associations, to establish the formal business angel networks for each of the

targeted clusters. Support from the Agency can be in the form of establishment grants or

matching grants for promotional and annual business matching forums.

This strategy measure seeks to incentivise angel investors to increase their financial and

entrepreneurial support for hi-tech start-ups; and to promote formal business angel networks

in targeted clusters.

Challenge 3: Mitigate the high risks of angel investment activities

While the introduction of a framework of tax incentives for angel investors can only limit the

downside risks of such activities, the absence of follow-on investors from the venture capital

or private sector in the eco-system will only lead to growing investor frustrations and early

strategy failure for hi-tech startups within a few years (such as the experience in the UK for

life sciences start-ups). The recent emergence of alternative private investor electronic

marketplaces in the US, highlight the important role of a functioning marketplace to fulfill

the disintermediation gap between exiting angel investors and the entry of high net worth

individuals (HNW) or private investment funds. This form of marketplace is essentially an

Over-The-Counter (OTC) market for unlisted, private securities which is self-regulated in

nature.

The present capital markets eco-system through Bursa and ACE has pandered towards

keeping high profit margins for existing market intermediaries, and promoting the low risk



funding of existing large corporates with poor innovation capacity. Though the current

regulatory regime by the SC, Bursa and SSM has failed to provide adequate minority investor

protection against corporate exercises involving privatization to re-listing; de-mergers; take-

overs; the “bastardization” of MESDAQ; and approved “ponzi-like” public investment

schemes – activities against the public interest; these same government agencies under the

cloak of investor protection, may object to initiatives to form a self-regulated OTC market,

that promotes innovation and addresses the financing needs of hi-tech start-ups. For over two

decades, these agencies have promoted the growth of a capitalist driven agenda on the back

of a short-term speculative investor culture to concentrate wealth creation in the hands of a

few “connected” entrepreneurs and GLCs, without regards to the nation’s overall

developmental agenda needs particularly in creating a knowledge-based and innovation

driven economy for the nation’s future.

Recommended Strategy Measure: Support a capital market framework for angel

investments

The Agency has a strategic mission to establish a self-regulated market mechanism for a new

OTC marketplace that will mobilize investments into seed and early stage hi-tech start-ups

from the angel investors and HNW community; provide benchmark valuations for exiting

investors; and seamless exchange of legal share ownership.

The Agency has a central role as a coordinator for the setting up of an open electronic

platform marketplace for (OTC) trading of private company equities of hi-tech start-ups. The

OTC Market should be organized like London’s PLUS Market on a self-regulated basis by

founding members from the angel investor and venture capital community, and adopt best

practice market regulations

The existence of such an OTC market will in some way set initial valuation benchmarks

based on intellectual property or technology prospects through price discovery to assist SME

bank lending schemes targeted at innovative start-up firms.



The OTC market being in the public domain will allow follow-on funders, such as venture

capital funds, investment banks and corporate investors, to select high performers; and

eliminate agency issues.

The existence of the OTC market as a separate marketplace will provide the exit route for

early-stage investors to pass on to group of investors more appropriate as enablers for the

start-up at the growth stage. The separateness from Bursa will prevent the participation of

retail players, who are generally punters and add no present value to the start-up.

The Agency should qualify and admit participants to the OTC market from the angel

investors, venture capital firms, private equity funds, institutional funds (provident, life

insurance, mutual funds), investment banks, stockbrokers, public listed and private

corporations and HNW individuals both domestically and abroad.

A further step that the Agency can take will be to qualify and promote the listing of angel and

venture capital funds on the OTC market to deepen liquidity for limited partners of these

funds; and broaden the investor base for innovative start-ups at the seed and early stages.

This is critical as seed and early stage investments will take between three (3) to five (5)

years before reaching maturity to qualify for the ACE market or a size large enough to be

acquired.

The Agency will promote the OTC Market with an incentive package which covers tax

exemptions from capital gains and dividend income arising from OTC trading. Also,

investment losses arising will qualify for double tax relief for funds; or equivalent to 100%

for personal income tax relief.



In order to reduce intermediation costs, the Agency will promote an incentive package for

advisory firms which includes pioneer status and tax exemption for ten (10) years; and a five

(5) year tax holiday applicable to the employees of the advisory firm on an unconditional,

non-discriminatory basis (ie inclusive of Malaysian residents) aimed to attract/retain talent

and knowledge workers (both local and foreign) to build up capacity in this financial services

sub-sector. As an admission condition to the OTC Market, the advisory firm must follow the

fee schedule charges not exceeding twenty-five percent (25%) of the capital raised for the

investee company.

