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AI and Malaysia are hot markets for investment: Withers KhattarWong

Samantha Chiew
Samantha Chiew • 5 min read
AI and Malaysia are hot markets for investment: Withers KhattarWong
Shen pinpoints the AI sector and Malaysian market for investors to keep an eye on.
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Joel Shen, partner at Withers KhattarWong, says the venture capital space is currently “right-sizing”. 

Shen – who advises corporate and venture capital clients on cross-border investments, acquisitions and joint ventures, with particular experience in the Indonesian market – explains that the region’s venture capital deals tripled from 525 to 1,711 between 2015 and 2021, with the deal value peaking at US$18.1 billion in 2022. This was due to the shift towards online services caused by the pandemic and low interest rates, which remained close to 0% until the third quarter of that year. 

However, interest rates started to spike, and consequently, deal value and count fell significantly. This brought on the now-infamous “funding winter”. With venture capitalists (VCs) becoming more selective and prudent with their investments, start-ups were feeling the squeeze and started to shutter and lay off staff. 

“While there may be some more pain in the months ahead, investors seem hopeful most of the troubles of the past couple of years are behind them,” says Shen. 

This is due to the marketing “right-sizing”, as tech companies are seen to have finally turned a corner on profitability. Companies like Sea, Grab and GoTo Group have shown profitability in 2023. 

Shen also highlights a notable surplus of available funds in the market. Referring to a report by Google, Temasek and Bain & Co, which indicated that undeployed funds increased to US$15.7 billion by the end of 2022, up from US$12.4 billion in 2021, Shen suggests that VCs are feeling the pressure to invest. Shen anticipates that funding activity will increase again in the latter half of 2024.

See also: Temasek-backed Partior announces second close of series B funding at US$80 mil with Deutsche Bank as new investor

“VC exits remain ‘elusive’, and the dearth of exits may cast a shadow on sustained investor interest in the region,” says Shen. According to PitchBook, nearly 87% of the exit value since 2015 has been generated by six exits of over US$1 billion ($1.36 billion), and stringent regulations impede start-ups from going public.

“In Southeast Asia, a third of all exits to date are via secondaries, and I envisage more secondaries in the next couple of years, especially as valuations remain flat and older funds mature,” he adds. 

What’s hot

See also: Prudential launches global AI Lab in Singapore to accelerate innovation

As the market waits for the VCs to start deploying their funds again, Shen has identified some sectors that investors have their eyes on. 

“Artificial intelligence (AI) is the flavour of the month for VCs. It can potentially disrupt almost every aspect of the economy, and investors are looking closely at AI-powered start-ups,” says Shen.

“In this connection, we’re seeing the most number of AI-powered start-ups in Singapore, which has taken an early lead in the responsible development of this new and exciting technology with a whole-of-government, whole-of-economy approach that is needed to reap the benefits of Al, while ensuring that those benefits are fairly distributed across Singapore, the region, and beyond,” he adds.

Singapore’s government is spearheading this movement. The National AI Strategy, Nais 2.0, was unveiled in December 2023. It outlines 15 initiatives to be implemented over the next three to five years. These include AI-focused training programmes, establishing a dedicated physical space for AI, and ensuring adequate carbon budgets for data centres in Singapore. Deputy Prime Minister Lawrence Wong declared the city-state’s intention to triple its AI talent pool to 15,000 within the same timeframe.

These are just some initiatives from the Singapore government, with more from the private sector. Shen cites Singapore Telecommunications Z74

(SingTel) and its efforts to develop sustainable AI data centres to support “intense computing environments”.

Apart from AI, Shen has identified an interesting market for investors — Malaysia. “I am excited about Malaysia and think that 2024 could be an inflection point for the country’s tech and VC ecosystem. It has hitherto punched below its weight in attracting VC investment,” he says. 

Malaysia is the region’s sixth-largest economy, home to almost 35 million residents. Its economy rebounded 8.7% after the pandemic before moderating to around 4% last year. Its digital economy, worth about US$23 billion in 2023, is also expected to grow at a CAGR of 14% to US$30 billion by 2025, driven by strong demand for online travel and digital financial services.

To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section

Additionally, Shen notes that Malaysia is the birthplace of several regional technology giants, including Grab, and home to several interesting startups and scale-ups, such as Carsome, iFlix and Fave (which has exited). 

“Despite having a wealth of innovative start-ups, Malaysia attracts only a fraction of VC funding compared to its neighbours,” says Shen. He adds that in 2023, 73.3% of the VC equity funding across the region went to Singapore, while Indonesia took second place with 15.4%, followed by Vietnam with 6.1%. Malaysia accounted for only 1.3% of VC equity funding in the region last year. 

Shen hopes this will change. He notes that although only 1.3% of all VC equity funding went to Malaysia, the country accounts for 6.3% of all VC equity deals in the region. This means that VCs are investing in Malaysia, but are writing smaller cheques, suggesting that Malaysia might be “at the pointy tip of an imminent surge in institutional funding”.

The Malaysian government has also made efforts to boost the start-up space. Prime Minister Anwar Ibrahim aims for Malaysia to have 5,000 start-ups by 2025 and to elevate it into a top-20 country in the global start-up ecosystem by 2030.

With all these initiatives in place, Shen is hopeful that these efforts “will open the VC floodgates and unlock an expansive future for Malaysian start-ups”. 

 

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