The Makings of Greatness

That’s how the Techinasia article starts… The article was posted on LinkedIn by a colleague, Gopi Ganesalingam, who works with sister agency MDEC. The article was meant to highlight how well positioned Malaysia is to “take” the burgeoning South East Asian market. It was very well received judging from the reactions and comments it generated.

It was interesting enough that it got me commenting as well. I noted how well the writer drew me in by relating how well things have gone for Malaysia in the opening paragraphs but then the writer got down to the brass tacks with Startup Genome Founder and CEO, Jean-Francois Gauthier’s, insights on the local tech ecosystem which hit…hard.

Frankly, he hit the nail on the head. Kudos to Techinasia writer Nathaniel Fetalvero for producing an article which succeeds at being inspiring yet still remaining balanced enough so we don’t lose sight of what really is important. And kudos to MDEC for bringing in Jean-Francois and Startup Genome to weigh in on the subtleties that make up our tech ecosystem.

If you have not read the article, you can read it here https://www.techinasia.com/makings-greatness-malaysia-toptier-startup-ecosystem.

The writer starts the article with an account of how well Kuala Lumpur is positioned as an ideal location for startup incubation with factors such as low costs, high quality of living, progressive talent, fast-tracked visas and robust government support. He cited Jean-Francois as saying Malaysia is in the top 25% worldwide in terms of aggressiveness of government policies that have helped fuel growth.

However, not everything is well in paradise. While aggressive policies have worked wonders in creating a large number of early stage start-ups, there are clearly gaps in later stage scaleups valued at USD100 million and over. This, Jean-Francois attributes to various bottlenecks.

My intent with this article is to go deeper into the bottlenecks he has identified and provide my own perspectives and observations into the mix.

Local Founders Do Not Seek Regional Dominance

Assuming ‘regional’ here means South East Asia (SEA) - a USD2.9 trillion (in 2017) market, the third largest in Asia and sixth largest globally - an alluring prospect surely. I think many in the ecosystem will agree that regional rather than global expansion is something Malaysian start-ups should aspire to and should be capable of.

So what is the problem? I think this goes back to the innovation or tech that underlies any start-up. It really forms the basis of how viable a start-up will be not only in a Malaysia but also regionally across 10 SEA markets. The stronger and better validated the innovation/tech the more likely it will achieve the elusive “product market fit” (PMF) it needs to ensure positive expansion beyond Malaysian shores.

Just to reacquaint ourselves with PMF – it’s essentially the dynamic between a business, its products and its customers. It’s a key concept that determines the difference between an also ran and what is truly a sustainable and scalable long term business. Marc Andreesen, best known for Mosaic and Netscape is credited with coining the phrase. It’s what VCs (or other late stage investor) look for before investing. A start-up must be able to demonstrate that it has achieved PMF or on its way to achieving the same before landing the big bucks required for expansion (see my post for a quick 101 on PMF - https://www.dhirubhai.net/posts/razifabdulaziz_what-is-product-market-fit-its-a-widely-activity-6725033692391182336-EbNV).

Given that SEA is essentially 10 largely dissimilar countries (as opposed to the US which is more homogenous or even the EU which has single market benefits) expanding beyond Malaysian shores can be an overwhelming prospect for a start-up let alone a mature SME. It will need funding to pull off, but funding will not come without the start-up being able to show positive results at home where it is supposed to have a home ground advantage. Many sadly never reach the stage where they are able to robustly demonstrate PMF. Instead, many find themselves simply struggling to survive without ever venturing abroad.

Start-up Glass Ceiling

In fact, Jean-Francois goes further and opines that this has become (or is becoming) culturally embedded and a critical impediment. He is essentially alluding to the fact that the Malaysian market is just too small for investors to pump in the big bucks. In fact, Jean-Francois suggests that Malaysian start-ups should start in (both) Malaysia and Indonesia immediately. This would make for a very sizeable market and opportunity and more likely to attract investor attention.

This only makes it absolutely critical that the innovation/tech is validated properly, demonstrate scaleability and address a large or growing market that will enable it to quickly get to PMF. Failures at this fundamental or basic stage will very likely impede success and if this becomes systemic as Jean-Francois suggests, it will quickly become a mindset thing, a form of “glass ceiling” of sorts for our start-ups. In this respect, Jean-Francois mentioned that there is a large number of Malaysian start-ups with a “low level of innovation quality”… ouch!