This strategy measure seeks to mitigate the high risk investments by angel investors; to

establish a marketplace for the trading of hi-tech startup equities to enhance liquidity and

marketability; to access a greater pool of liquidity to support hi-tech start-ups; and to promote

capital market access via lower cost intermediaries.



CHAPTER 4 : EVALUATION OF THE INCUBATORS OF INNOVATION

Overview

In our study, we have examined the performance of the incubator organisations and the

successful rate of commercialisation by innovators under their programmes to determine the

extent of any sustained economic impact of this public and private sector investment. A

robust evaluation criteria is used to evaluate the broad spectrum of organisations involved in

incubation ranging from government agencies, universities and private sector, including

foreign partnerships.

The incubator organisations evaluated are as follows :

1. Government-owned Agencies -

i) Technology Park Malaysia (TPM), Ministry of Science, Technology and Innovation (MOSTI);

ii) Plug & Play Technology Holdings Sdn Bhd, Kumpulan Modal Perdana Sdn Bhd, Ministry of Finance (MOF);

iii) Malaysia Venture Capital Management Berhad (MAVCAP), Ministry of Finance (MOF);

iv) Malaysian Technology Development Corporation (MTDC) Incubator, Khazanah

v) MSC Malaysia Technology Commercialisation Centre, Multimedia Development Corporation (MDec)

vi) SIRIM Berhad, Ministry of Finance (MOF);

vii) Kulim High Technology Park (KHTP), Kedah State Development Corporation

viii) Malaysian Agricultural Research and Development Institute (MARDI), Ministry of Agriculture and Agro-based Industry (MOA)

ix) Furniture Industry Technology Centre (FITEC), MARA, Ministry of Rural and Regional Development (MRRD)

x) Industry and Business Development, Majlis Amanah Rakyat (MARA), Ministry of Rural and Regional Development (MRRD)

xi) Forest Research Institute Malaysia (FRIM) and MTDC-FRIM, Ministry of Natural Resource and Environment

2. University-owned incubators -

xii) USAINS Holdings Sdn Bhd and Sanggar Sains Sdn Bhd, Universiti Sains Malaysia (USM);



xiii) UKM TECHNOLOGY Sdn Bhd and MTDC-UKM, Universiti Kebangsaan Malaysia (UKM);

xiv) Innovation and Commercialisation Centre (ICC) and MTDC-UTM, Universiti Teknologi Malaysia (UTM);

xv) University of Malaya Centre of Innovation and Commercialization (UMCIC) and UM-PKNS InnoTech Park (1), Universiti Malaya (UM)

xvi) UPM R&D Sdn Bhd, MTDC-UPM and Putra Science Park, Universiti Putra Malaysia (UPM)

xvii) Technology Transfer & Commercialization (TTC), and MTDC-UiTM, Universiti Teknologi MARA (UiTM)

3. Private sector incubators -

xviii) MAD Incubator Sdn Bhd

xix) ICT Incubator Centre Sdn Bhd

xx) YTL E-Solutions Sdn Bhd, YTL Corporation Berhad

4. Public-Private partnership incubators -

xxi) Expedient Equity Sdn Bhd, outsource partner of MAVCAP, MOF;

xxii) Teak Capital Sdn Bhd, outsource partner of MAVCAP, MOF;

xxiii) Astra Partners Sdn Bhd, outsource partner of MAVCAP, MOF;

xxiv) Kumpulan Modal Perdana Sdn Bhd, MOF;

xxv) Malaysian Life Sciences Capital Fund (MLSCF), Burrill & Co (USA) and MTDC, Khazanah;

xxvi) Spring Hill Bioventures Sdn Bhd, Spring Hill Management (UK) and Khazanah;

xxvii) CIMB Private Equity, CIMB Group Berhad (Khazanah GLC)



The Entrepreneurship Environment Evaluation (3E) Index

Our theoretical model for carrying out this extensive assessment is called the “3EI” or

“Entrepreneurship Environment Evaluation Index”. The 3EI criteria assesses the experience

of incubated firms across three (3) dimensions and nine (9) factors, measurable by a simple

evidence-based scoring system.

The three broad dimensions measured are environmental, entrepreneurship and

developmental impact factors. The Environmental dimension assesses the contributory

factors arising from the attractiveness of the market and industry; collaboration with strategic

partners; and financial support. The Entrepreneurship dimension assesses the internal firm

factors of entrepreneurial leadership; management capacity; and administrative support

provided to the incubated firm. The Developmental Impact dimension assesses the

performance factors of the firm in terms of business survivability; the creation of new jobs;

and knowledge spill-overs to the community.

