IN the last few months, start-up ecosystem social media chatter has been buzzing about Fashion Valet (FV).
It started out because of a question asked in parliament about the losses of RM43.9 million incurred by Khazanah Nasional Bhd and Permodalan Nasional Bhd (PNB) from the divestment of their investment in FV.
This was followed by even more questions, including from politicians, on why a Malaysian icon of e-commerce that raised significant sums of money from two of the largest funds in Malaysia failed.
The Malaysian Anti-Corruption Commission (MACC) has also started investigations and the founders have since been brought to court to stand trial.
START-UP LOSSES VS. INSTITUTIONAL SCALE
All this because of two huge institutions had one loss from a start-up investment.
This loss does not even make a mini dent in these funds.
According to its 2023 report, Khazanah has an investment portfolio valued at RM126.2 billion; therefore, a RM25 million loss is a mere 0.02 per cent of its portfolio.
PNB is even larger, with assets under management of RM337 billion. Thus, its loss of about RM18 million is only 0.005 per cent of its fund.
In fact, in 2014, Khazanah sold US$1 billion (worth about RM3.2 billion then) of its stake in Alibaba Group Holding Ltd when it was listed on the New York Stock Exchange and, in 2019, it sold a further stake worth RM2.23 billion.
It made a huge profit on just its Alibaba investment, proving that investments in start-ups can be profitable. Thus, the loss in FV is not significant to the fund.
This column, however, is not about discussing the merits of why the funds invested in FV or even why the investment failed.
It is not about the founders accepting responsibility for their failure in public or what caused the failure. I will not comment on the action taken by MACC, as none of us has any information about this.
If there is clear evidence of wrongdoing, then MACC’s action is justified. If it cannot find such evidence, however, then it must act quickly to clear the names of the founders and the institutions, as prolonging it will be bad for the start-up ecosystem.
But there is a much bigger issue at hand, and that is the potential repercussions that the debate about and public humiliation of the funds and founders have on future funding, not just by these two funds but other funds and corporate investors considering investing either in venture capital funds or directly in start-ups.
I can only imagine that having seen this very public fallout of one start-up investment, all the leaders of Malaysian government-linked investment companies (GLICs) and government-linked companies (GLCs) will now most likely be rethinking their decisions about investing in this space.
And why would they? If they are going to be dragged through the mud if an investment fails, then they might as well take the safe route and not invest in the space at all.
After all, most CEOs and chief investment officers are professionals appointed to their posts on, most likely, three-year contracts; so, why would they jeopardise their jobs and reputations by investing in start-ups?
It would be far safer to just reinvest the money into their own business or acquire conventional businesses that are profitable and sustainable.
Might as well be safe than sorry.
Frankly, I would not blame them.
None of them wants to be singled out if any investment fails.
All of this is coming at a really bad time.
IMPACT ON FUTURE START-UP INVESTMENTS
The news around start-up investing has been amazingly positive since the announcements at the KL20 Summit and Budget 2024 and the recent Budget 2025.
Khazanah has also made announcements of its fund of funds (FOF) investment vehicle Jelawang Capital, which has commitments of almost RM4 billion for the FOF (including RM3 billion announced at KL20 for the semiconductor sector).
There has even been a lot of interest from foreign venture capitalists (VCs) in the local ecosystem, and more than 50 foreign VCs have indicated an interest in partnering with Khazanah’s FOF.
Unfortunately, the FV saga is highly damaging to the positive energy created by the government over the last 18 months.
Now, there are questions about whether Malaysia is such a great destination for start-up investments after all. There are even questions about whether Khazanah will go ahead with the FOF.
Khazanah has indicated that it will but foreign investors are justified in wondering about these issues because Malaysia has shot itself in the foot many times before and they wonder if this is history repeating itself.
Of course, this is not the government’s doing, but foreign investors do not really care.
The other impact has been on start-up founders.
Many now wonder whether it is worth taking money from GLICs or GLCs if they are going to be under intense scrutiny like this, especially where failure is not an option.
They worry that if their business fails, they will be publicly humiliated and investigated by MACC. Even VCs who have been interested in participating in Khazanah’s FOF request for proposals now worry about whether they will also be targeted if their investments fail.
It is about time we admitted that this matter has gotten far out of hand.
Despite this fact, there is no public support for the institutions.
The loud and boisterous crowd of naysayers is winning the PR war and Malaysia is losing.
Who is speaking up for these institutions?
Many people, including politicians, do not understand the start-up model or start-up investing.
It is a lot like wanting to go to Heaven without the hassle of dying first. Everybody wants to reap success in life, but nobody wants to pay the price that goes with it.
They think investing in a business that is losing money is dumb and wrong.
All businesses lose money in their early years. Conventional businesses may reach profitability sooner than start-ups, but that is mainly because they grow slower and are less concerned about market share.
While I advocate building a path to profitability quickly, with start-ups, this can take much longer because of the nature of their business models and the need to scale. Grab Holdings Ltd has shown profitability only last year, after 13 years of existence, yet it is worth almost US$20 billion today.
When it declared a profit, its market price jumped 15 per cent.
So, profits are important, but they needed the backing of VCs — despite showing only losses — to enable them to grow into six countries and build multiple businesses from ride hailing to food delivery to digital banking.
So, when Khazanah and PNB invested in FV even when they were losing money, it does not mean something sinister happened.
This is how start-up investing works. That is the model.
THE DOSTOEVSKIAN MOMENT
Of course, both institutions would have hoped that FV would have gone on to build a successful and, ultimately, profitable business but it did not — it failed.
Eighty per cent of start-ups fail within the first five years anyway, so it is risky to invest in start-ups.
Get it right, however, like Khazanah did with Alibaba, and the reward is amazing returns.
We must not punish the institutions for making the investment or the founders for their failure. It is okay to fail, as this happens often.
I am positive they did not want to fail — no one does, but it happens nevertheless.
I’ve had my fair share of failures too, more than I’d care to admit.
Still, like every excellent investment banker, I pick myself up and try and try again until I get the model I crave.
I am sure the founders of FV would have learnt many lessons and their next venture could be highly successful.
At Goldman Sachs, failure isn’t something to be ashamed of — it’s a badge of honour.
My teams embrace it so much we’ve even coined a term for those moments of reckoning. It is called a “Dostoevskian moment” — a time to reflect, recalibrate and come back stronger.
To have tried, to have given your all and to have failed means you are a true Goldmanite.
In fact, VCs like to back serial entrepreneurs, even those that have failed, because failure — not success — is the best teacher.
Not all of your investments will be winners and not all will be losers.
All investors know this.
So, this one failure should not define our ecosystem.
In fact, we should celebrate the fact that our institutions are willing to support entrepreneurs and take a risk on start-ups.
We should also celebrate the courage of founders who take massive risks with their start-up.
It is a very tough 24-hour job.
Start-up founders make a huge difference with their innovation and ability to improve the lives of the public and prospects of businesses. It is my wish that we move on from this saga and continue to support founders and our institutions that support these founders.
I commend them all for their courage. To the institutions, do not let this incident stop you from doing what is right in supporting founders and the ecosystem.
We cannot let the naysayers win. We must ensure capitalism wins. Stay the course; the ecosystem needs your continued and unwavering support.
Medecci Lineil has over a decade of experience leading a niche-focused team within Goldman Sachs’ investment banking division (IBD). His expertise extends beyond the bank, having been instrumental in establishing consultancy firms in Kuala Lumpur and Singapore, where he serves as a founding board member.
