Corporate Venturing
In today’s challenging landscape, it is imperative for businesses to remain abreast of technological developments whilst seeking the right funding model and growth strategy to remain agile and competitive. To achieve this, there are many different strategies that companies can adopt to achieve their objectives. Corporate venturing, for example, is a strategy that companies have employed for different purposes amongst some are: to explore new business opportunities by investing in or creating external start-up ventures, developing or fast-tracking new product development, exploring new markets, building internal competencies, to eliminating competition by assimilating them.
Ultimately, the goal of corporate venturing is to sharpen an organisation’s competitive edge by generating long-term growth and diversification. Corporate venturing opens large firms to new technologies, products and markets that may not be available within their own organisations. For optimal strategic fit, corporate venturing also requires striking a balance between corporate rigidity and more fluid start-up culture, which may well affect the chances of success. At the end of the day, most if not all corporate ventures aspire to achieve strategic objectives along with lucrative financial returns.
In today’s challenging landscape, it is imperative that businesses keep abreast of technological developments while striving to stay ahead of the competition. To achieve this, they are spoilt for choice amid a plethora of strategic options and can pick those that best fit them. Through corporate venturing, for example, big companies explore new business opportunities by investing in or creating external start-up ventures.
Considered as a sub-set of VC, corporate venturing can take several forms, including corporate venture capital (CVC), corporate accelerators, partnerships, and incubators. CVC involves a sizeable company investing in a start-up in exchange for equity, with the objective of gaining strategic benefits such as access to new technologies or markets. Corporate accelerators and incubators are programmes that provide resources and support to early-stage start-ups, in return for a stake in these entities. Through such programmes, start-ups can benefit from the expertise, networks and resources of the bigger establishment. The latter, on the other hand, would have the benefit of being privy to innovative ideas and technologies. CVC funds have also grown in popularity globally and locally. As an investment strategy that has been gaining traction, CVC can also play a positive role in a downturn, such as the current volatile economic environment. In challenging times, CVC offers unique investment opportunities with immense upside potential for forward-thinking corporates.
Amid corporate belt-tightening and subdued returns from startup exits, the CVC market tightened in 2023, hitting all-time lows since 2019 on several fronts. According to the State of CVC 2023 Report by CB Insights Research, the number of deals fell to its lowest levels since 2019, marking a 32% drop Year-on-Year (YoY) and sinking in value to USD55.1 billion from USD98.9 billion in 2022. In line with this trend, the year saw fewer new CVCs emerging at a 6-year low, with just 162 CVCs founded in 2023. Early-stage deal share however, has remained at an all-time high of 63% for two (2) years running. Although the US retained its position as the world leader in CVC funding, it has been hit especially hard by the retreat from CVC. Deal volume in the US fell 25% quarter-on-quarter (QoQ), driving the nation’s global share of CVC deals down to just 29%, its lowest point in over a decade.
Meanwhile, Asia and Europe saw growth in CVC activity at the end of 2023, surpassing deal volume in the US albeit with smaller investment value, signalling the potential for a rebound in 2023. The majority of the most active CVCs by company count were based in Japan, with venture arms of Japanese financial services incumbents topping the list in Q4 2023. In addition, the world’s 10 largest CVC investments in 2023 were related to healthcare and electronics, a shift from the focus on energy transition in the year before.
In South-East Asia, most CVC players invest in start-ups as limited partners. Similar to the rest of the world, the prolonged Covid-19 pandemic accelerated digital adoption amongst the region’s population. This had, in turn, led to the incorporation of new technologies in many different spheres. Underpinned by conducive demographics, the landscape is well poised for the growth of VC in general, and CVC.
Corporate Venturing Ecoystem in Malaysia
In tandem with the rising popularity of fundraising and investment via the private market, the SC has been advocating the development of the Malaysian digital market. Amongst other things, the regulatory authority has been monitoring the development of the domestic PE and VC industry, by requiring registration in 2015 and also setting up the Malaysian Venture Capital and Private Equity Development Council (an inter-ministerial council comprising of representatives from the public and private sectors, set up it 2005 to provide vision and direction as well as coordinate strategies for the overall development of the PE and VC segment).
Under the Capital Market Masterplan 3 (CMP3), which aims to promote a more sustainable and equitable economy, the SC has committed to collaborating with pertinent agencies and investment entities in Malaysia to develop the corporate venture landscape. On this front, SC-affiliated Capital Markets Malaysia (CMM) will lend its support through the delivery of capacity building programmes and awareness campaigns, to encourage development and build depth in corporate venturing.
In November 2022, the SC enhanced its Guidelines on the Registration of Venture Capital and Private Equity Corporations and Management Corporations (VC/PE Guidelines, first issued in March 2015). Aimed at creating a more conducive environment and increasing the vibrancy of private markets, notably in the PE and VC sector, this will also offer diverse funding options to micro, small and medium-sized enterprises (or MSMEs), particularly start-ups and high-growth enterprises, in turn driving innovation and strengthening economic growth. Since the introduction of the SC’s registration framework, the AUM of registered VC/PE firms have experienced a steady growth.
Most recently, on 13 June 2024, the SC issued the first edition of their ‘Practical Guide on VC and PE in Malaysia’, offering a comprehensive, and practical knowledge to prospective VCs and PE fund managers, service providers, and investors navigating Malaysia’s regulatory landscape .
In line with its developmental and promotional mandate, CMM launched Malaysia’s pioneering CVC programme in March 2023 to promote the domestic PE and VC ecosystem. Against the rapidly evolving technological backdrop, this inaugural CVC programme highlights the significance of technology and digitalisation in driving economic transformation and progress, which should serve as the impetus for corporate venturing.