The evaluation of each incubator organisation is based on simple scoring system based on the

preliminary evidence discovered or reported during the study, where “0”denotes “no

evidence” found; “1” denotes “a little evidence but not conclusive enough” to support; “2”

denotes “some conclusive evidence” found; and “3” denotes “strong conclusive evidence”

found consistent with claims.

The scoring for each Dimension is colour coded as follows – “BLACK” denotes “No

improvement is possible without major organisation transformation”; “RED” denotes

“require significant improvement”; “YELLOW” denotes “require some improvement”; and

“GREEN” denotes “acceptable performance”.



DIMENSION 1 :

ENVIRONMENTAL

What are the environmental factors that impact on the successful commercialisation of innovations?

Factor Criteria Key Performance Measures Best practice features

1 Market / Industry Attractiveness

Has the incubator evaluated the market feasibility of the incubatee’s products or services ? Is the niche market segment substantial in size to justify investment; and the global industry allows unhindered access to new entrants?

Incubatee sells innovative products or services that resolves a major customer pain in an under-served market segment without significant barriers to entry to the new firm.

2 Strategic Collaboration

Has the incubator assisted the incubatee to develop formal linkages with strategic partners for continuous technology and market development?

Incubatee has formal agreements with research university for on-going technology development; and with major customers as part of the supply chain network for new product development and testing.

3 Financial Support Has the incubator assisted the incubatee to establish financial networking with the sources for innovation funding?

Incubatee has received committed funds at start-up from founders, government grants, or seed fund; and a ready secondary financing plan to obtain funds from bank, venture capital and/or the capital market.



DIMENSION 2 :

ENTREPRENEURSHIP

What are the internal firm factors that impact on the successful commercialisation of innovations?


1 Entrepreneurial Leadership

Has the incubator the entrepreneurial management to provide leadership and mentorship support to the incubatee in developing the business from start-up?

Incubatee is led by entrepreneurial team with successful characteristics and trackrecord in business development.

2 Management Capacity Does the incubator provide adequate commercial and technical management training and development programmes to the incubatee for business readiness?

Incubatee is organised and managed by an experienced team of founders, directors, managers and specialists who are familiar with the industry and market which the firm is operating in.

3 Administrative Support

Does the incubator provide subsidised office or lab space; shared administrative, marketing, legal, HR and technical support services to the incubatee for business start-up?

Incubatee receives efficient and cost effective support to launch business operations.



DIMENSION 3 :

DEVELOPMENTAL IMPACT

What is the measurable economic impact upon the successful commercialisation of innovations?


1 Business survivability Has the incubatee sustained its business growth and financial viability?

The incubatee has a sustainable business that has attracted long term capital market investors.

2 Job creation Has the incubatee created new permanent jobs?

The incubatee has created new jobs in its organisation and along the domestic supply chain network.

3 Knowledge Spillovers Has the incubatee created new knowledge, intellectual property or technology that has affected the domestic industry?

The new innovation and knowledge by incubatee has been shared, licensed or transferred to other firms bringing multiplier effects in the domestic industry.



Summary of Evaluation

The summary of the 3EI results of the incubator organisations are tabulated as follows –

1. Government-owned Agencies

Organisation Stakeholder : GOVERNMENT

ENVIRONMENTAL FACTORS (Market+ Partners+ Finance)

INTERNAL FACTORS (Entreprene

ur+Mgt+ Support)

IMPACT (IPO+Job+I

P)

Remarks

TPM 1 + 1 + 1 =

3 0 + 1 + 3 =

4 1 + 1 + 1 =

3 Support 90 out of 120 incubatees RM10m Seed Funded 2 IPOs Success rate 2%

PLUG & PLAY, KMP

1 + 1 + 2 =

5 0 + 1 + 3 =

4 2 + 2 + 2 =

6

Support 21 local start-ups RM45m Seed Funded 19 local start-ups with 7 IPOs Success rate 37%

