Starts with US$3.5mil, allocates US$10mil for 2015, expects 20-30 partners then
Targeting 70% of its investments to be in the form of equity co-investments
CRADLE Fund Sdn Bhd, an early stage grant provider that over the past decade has given over 600 Malaysian entrepreneurs a financial boost through its grants that range from US$45,000 to US$150,000, will now start co-investing for equity.
At a media briefing in Kuala Lumpur on Nov 6, its chief executive officer Nazrin Hassan described it as “a landmark shift in the evolution of Cradle’s role and function in the Malaysian ecosystem.”
Its equity co-investment chapter starts with Cradle investing RM11.5 million (US$3.5 million) over the next two years with four co-investment partners: OSK Ventures International, FatFish Ventures, Crystal Horse Investments and CoEnt Ventures.
Investments will be made on a one-to-one basis between Cradle and each of its co-investment partners, with the funds acting “as the front door,” as Nazrin puts it, to bring deals to Cradle.
Combined, the co-invest partners will invest a total of RM11.5 million over the two-year period with Nazrin drawing attention to the total RM23 million that the partnership will create. [RM1 = US$0.31]
Add the RM5 million co-investment from its first such deal with Golden Gate Ventures (GGV) in May, and Cradle would have generated RM28 million in combined co-investment from its five partners.
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In its GGV partnership however, Cradle follows its traditional grant model.
In the new agreement, each co-invest partner is putting up different amounts, with OSK putting up the largest amount at RM5 million, while FatFish Ventures will invest RM3 million, Crystal Horse RM1 million and Japanese based CoEnt Ventures putting upRM2.5 million.
The RM28 million is a significant amount, especially in an environment where direct grants are almost the only recourse in early-stage funding, Nazrin said.
With Cradle making a maximum investment of RM500,000 per deal, meaning the maximum invested per company will be RM1 million, a minimum of 23 tech startups will benefit over the next two years.
Nazrin said that availing RM500,000 to RM1 million of venture capital to startups means that more angel investing and crowdfunding can occur in smaller amounts and at earlier stages, as the investors know that there is follow-on funding for their investments to scale.
Startups in Malaysia typically face their biggest funding hurdle at this level of funding, setting the stage for them to raise the amount from overseas and relocating their headquarters. Singapore-based regional funds are the most likely source.
This “entrepreneurial drain” as Nazrin likes to describe it, has become a familiar refrain from the Cradle chief, who has been vocal in his views that more needs to be done to stop this drain from becoming a flood.
Cradle plays its cards
The equity co-investment deal is Cradle’s card to prevent this entrepreneurial drain from happening at the early growth stage of Malaysian tech companies.
“There is strong demand for funding in the US$150,000 to US$300,000 range in the ecosystem,” FatFish chief executive Lau Kin Wai noted, with Nazrin (pic) adding, “We are now increasing the sources of funding at this level.”
The ecosystem can expect many more such co-investment deals in the future, with Nazrin later telling Digital News Asia (DNA) that Cradle has allocated RM30 million for co-investment partnerships in 2015.
“With the strong interest that we are experiencing from other funds, we will eventually have between 20 and 30 such partners in total,” he said, adding that he welcomes the diversity these investors bring to the ecosystem, and the spotlight and increased visibility their presence lends to Malaysian entrepreneurs.
By 2017, Cradle is targeting 70% of its investments to be in the form of equity co-investment with 30% as direct grants, which Nazrin foresees will be mainly for prototyping initiatives.
The target will help the Malaysian Government reduce its direct involvement in the funding space and let the private sector be the main driver, with funding levers such as equity and debt instruments replacing grants as the means by which tech entrepreneurs raise funds.
Aside from the diversity of investors the funds bring, there is also the more practical reason of tapping the experience, networks and expertise of its partners for the benefit of the Malaysian companies they invest in, and for Cradle’s benefit too.
“We will learn from them how to invest and exit,” Nazrin said.
The savvy of these investors in helping startups in Malaysia scale in regional markets is another plus point, he added, pointing to how iMoney, MyTeksi (known regionally as GrabTaxi) and TribeHired have benefited from their investment by regional funds.
The hope is that many more such successes will be created moving forward, and with the added benefit of Cradle enjoying a financial upside through the stake that it will enjoy.
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