CMM’s CVC programme aims to build confidence in corporate venturing as a potential enabling or innovation strategy in fuelling growth by driving corporate investment amongst the large cap public listed companies (PLCs). By heightening the awareness and familiarity with the strategy, the ecosystem and its market participants, CMM’s goal is to boost PLC participation in the ecosystem and spur ventures. In addition, the programme brings together and connects the relevant agencies and investment entities in Malaysia, which will serve to enhance the CVC network across different verticals. The eventual and seamless integration and connectivity will aid and enhance the process of capacity building, business leadership and development, and importantly, improve access to capital.
Moving forward, CMM intends to collaborate with more strategic partners to deliver impactful workshops and networking roundtables to benefit the market as a whole.
In keeping with the overarching theme of promoting market development, Bursa Malaysia launched the Public Listed Companies Transformation (PLCT) Programme on 2 March 2022, with the objective of elevating the performance and appeal Malaysia’s Public Listed Companies (PLCs).
This three-year PLCT Programme is underpinned by five (5) key tenets detailed in five digital guidebooks specifically: being purpose and performance driven, embody sustainable, socially responsible and ethnical practices, enhancement of stakeholder management and investor relations, adoption of digitalisation to enhance competitiveness, and robust talent development and succession planning, to strengthen nation building. The programme will run to the end of 2025 and has seen 212 participating PLCs as at end-May 2024, of which 26 were champions.
As part of its mandate to lead Malaysia’s digital economy, MDEC established the Global Acceleration and Innovation Network (GAIN) programme in 2015, This programme is designed to launch high-potential Malaysia-based tech companies on to the global platform. It provides year-round growth interventions based on four pillars, i.e. Gateway, Amplify, Invest, and Nurture.
Today, GAIN has cultivated more than 150 successful tech companies under its umbrella through various CVC matching and accelerator platforms. Participating investors include well-known corporates such as Petronas Berhad, Sunway Berhad and Genting Berhad under Genting Ventures.
In March 2023, Khazanah Nasional Berhad launched the Future Malaysia Programme, an initiative under its RM6 billion Dana Impak – a key pillar of its Advancing Malaysia strategy. Dana Impak is a five-year commitment to invest based on six themes concerning issues and challenges that Malaysia encounters. The sovereign wealth fund believes that many potential solutions to such issues can be found in early-stage companies, which will necessitate the infusion of risk capital at different stages.
The Future Malaysia Programme also advocates strategic corporate collaboration within the domestic VC ecosystem, to stimulate the sharing of ideas and augment business value. It will initially deploy RM180 million to cooperate with established local and international VC and CVC players based in Malaysia.
Reflecting its determination to discover and develop early-stage entrepreneurs and start-ups via the provision of strategic growth support,
Khazanah has also collaborated with Gobi Partners and 500 Global to discover and develop early-stage entrepreneurs and start-ups via the provision of strategic growth support. The collaboration serves two main goals: firstly, to convince regional venture funds to invest in Malaysian companies by leveraging on the international footprints and networks of Gobi Partners and 500 Global; secondly, to motivate local start-ups to expand globally, with a view towards becoming regional players.
Elsewhere, Khazanah has also formed a partnership with Plug and Play, to set up a Malaysia-based corporate innovation and accelerator programme involving leading Malaysian corporates.
Incentives to Spearhead Development
As part of efforts to promote the VC and CVC segments, incentives have been incorporated into various policy measures and guidelines. Recent VC-related capital market measures under the CMP3 include the following:
- Revision of the VC/PE framework
- Additional eligibility tests to encourage pooling by angel investors.
- Streamlining of registration requirements.
- Enhancement of the SPAC (special-purpose acquisition company) framework
- Shareholder approval for qualified acquisitions have been reduced to a simple majority.
- A professional VC/PE background is now deemed eligible experience for SPAC management.
- Besides the above, the enhancements to the VC/PE Guidelines in November 2022 target to broaden the investor base and make available more capital, especially for early-stage start-ups, including the following:
- Augment the pool of eligible investors that can invest in VC and PE funds, with the introduction of a new minimum investment test of RM250,000. This will allow more investors, particularly angel investors, to put their money into VC and PE funds.
- Simplify the registration requirements for VC and PE firms, to encourage the setting up of new local and foreign firms in Malaysia, and to deepen the professional VC and PE talent pool.
- Require registration only for companies that undertake fund management activities vis-à-vis VC and PE funds. As such, entities that are strictly fund vehicles will not need to be registered under the VC/PE Guidelines.
- Remove the 50-investor limit on VC and PE funds, to cater to the changing requirements of the industry and the increasing popularity of other structures such as limited partnerships.
Over the next couple of years, the SC will focus on policy enhancement, capacity-building programmes, as well as stakeholder engagement and awareness to continue developing this segment. In the meantime, VC investors (or VCCs) are also eligible for tax incentives when they invest in VC entities or start-ups. These include the following:
If a VCC suffers losses from the disposal of shares in a VC investee company during the tax-exempt period, such losses can be carried forward to the post-tax-exempt period. Nonetheless, these incentives entail certain requirements before they can be enjoyed. For instance, applicants must obtain certification from the SC to ascertain that the qualifying conditions of the incentives have been fulfilled.
The certification process is outlined in the VC Tax Incentive Guidelines and the Application Kit. In a recent development, the SC will also look at promoting corporate venturing through a more facilitative tax and incentives policies including enabling tax losses from corporate venturing to be utilised by the parent company to set off other sustainable investments within the group.