MAVCAP 1 + 0 + 2 =

4 0 + 0 + 0 =

0 1 + 1 + 1 =

3 Funded 11 IPOs from 69 investee companies Success rate 16%

MTDC 1 + 1 + 2 =

4 0 + 2 + 2 =

4 1 + 1 + 1 =

3 Support 70 incubatees in 5 centres RM1.0B VC Funded 5 IPOs Success rate 7%

MDEC 1 + 1 + 1 =

3 0 + 2 + 3 =

5 0 + 2 + 1 =

3 Support 30 incubatees 100 companies supported with no successful results Success rate 0%

SIRIM 1 + 1 + 1 =

3 0 + 2 + 3 =

5 0 + 1 + 1 =

2 Established 10 centres

KULIM HTP 0 + 0 + 0 =

0 0 + 0 + 2 =

2 0 + 1 + 1 =

2 Support 12 incubatees, including foreign company branches.

MARDI 1 + 1 + 1 =

3 0 + 1 + 1 =

2 0 + 1 + 1 =


FITEC 1 + 1 + 1 =

3 0 + 1 + 1 =

2 0 + 1 + 0 =

1 Support 69 vendors

MARA 1 + 0 + 2 =

3 0 + 1 + 1 =

2 0 + 1 + 0 =


FRIM 1 + 1 + 1 =

3 0 + 1 + 1 =

2 0 + 1 + 1 =

2 Support 10 incubatees with MTDC



2. University-owned incubators

Organisation Stakeholder : UNIVERSITY



ur+Mgt+ Support)

IMPACT (IPO+Job+I

P)

Remarks

USM 1 + 1 + 3 =

5 0 + 2 + 2 =

4 1 + 1 + 1 =

3 RM0.5m Seed Funded 2 IPOs out of 20 incubatees Support 7 spin-out companies MTDC funded RM24m for 8 projects Success rate 10%

UKM 1 + 1 + 2 =

4 0 + 2 + 2 =

4 1 + 1 + 1 =


UTM 1 + 1 + 2 =

4 0 + 2 + 2 =

4 1 + 1 + 1 =


UM 0 + 0 + 0 =

0 0 + 1 + 1 =

2 0 + 1 + 1 =

2 Support 1 incubatee at Selangor Science Park

UPM 1 + 1 + 2 =

4 0 + 2 + 2 =

4 1 + 2 + 2 =

5 Support 30 incubatees with MTDC Support 7 spin-out companies Achieved sales revenue RM31.1m

UiTM 1 + 1 + 1 =

3 0 + 1 + 1 =

4 0 + 1 + 1 =

2 Establish new incubation centre with MTDC



3. Private sector incubators

Organisation Stakeholder : PRIVATE



ur+Mgt+ Support)

IMPACT (IPO+Job+I

P)

Remarks

MAD Incubator Sdn Bhd

2 + 1 + 1 =

4 2 + 2 + 2 =

6 0 + 1 + 1 =

2 Support 39 incubatees, with 30 from MDEC

ICT Incubator Centre Sdn Bhd

1 + 0 + 0 =

1 1 + 1 + 2 =

4 0 + 1 + 1 =

2 Support 10 incubatees

YTL E-Solutions Sdn Bhd

2 + 2 + 2 =

6 2 + 2 + 2 =

6 1 + 2 + 1 =

4 Support 2 internal incubatees

4. Public-Private partnership incubators

Organisation Stakeholder : PUBLIC-PRIVATE



ur+Mgt+ Support)

IMPACT (IPO+Job+I

P)

Remarks

Expedient Equity Sdn Bhd

3 + 0 + 3 =

6 0 + 1 + 0 =

1 1 + 2 + 2 =

6 Manage 2 Seed Funds total RM85.3m Funded 17 local start-ups with 3 IPOs Success rate 18%

Teak Capital Sdn Bhd

3 + 0 + 3 =

6 0 + 1 + 0 =

1 3 + 2 + 2 =

7 Manage 1 VC Fund total RM40.5m Funded 2 local start-ups with 1 IPO Success rate 50%



Astra Partners Sdn Bhd

3 + 1 + 3 =

7 0 + 1 + 0 =

1 3 + 2 + 2 =

7 Manage 1 Seed Fund total RM30m Funded 3 local start-ups with 2 IPOs Success rate 66%

Kumpulan Modal Perdana Sdn Bhd

3 + 2 + 3 =

8 0 + 1 + 3 =

4 2 + 2 + 2 =

6 Manages 5 Funds total RM167.5m RM45m Seed Funded 19 local start-ups with 7 IPOs RM122m VC Funded 21 foreign start-ups with 3 IPOs Success rate 24%

MLSCF 3 + 2 + 3 =

8 0 + 2 + 0 =

2 1 + 1 + 0 =

2 Manages 1 Fund total US$150m Funded 12 start-ups with 2 IPOs Support 2 start-ups in Penang, where one company is founded by Malaysian scientist and the other is a company rejected by Singapore A*STAR. Success rate 17%

Spring Hill Bioventures Sdn Bhd

1 + 1 + 3 =

5 2 + 0 + 0 =

2 1 + 1 + 0 =

2 Manages 1 Fund total RM114m Funded 7 start-ups with 1 IPOs, of which 6 companies were founded by the controlling shareholder of the Fund manager. Support 2 start-ups at Penang Science Park. Success rate 14%

CIMB Private Equity

3 + 1 + 3 =

7 0 + 1 + 0 =

1 2 + 2 + 2 =

6 Manages 2 Funds total RM300m Funded 50 start-ups with 10 IPOs Success rate 20%



Summary of Recommendations

The detailed assessment of incubator organisations highlights the core competences that need to be developed going forward with respect to improving the various factors that influence their performance and the impact on the nation’s innovation development agenda.

