Policy Brief: Improving the accessibility of government funding for startups & SMEs

Updated: Oct 6

Anisha Nadkarni


Issue statement


Malaysia aims to grow its digital economy and become an innovation hub. A system which is friendly to new startups and SMEs would advance these goals. Plenty of public funds exist to help local entrepreneurs, but the administrative framework is extremely fragmented. This creates a barrier for newcomers who do not have the social capital necessary to understand (i) what their funding options are, and (ii) which government body to seek out for assistance. What are some steps the government can take to simplify the process of navigating the funding landscape for entrepreneurs?


Background


A startup is a company which aims to solve an existing problem or ‘pain point’ in an innovative way. Their business models are unconventional, often untested. SMEs on the other hand, are based on traditional proven business models. Secondly, a startup will aim to scale aggressively and take over or disrupt a certain market - but an SME targets a smaller (often localised) set of customers and has limited scaling potential.


Why is it important for Malaysia to nurture startup and SME growth?


Economic benefits (i) Longitudinal research has shown that startups create new jobs on a scale that larger, older enterprises do not[1]. The government has aspirations to create one million extra jobs through SMEs as well[2]. (ii) Startups especially boost innovation. This is important in light of the government’s goal[3] to be ranked amongst the top 30 countries on the Global Innovation Index[4] by 2025 (currently Malaysia is #35 on that index).

Societal role Startups can play an important societal role by solving local-specific problems. For example in Indonesia, the agricultural sector is a crucial contributor to GDP, but is notorious for low income and exploitation. Local startups are revolutionising the sector in a way that shifts the balance of power towards greater social equality. The TaniHub platform for example, enables farmers to connect and transact with buyers directly, allowing farmers to set fairer prices and be less vulnerable to exploitation by middlemen. This example highlights that startups can play an important role in solving large-scale and deeply embedded local problems which can only be addressed by a shake-up of traditional industry mechanisms.


Current status According to MaGIC[5], only 0.25% of all registered companies in Malaysia are startups[6]. This is a tiny proportion compared to Singapore’s 8.8%. Malaysia scores well (12th in the world) on the World Bank’s overall Ease of Doing Business index, but relatively poorly (#37) on the ‘ease of getting credit’ indicator[7].


What is the problem?


The administrative framework for managing public funds aimed at helping entrepreneurs is far too convoluted. For the average small-business owner or startup founder, this manifests as a lack of clarity about where to start in terms of finding government financing.


Based on SME Corp’s official website[8] there are 61 different funding options available for SMEs and startups from government agencies alone (not including development financial institutions), structured in various different ways (loans; grants; guarantees; equity). These 61 funds are administered by 22 different government agencies.


Notably, MaGIC, MyCreative Ventures and SME Bank are missing from this list, despite each offering their own funding programmes. This indicates there are likely to be even more that are not mentioned. MaGIC is under the same Ministry as SME Corp yet is not even mentioned on their official website.


Meanwhile, MyCreative is responsible for helping entrepreneurs in the creative industry. Since the 2020 Budget explicitly emphasised the promotion of Malaysia’s digital content industry, one of MyCreative’s core areas (with an RM20 million allocation), presumably some of this will be managed by MyCreative. SME Corp states as its mandate: “[to be the] central point of reference for information and advisory services for SMEs.” However these two examples highlight that even for crucial sources of funding which are strategically promoted by policy, there is a lack of coordination with the ‘centre’ and between each other, that is inevitable considering how many different agencies are involved. The sheer number of different bodies administering the funds makes the notion of any real ‘centre’ of control or accountability seem dubious.


The Ministry of Finance stated in its Economic Outlook 2020[9] that “the 2020 Budget will introduce initiatives to streamline... procedures and systems as well as public service delivery to support entrepreneurship.” However, nowhere in the 2020 Budget is this explicitly evident. Contrary to streamlining, it seems that funding is being allocated in an increasingly dispersed way.


Numbers published in SME Corp’s annual report show a trend towards decentralisation. The number of government financing programmes for SMEs increased from 41 programmes in 2017, to 48 in 2018 – and 61 in 2019 according to their website.


Having a large budget for funding SMEs and startups is in itself a good thing, and it is of course good that there are specific funds designated for especially deprived groups, such as single mothers and the rural poor. These are commendable policies. The issues are:


Access to information. From an end-user perspective (the average entrepreneur), this is an extremely confusing landscape to navigate and even amongst different government agencies, it is not clear to an outsider (without investing significant time in researching) who the ‘Single Point of Contact’ is. There does not appear to be one government website which functions as a one-stop, up-to-date portal of all necessary information.


