Malaysia launches venture capital fund for MSC
By Julian Matthews
Tuesday, June 22 1999

KUALA LUMPUR--Malaysia is launching a RM120 million (US$31.6 million) venture capital fund, the first of its kind specifically for the Multimedia Super Corridor project.

The fund will be set up by project facilitator Multimedia Development Corporation (MDC) and government investment arm Khazanah Nasional.

MDC executive chairman Dr Othman Yeop Abdullah said the fund will be targeted at small and medium-scale local start-ups and foreign-local joint-venture companies that have committed to the project.

The news comes to the relief of local investors that were in a bind after the financial crisis, political debacle and infrastructure delays to the billion-dollar project last year.

The Multimedia Super Corridor (MSC) is a 750 sq km area designated to become a global hub for the creation of new and experimental products and services. Half of the over 200 companies that are pioneers in the project are local companies.

At least 26 local companies involved in Internet-related ventures are known to have applied for funding from MDC.

Dr Othman said the MDC was forced to start the venture capital fund on its own, after lukewarm reception from foreign venture capitalists.

"We approached the big venture cap players in New York but they are only interested in projects that have a minimum investment of US$10 million. Anything less than that would be a waste of their time," he said.

Dr Othman says local small and medium-scale enterprises (SMEs) only require between US$790,000 and US$1.3 million (RM3 million to RM5 million).

"We have taken the initiative to provide the first push. We will not remain there as a single player. There is a great need to create more venture cap companies to support the IT and multimedia sectors in Malaysia," he said.

Dr Othman says MDC is still keen on attracting foreign venture cap companies, and is currently in discussion with a Silicon Valley venture capital company who will be invited to become MDC's strategic partner.

Dr Othman says he expects about a 56 or 57 percent return rate on the fund based on available industry performance statistics.

The fund has been segmented to address companies in three phases--start-up, mezzanine (in the process of expanding business), and pre-listing or ready for an initial public offering. "Return rates will be higher on start-ups than pre-listing companies," he said.

Observers close to the project have questioned whether MDC's recent investments were in conflict with its role as promoter of the project.

"We are more than just promoters of the MSC, we are also the catalyst and one-stop agency. There is a need for somebody to take the lead and be a pioneer. We are playing that role," he said.

Dr Othman explained MDC's becoming a player-investor in the MSC is akin to the government's previous set up of government-funded corporations to enter private sector markets.

"As the market improved and more and more entrepreneurs came on board to participate in the marketplace, then the government slowly withdrew and allowed the industries to take the lead," he said.

Dr Othman conceded the venture fund was risky but added that other funds in Taiwan and Silicon Valley have proven their worth.

MSC companies have been hampered by the investment climate in Malaysia which is more geared towards property and construction ventures and companies with proven track records.

"Information technology and multimedia sectors are new areas for Malaysian investors who are not able to value these companies and assess the risks involved. The moment we are able to convince the business sector and various entrepreneurs that you can take risks and get high returns, then they will plonk the money down on these type of companies," he said.

Dr Othman added that local banks were similarly not ready to extend loans to such companies due to their inexperience in the areas. "Bank loan officers are not comfortable with the IT and multimedia industries. Intellectual assets are difficult to assess, unless, one has in-depth knowledge on the personalities, technologies and applications being developed in relation to competitors. Banks are not able to do that--as yet. They have to engage new analysts with that kind of knowledge," he said.

The new funds will be managed by wholly-owned subsidiary, MSC Venture Corporation Sdn Bhd and its venture capital vehicle company, MSC Venture One Sdn Bhd. Khazanah Nasional is expected to pump in at least RM20 million into the fund.