This article first appeared in Digital Edge, The Edge Malaysia Weekly on September 26, 2022 - October 2, 2022

The recent correction of stock indices around the world, especially the tech-heavy Nasdaq, has had a ripple effect on the valuations of technology companies globally, both listed as well as companies funded by venture capital (VC) and private equity (PE) funds.

The share prices of companies like Grab, which was listed on the Nasdaq via a special purpose acquisition company (SPAC), and Airbnb fell 80% and 60% respectively off their market highs, thus bringing down almost the entire tech industry’s valuations with them. Airbnb has since rebounded with the rise in tourism but the carnage among unlisted tech companies, especially those that were VC- or PE-funded, still reverberates throughout the industry.

Additionally, the current uncertainties in the market due to sharply rising interest rates, high inflation and the Russia-Ukraine war are another reason for the drop in market valuations.

Venture capital funds haven’t been spared either. Softbank’s Vision Fund recently announced an unbelievable loss of US$23 billion in the last quarter while Tiger Global lost 50% of the value of its hedge fund. Tiger Global invested in technology companies like Robinhood, JD.com, Coinbase and Zoom.

This has caused fear to grip the tech investing market and most funds are holding back on investing in start-ups while high-net-worth individuals (HNWIs), corporations and pension funds are more cautious about putting money in VC and PE funds.

There is a lot of negativity about tech investing currently, but that is exactly the best time to be an investor. Legendary investor Warren Buffett once said the best time to invest is when there’s blood on the streets — he meant the stock and financial markets of course, not literally.

Today, there is blood on the VC and start-up streets, with huge drops in valuations, less VC money and far more cautious fund managers.

Buffett also says the best time to invest is when valuations are low. The valuations of tech companies peaked in 2020 and 2021 and took a big dive in 2022, making it a good time to invest.

The question that people have is, when will the market turn positive again and will valuations rise so that anyone who invests today will make money in the future?

The answer is that no market stays down forever and history has proved that it is a cycle. There will always be dips and rises. Even after the global financial crisis (GFC) in 2008/09, markets started to rise again and reached a peak in 2020/21 (see chart).

Venture capital is patient capital and most VC funds have a seven- to 10-year lifespan. Timing is of course critical and had you invested in 2020/21 when valuations were at their peak, you would have suffered huge losses. However, if like Buffett you invest when valuations have dropped, in many cases significantly, then you will make huge returns.

At the start-up level, it is also a great time to invest. Valuations are down, so start-ups won’t be demanding ridiculously high valuations. And there is less money rolling around, so scarcity of funds means start-up founders will find it harder to source for funds and will accept lower valuations.

Drops in start-up investing also means that many start-ups that were spending freely will now be more careful, and salaries and compensation for staff will be lower, making it easier for other start-ups to hire staff. Many VC-funded companies have also cut their headcount, hence there are more people looking for jobs, making it easier to employ workers.

All of this points to a very healthy investing environment for those who have money to invest and VC funds that have more dry powder (industry-speak for having money to invest) will be able to get good deals at decent valuations.

We are also rather lucky in Malaysia as there are tax incentives for investors, both for individuals and corporations. Individuals who invest in tech companies are known as angel investors and there is an angel investment tax incentive of up to RM500,000 per year if you invest in qualifying companies — most technology companies will qualify with some exceptions. All you have to do is hold the investment for two years, then you can apply for the investment amount to be written off your taxable income. You need to be a HNWI and to qualify for the incentive, you need to be a member of the Malaysian Business Angel Network (www.mban.com.my).

Corporates also have a very generous tax incentive of up to RM20 million per year to invest directly in start-ups as well as to invest in VC funds. Like angel investors, they need to hold on to their investments. But in this case, for three years to qualify for the incentive. This is one of the most generous tax incentives in the world and is a huge positive for corporations.

Corporate investors who want to minimise their risk should invest in VC funds as fund managers are more experienced at investing in start-ups and will invest in a portfolio of companies, thereby spreading the risk and minimising the risk for corporations. They are also able to guide entrepreneurs on growing their business and are able to secure an exit via a sale of the business or via listing on a stock exchange to realise their gains.

Prospective investors may wonder whether they can make money from investing in VC funds. The definitive answer is yes! A 2020 study by Cambridge Associates on the US VC market, benchmarking a fund from the year 2010, shows that the average 10-year internal rate of return (IRR) of US VC funds is 22% and the upper quartile 27%. An IRR return of 22% in a 10-year fund means a return on investment of seven times, while an IRR of 27% is equivalent to a return of 10 times.

We don’t have data on Malaysian funds, but if our funds just match the average, or even if it is 20% below the US average, it is still a very healthy return. Traditionally, our VC funds may not have provided good returns, hence the hesitancy of HNWIs to invest in VC funds. Things have changed a lot since then. The market is now more mature, both the start-ups as well as the VC fund managers. And with the recent matching of funds by the government via Penjana Kapital, more seasoned foreign VC funds have entered the market, thus creating a more vibrant ecosystem in Malaysia.

Start-ups are also benefiting from stronger valuations in Southeast Asia, as well as the potential for exits, either via the public markets or via acquisitions as more foreign entities look to make acquisitions in Malaysia. One of my portfolio companies, ATX Fintech, was recently acquired by an Australian Securities Exchange-listed entity.

Another reason why I am confident investors can beat the upper quartile of US VC returns is because valuations of Malaysian start-ups are generally lower than others in the region, which gives investors a better upside when the companies do well. Indonesia, Singapore and Vietnam have premium valuations because of the size of their markets and the maturity of the companies. Malaysia is generally accorded a lower valuation, but that is good for investors as that makes the upside even better.

On many levels, this is now a great time to invest in the technology ecosystem. From better incentives to expertise of fund managers to start-ups with the potential to get better exits, there is no better time to be an investor.

I hope more investors will grab this opportunity as it comes only once every 10 years. You may have missed the last great opportunity post-GFC, but the cycle has returned. Don’t miss it this time around.

Dr Sivapalan Vivekarajah is co-founder and senior partner of Scaleup Malaysia Accelerator (www.scaleup.my) and adjunct professor at the School of Science and Technology, Sunway University. He is author of the book Supercharge Your Startup Valuation.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.