Market size crunch for Malaysian startups?

  • Japanese VC CyberAgent Ventures has 15 investments in SEA, none in Malaysia
  • Feels market size limited, tough for startups to replicate home market success in other SEA markets

Market size crunch for Malaysian startups?HIS fund has 15 current investments into startups in South-East Asia and for an Asian venture capital firm, it actually has a very ‘Silicon Valley’ investing philosophy.
“Because we are an early stage investor, we don’t really look for revenue but rather market traction in terms of users and the potential of the startup,” says Nobuaki Kitagawa (pic), director of overseas investment at CyberAgent Ventures, speaking to Digital News Asia (DNA).
That will be music to the ears of any Asian startup: An early stage venture capitalist (VC) that will invest in a startup with no revenue but because it feels the product in the market has “huge potential.”
CyberAgent Ventures is a Japanese VC established in 2006 with an early stage and Asian focus to its investments. These investments can range from US$300,000 at the seed level to US$1 million at the Series A stage.
According to Kitagawa, it is most comfortable taking between a 10% and 20% stake in return for its money.
Kitagawa was in Kuala Lumpur for the MOSTI-MSC Malaysia InnoTech conference which brought together VCs from around Asia and Malaysia to meet selected Malaysian companies which have been screened for their potential to attract investments.
The event was held in conjunction with the 4th Global Entrepreneurship Summit that took place in Kuala Lumpur from Oct 11-12.
Now before you polish your elevator pitches, there is a caveat. CyberAgent will only invest in South-East Asian startups which play in markets with a certain size. To them, the Malaysian market of 29 million does not cut it.
“The Malaysian market is not big enough by our standards,” says Kitagawa, almost apologetically.

Which is why, none of its 15 investments in the region are from Malaysia. The investments have been mainly in Vietnam, Thailand and Indonesia. It has a US$20 million fund for the region with 2018 as the end of fund life. For a list of 12 out of its 15 investments, click here for a PDF. The other three are in stealth mode.
But it is not like CyberAgent has totally cut off Malaysia from its radar. Kitagawa has looked at a number of Malaysian startups and believes some of them will be very successful here, but the overall size of the Malaysian online market is still too small for them to consider.
He is also doubtful that a Malaysian company that is successful here can replicate its success in a neighbouring country, despite DNA bringing up the examples of and MOL Global.
For that matter, his fund seems to feel the same way about any startup in South-East Asia – that they would find it very tough to replicate their success in a neighbouring country.
“They could have succeeded in their home market because of entering the market at the right time and because of a marketing advantage they had, but they won’t enjoy these factors when they move into a neighbouring country,” says Kitagawa.
This is where the focus of CyberAgent is very different from other VC funds which want to see a business scale and replicate. CyberAgent is looking to invest in local Internet and mobile champions focusing on their home market B2C (business-to-consumer) space – as long as the market is big enough.
However, it is assisting one of its Thai investments to expand into Indonesia though it is very early days.

Because it recognises the still nascent funding ecosystem in the region, CyberAgent will even invest again in Series A of its own investee companies.
“We tried but no one wanted to come in to a Vietnamese startup recently where we were the seed investor so we put in our own money for the Series A,” shrugs Kitagawa.
Surprisingly, it has not made any investments in the Philippines. Kitagawa’s last trip there was two years ago, when he came away thinking the market was not really ready to birth a successful Internet company mainly because of language and history.
With English being a strong second language, he saw locals preferring to use online products and services from US companies.
Due to these factors, he feels it is going to be tough for local companies to compete. However, he plans to revisit the Manila market again, acknowledging that it may have changed.
Ambition matters
Kitagawa also has a quick response when asked what he saw as a common thread in the entrepreneur scene between the various countries. “The size of the ambition,” he says, explaining that a South-East Asian entrepreneur has fewer success stories to aspire to, versus those in South Korea and of course China.
He is also the chief executive officer of CyberAgent Ventures China, where it has around 20 current investments in startups. It has a US$42-million fund for the China market with the end of the fund life at 2017.
For its home market, Japan, it has a US$25-million fund, with the end of fund life at 2019.
“It is not uncommon for startups in South Korea and China to tell you that they are targeting to become billion-dollar companies. Their goals are very high,” Kitagawa says.
There is also reinforcement of these goals. He shares that so far this year, the big three Internet companies in China –, Tencent and Baidu – have bought almost US$2 billion in startups, mainly in the mobile space, to complement their strengths in the desktop Internet space.
At the same time, he also says that entrepreneurs in South-East Asia are not as motivated by money as those from China and South Korea.
“They seem to be motivated to do something that will help the country. I personally think this is admirable,” he adds.

The top two reasons for failure, meanwhile, are related to the persistence of the entrepreneur, or lack thereof, and market readiness.
“There have been times where we have been overly optimistic in our estimation of the potential or future market and this just jams the startup’s cash flow,” says Kitagawa.
Meanwhile, the passion and grit of the entrepreneur is also critical. Those who are lacking in this trait will give up at the first sign of trouble or hardship, he observes.
All things considered, is the door totally shut for Malaysian startups to try and catch the interest of CyberAgent?
Apparently not. “The fact that I am here for InnoTech tells you that we are still keen,” says Kitagawa. In fact, he welcomes further enquiries via mailto:[email protected].
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