Beyond Funds… Its all About the Talent

Another gap Jean-Francois observed is Malaysia’s deep-tech talent funnel. He opines that while Malaysia has no shortage of engineering talent, a large number of them become employees instead of starting up businesses of their own. Local engineers (and professionals in general) prefer taking high-paying jobs with corporates (where innovation is not a byword) so they become “soft-skill people” who do not code themselves, preferring to outsource the coding work. This, according to Jean-Francois has led to more start-ups creating “simple first products instead of more complex ones” which confirms my own experience with Cradle, where we see a lot of start-ups outsourcing coding work to third parties.

Also from my work with Cradle, we see a lot of start-up founders that lack the depth of experience required to ensure well validated solutions let alone the experience to roll out solutions over an entire region. Charisma and sheer determination alone are not nearly enough. Depth of experience would help them go further. Jean-Francois himself pointed out the lack of experienced C-levels in marketing and sales who are based in Kuala Lumpur who know how to scale from US$1 million to US$200 million in revenue.

I know some will say that you can simply acquire the talent you need. The problem is, you will need deep pockets for that because they will not come cheap as Jean-Francoise noted, they will likely be working for a large corporate or an MNC. So you will need to lure them away from their nice jobs…and into the gruelling world of start-ups. Very few start-ups will have the money to do this unless they are substantially funded by investors. From this you begin to realise a vicious circle exists, which can only be broken if the start-up has strong fundamentals namely, a robustly validated innovation/tech that will attract investments.

Government Support – Bane or Boon?

We live in a country where Government support for tech start-ups abound… remember the top 25% status mentioned earlier? Jean-Francois opines that this very abundance could be part of the problem. He feels that grants are actually detrimental to the growth of the start-up ecosystem as they only have short term impact.

While difficult to hear, what he is saying could very well be true. Back in 2016 I wrote an article in TheStar SMEBiz about how Malaysian start-ups compared with their US counterparts using the Inc Magazine’s Inc500 list of fastest growing private companies in the US from that year as comparison (see article here https://www.thestar.com.my/metro/smebiz/columns/2016/10/03/how-do-we-compare-with-the-us/). I noted that while there were many similarities between the two ecosystems, one stark difference was that a solid 78% of the Inc500 responded that they used their personal savings to start their businesses. This is followed by credit cards, family loans and angel capital (10%). Nobody from the Inc500 stated they received funds from the Government. If the US ecosystem is the benchmark, that key difference suggests Jean-Francois may be on to something.

Jean-Francois feels that start-ups should not rely on government support and that the Government’s role is only to build a private ecosystem that is self-sustainable. One concession he mentioned is that “… government needs to get involved in the beginning…”. Jean-Francois suggests grants only have short term impacts and that the Government should not touch start-ups and instead support organisations (such as accelerators) to create private sector success factors.

I find myself disagreeing a little with Jean-Francois on this point. Much of what I (strongly) believe in is that grants are appropriate, even necessary, at the earliest stages of a tech start-up’s development, when risks are at its highest and no private sector investor is willing to bear the risk. I feel that the private sector’s reluctance to invest at the earliest stages is a ‘market failure’ and that grants are an ‘intervention’ to address that failure. I revisit this position later when we discuss the role of angel investors in the Malaysian ecosystem.

The only way I can reconcile Jean-Francois’ position with mine is that (early stage) grants are only part of the picture and that resources should also be put towards the support of the peripheral ecosystem (of private sector led support). This is what Cradle has tried to do more of over the last 5 years, diversifying its support beyond that of grants to include other value added support which includes working with corporates and other ecosystem actors to enhance the sustainability of our tech start-ups. This is much in the same way MDEC is trying to do with its own corporate innovation programme launched in 2020.

The question is, what if grants were indeed impeding long term growth? What if we took the extreme approach and stopped all grants? Will we be rewarded by a more vibrant and sustainable ecosystem (albeit at the expense of very significant short term pain that will likely ensue)? More critically, will we fall behind the likes of Indonesia and Vietnam where there is very limited Government support in the form of grants and they are the better for it? Will it force higher quality solutions to emerge from the "low quality" that Jean-Francois says pervade the ecosystem today?

Ultimately, Jean-Francois submits that “Every ecosystem that thrives in creating scaleups is made up completely of private enterprises”. Clearly this is something for us to ponder.