Lack of guidance. Due to the huge variety of different funding instruments, each with its own conditions and target group, the process of choosing which fund to apply for is not streamlined and is very time-consuming.


There is no wizard or free tool online which guides applicants through the process of choosing the most relevant funding structure for them. MaGIC’s website allows users to filter its database by funding type, ‘company stage’, location, and industry, but does not guide the user. For example, they could ask targeted questions and make a smart recommendation (e.g. based on historical data - companies with similar characteristics have been successful with this type of funding). This would of course require consolidation of historical application data by the different agencies.


If the National Entrepreneurship Policy 2030 is supposed to help the B40 group[10] who systematically do not have the social capital to give them a head-start, then even more so, the government needs to simplify and streamline the processes as much as possible to minimise any administrative barriers to starting a business.


Decentralisation. Greater decentralisation means less accountability. How can the success of all these programmes meaningfully be tracked and measured on one common scale if they are all implemented by different bodies?


Recommendations


For internal organisation:

  • Administration of the funds, setting an overall strategy, defining the success metrics, and measuring progress - all could be consolidated to a centralised body. Consolidating these functions would ensure: (a) clearer oversight of how the resources are used, and (b) that the impact of the various funding programmes are measured by one a common standard. This would also make comparisons over time more reliable.

  • KPIs should be introduced, at least within the body that is responsible for pushing the digital economy and entrepreneurship forward. These KPIs should prioritise and reward collaboration between any factions that have a role in handling funds or entrepreneurship development programmes. The agency setting the KPI should provide specific indicators of what success entails, to follow up to ensure these are being met, or to understand why they are not.


For the public:

  • Single Point of Contact (SPOC) - The different agencies which are responsible for helping entrepreneurs should collate the information on all funding options, public and private, into one master database which is updated regularly and is published online. All government websites that are relevant to entrepreneur funding should direct users to this single database.

  • If all applications for government entrepreneur funding could be made via this one portal, this would be a huge improvement in terms of e-government services. It would also prevent ‘”double dipping” by applicants, which is currently happening.

  • Guidance/ recommendation tool - Make the information relevant by offering a free online tool which helps entrepreneurs identify the most suitable funding source for them. The model behind the tool could take into account just the data input by a user, or combine that with historical data on funding applications.

  • This would save time and resources for both parties - the applicant and the organisation administering the funds - since it would channel more relevant candidates to apply, thereby reducing the proportion of irrelevant applications to screen. The Dutch government has implemented this kind of recommendation/ screening tool which is an excellent example of how to make the information-seeking process for startup funding very user-friendly (https://business.gov.nl/startupbox/). (This website is also an example of a good SPOC portal, as discussed in point (i) above.

  • There should be greater transparency about the application process for government funding. Some key facts that should be reported alongside the master database (per funding programme) are: what percentage of applicants are successful in securing funding, deadlines for applying, timeline for decision-making.

References


[1] Two studies by the US-based Kauffman Foundation which focuses on entrepreneurship: https://www.kauffman.org/-/media/kauffman_org/research-reports-and-covers/2010/07/firm_formation_importance_of_startups.pdf

https://www.kauffman.org/-/media/kauffman_org/resources/2014/entrepreneurship-policy-digest/september-2014/entrepreneurship_policy_digest_september2014.pdf


[2] “National Entrepreneurship Policy 2030 to empower B40 segment, says minister”, Malay Mail, 11 July 2019. Available at: https://www.malaymail.com/news/malaysia/2019/07/11/national-entrepreneurship-policy-2030-to-empower-b40-segment-says-minister/1770422


[3] Ministry of International Trade & Industry (2018), “Industry 4WRD: National Policy on Industry 4.0”. Available at: https://www.miti.gov.my/miti/resources/National%20Policy%20on%20Industry%204.0/Industry4WRD_Final.pdf


[4] https://www.globalinnovationindex.org/gii-2019-report


[5] Malaysian Global Innovation & Creativity Centre


[6] Lee, Joy (2019), “Startup opportunities abound”, The Star, 14 January 2019. Available at: https://www.thestar.com.my/business/smebiz/2019/01/14/startup-opportunities-abound


[7] World Bank (May 2019), “Ease of Doing Business” Ranking. Available at: https://www.doingbusiness.org/en/rankings


[8] http://smeinfo.com.my/development-programmes/access-to-financing/acces-to-financing-by-m-a


[9] Ministry of Finance Malaysia (11 October 2019), “Economic Outlook 2020 – Chapter 1: Economic Management and Prospects”. Available at: https://www.treasury.gov.my/pdf/economy/2020/chapter1.pdf

[10] According to Entrepreneur Development Minister Datuk Seri Mohd Redzuan Yusof, see footnote [2].

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