1. Government-owned Agencies

Organisation

Stakeholder :

GOVERNMENT

GOING FORWARD

MAVCAP

KHTP

Requires complete re-structuring of organization with new

management team.

MARDI

FITEC

MARA

FRIM

Requires major organizational strengthening through organizational

development; management training; partnering with large corporates

and funding providers.

MDEC

SIRIM

Requires managerial strengthening through management training &

development; and partnering with large corporates and funding

providers.

TPM

MTDC


development and partnering with large corporate. Organisation will

need new leadership to be more focused and accountable for

performance.

Plug & Play, KMP Requires managerial strengthening through management training &

development; appointment of entrepreneur-in-residence; and closer

networking with mentors and Angel Investors.



2. University-owned incubators

Organisation

Stakeholder :

UNIVERSITY

GOING FORWARD

UM Requires complete re-structuring of organization with new

management team.

USM

UKM

UTM

UiTM


development and partnering with large corporate. Organisation will

need new leadership to be more focused and accountable for

performance.

UPM Requires managerial strengthening through management training &

development; appointment of entrepreneur-in-residence; and closer

networking with mentors and Angel Investors.

3. Private sector incubators

Organisation Stakeholder :

PRIVATE

GOING FORWARD

ICT Incubator Centre Sdn Bhd

Requires major organizational strengthening through

organizational development; management training; partnering

with large corporates and funding providers.

MAD Incubator Sdn Bhd Requires managerial strengthening through management

training & development; and partnering with large corporates

and funding providers.

YTL E-Solutions Sdn Bhd Recommend review of pioneer tax status, if organization

maintains only a closed door strategy for incubation.



4. Public-Private partnership incubators

Organisation Stakeholder :

PUBLIC - PRIVATE

GOING FORWARD

MLSCF

Spring Hill Bioventures Sdn

Bhd

Requires complete re-structuring of organization with new

development focus and management team.

Expedient Equity Sdn Bhd

Teak Capital Sdn Bhd

Astra Partners Sdn Bhd

CIMB Private Equity

Requires managerial strengthening through management

training & development; partnering with universities and

technology parks; and closer networking with mentors and

Angel Investors.

Kumpulan Modal Perdana

Sdn Bhd

Requires managerial strengthening through management

training & development; and closer networking with mentors

and Angel Investors.



CONCLUSION

The findings of this study has enabled the gathering of preliminary evidence for our

understanding and assessment of the main players in the incubation of innovation in

Malaysia.

Among the major issues raised by the existing incubation players in the innovation eco-

system ranged from inefficient and late funding disbursement processes; unfocused external

institutional factors to poorly coordinated strategy mechanisms. The study further observed

the total lack of collaboration and coordination among key players leading to isolated silos of

activities; a severe under-provision and mismatching of entrepreneurial leadership and

management capacities with innovative talents; and a disconnected financial infrastructure

with the life-cycle and growth of the high tech enterprises.

In order to improve the rate of successful commercialisation of innovations and business

survivability of innovative start-ups in Malaysia, our strategy measures recommendations are

to follow through with a more focused framework for business and technology incubation

activities and organisations in three principal areas, namely –

1. The establishment of a national agency as a focal point and mechanism for the

coordination of incubation activities and the continued management of the innovation

eco-system;

2. The strengthening of human capital in the areas of management, entrepreneurship,

commercial competence, technical expertise and financial capabilities among players

in the incubation industry;

3. The deepening of financial involvement among innovators, successful entrepreneurs

and investors through global networking; and the broadening of capital marketplaces

and instruments to facilitate investment flows to readily support innovative activities.

The conclusions of this study are supported by present academic theory and research in

innovation policies of high technology clusters in Asia as well as in the developed economies

of USA, EU and Japan. The necessary characteristics of successful incubation in a region

include sufficient sources of innovation generation; skilled knowledge workers; a technology

entrepreneurship culture; and efficient investment capital markets.



Appendix – Incubators Survey Questionnaires

Government & Nonprofit

The role of incubators in entrepreneurship and innovation