Angels to the Rescue

Jean-Francois also talks about the critical role angel investors play in the development of the tech start-up ecosystem. This I feel is true as it is the hallmark of what separates the best ecosystems out there in the world. Case in point is Silicon Valley which owes much to the (angel) diaspora that came out of Hewlett Packard and Fairchild Semiconductor and later on the much venerated PayPal Mafia that have seeded much of what we see today. This process continues with engineers and executives who played critical roles in building Apple and Microsoft. Their money and critically, their insights, networks, business and technical expertise gained from building those enterprises have been key to creating the Valley we know today. It is this vital ingredient that has attracted money from all over the world and have driven the growth of the Valley into the hub for innovation.

He opines that grants effectively replace angel investors. While critical to catalyse growth it does very little in ensuring sustainability over the long run. In short, local start-ups are missing out on the sage advice, mentorship and coaching that angels are able to provide.

Perhaps what is missing from his analysis is an understanding of where we are today with regards to the local investing scene. The key differences that exist today that has prevented angels from being a significant force today can be summarised as follows (my views are based on the official community ie accredited angels and members of the Malaysian Business Angel Network (MBAN), the leading industry organisation representing angels in Malaysia):

1. While we have made significant inroads – growing (official accredited) angel investors from 56 in 2015 to over 200 today – it is still in its infancy;
2. Local angel investors largely come from non-technical backgrounds and did not start tech start-ups themselves. Think lawyers, brick and mortar execs/founders, professionals etc;
3. These accredited angels still largely invest conventionally ie in capital markets, property and other brick and mortar sectors. They are still attracted to less risky investments and investments they understand better;
4. Being from non-tech/non-start-up backgrounds mean that they are unable to leverage their experience and critically are unable to invest confidently in early stage start-ups ie they are unable to bring something to the table beyond just money that can help start-ups grow or at least navigate the treacherous start-up waters;
5. We do not have the overseas diaspora like Taiwan and India has… wait, I think we do, but they have not returned, or at least impacted, the local tech ecosystem in the same way they have done – like the so called Non-Resident Indians (NRI) and overseas based Taiwanese who have made their money in the US and elsewhere returning home with money and expertise to seed and support high tech ventures.

Of course this is changing fast. Both MBAN and Cradle have collaborated and funded angel education and awareness programmes since 2014 and more and more tech savvy angels are joining the fray.

Things are set to change but it will take time. Perhaps in another 5 years? The impact of Covid19 on this timeframe creates a bit of uncertainty – it may have accelerated the pace of angel investments due to the growing awareness of techs role as solutions to the pandemic’s issues OR it may have driven back interest as investors hold on to their cash and seek the safe haven of more conventional investments.

So what do we do in the meantime?

Clearly this makes for a strong case to continue with grants at least for the medium term to continue to fill the vacuum. This along with the approach I mentioned earlier, which is to provide grants while also building the peripheral private sector led ecosystem to help provide the necessary support to keep things going in the right direction.

Let us hope that the angels out there will rise to the challenge and set things right in the near future.

Takeways

Despite these challenges, Jean-Francoise is still bullish about Malaysia’s prospects. As he points out “Southeast Asia is Malaysia’s to grab. There’s nobody else doing it,” and goes on to explain that “Singapore doesn’t do it very well because it’s a city that’s different from the rest of Southeast Asia. Meanwhile, Indonesia’s focusing locally because it has a big enough market. So Malaysia has the potential to take over the region.”

These are powerful views indeed and I am inclined to believe him.

Nowhere else do we find an ecosystem driven by people who are more culturally aligned and sensitive than here in Malaysia. Our level of development, talent, tech and cost base makes us uniquely positioned to create solutions that have the potential for wide spread application across the 10 nations that make up ASEAN.

In that sense I agree with how the writer has pitched his article – that the Malaysian tech start-up ecosystem truly has the makings of greatness built into it. and that South East Asia is indeed us for the taking.

So I urge the private sector to join Cradle, MDEC, MaGIC and the other agencies out there to make this come true. The saying “It takes a village” rings true here.

PS : I invite discourse - all comments, disagreements, additions, corrections are welcome.

PPS : to Jean-Francois or Nathaniel Fetalvero, if you are reading this, I sincerely apologise if I have misquoted you in any way. If I did, it is unintended. Do let me know if there are any issues.

PPPS : I think "ability and quality of execution" is another factor which should have been in the original article. I feel that the ability of the founder to execute and to execute well not only within Malaysia but also across markets is also an important factor. This ability I believe comes with (again) depth of experience. If you have the experience to execute complex large scale projects across borders the more likely you are to be able to pull off a multi country roll out of your solution. Alternatively, you can try and "buy" the talent from somewhere... if you have the funds.