Lack of funding, red tape hindering investments in start-ups, say economists
Published on: Tuesday, April 23, 2024
By: Danish Raja Reza
According to a recent report, Malaysia struggles to attract the same amounts of venture capital funding as Singapore or Indonesia despite its wealth of innovative start-ups.
PETALING JAYA: Economists have identified limited early- and late-stage funding, red tape and a small domestic market as some of the factors hindering investments in local start-ups.
Goh Lim Thye of Universiti Malaya said Malaysia’s early-stage investment landscape is underdeveloped and marked by a shortage of angel investors – those who provide initial seed money for start-up businesses, usually in exchange for ownership equity in the company.
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He also cited a weak venture capital scene and a lack of skilled venture capital professionals.
“Malaysia has a relatively small number of venture capital firms compared to more mature ecosystems. This limits the availability of funding, particularly for start-ups that are in their nascent stages.
“There is also a gap in terms of the availability of skilled venture capital professionals in Malaysia who have the requisite knowledge and experience to manage venture capital funds and make informed investment decisions,” he told FMT.
Goh was commenting on a South China Morning Post report that Malaysia struggles to attract the same amounts of venture capital funding as neighbours Singapore and Indonesia, despite its wealth of innovative start-ups.
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According to Nikkei Asia, despite various government initiatives to boost the local start-up ecosystem, Carsome – an online used car trading platform – remains Malaysia’s sole unicorn.
Carsome, a private start-up, is valued at over US$1 billion (RM4.8 billion).
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Market intelligence firm Pitchbook meanwhile said in a recent private capital update that Singapore had attracted about 80% of the region’s venture capital funding last year.
Indonesia claimed over 10%, leaving Malaysia in third place.
Goh said that despite improvements in its business environment, Malaysia still struggles with issues like capital gains taxation and bureaucratic procedures related to fund formation and exit strategies.
“Hong Kong is listed among the most ideal locations for the formation of offshore companies because of its strong international reputation and beneficial business schemes, which include allowing 100% foreign ownership and a business-friendly tax regime, namely free corporate tax on foreign-sourced profits and a low tax rate ranging from 8.25% to 16.5%,” he said.
Carmelo Ferlito, CEO of the Center for Market Education, said that increasing restrictions against foreign involvement in local firms had also deterred investment.
“Over the years, Malaysia has made it increasingly difficult for firms with foreign capital to obtain bank accounts or credit cards,” he said, adding that higher taxes are also imposed on foreign-owned companies.
However, he also said that challenges in securing late-stage investments are a common issue globally across start-up ecosystems.
Economist Geoffrey Williams said regulatory hurdles imposed on growing businesses discourage start-ups and micro, small and medium enterprises from seeking investors.
“If they grow too big or too fast, it becomes very complicated to manage very quickly, especially from a regulatory perspective,” he said.
“For example, if companies keep their revenue below RM500,000, they are exempt from the sales and service tax. Low profits can help them avoid corporate taxes, and not employing staff means they don’t have to pay into EPF, Socso, or the Employment Insurance System.”
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