The Search for Startups
The Search for Startups is an ongoing series on what helps and discourages startup culture. This article will focus on the Malaysia startups boom and what we can learn from it.
Malaysia has proved itself to be in the top 10-20% best countries for startups. Malaysian startups have proven to be some of the most successful on average. Yet looking at total investments into startups Malaysia lags behind all of its neighbors. How did these seemingly cash strapped Malaysian startups hit it big?
Through strong human capital, strong innovation in improving how things work and strong networking skills and connections Malaysian startups have overcome the huge hurdles in front of them. But there are still challenges that lie ahead. No matter where we are we can learn from Malaysia’s strengths and weaknesses in order to grow and flourish startup culture everywhere.
Handicaps and issues
Malaysian startups face a tough challenge. Malaysia only invests just under 400 billion USD a year in its startups. Meanwhile Indonesia invests about 5.6 billion USD, over 14 times more despite having its population only 8 times larger.
Taking into account the over 3000 startups present in Malaysia today that leaves a total of about only 13 thousand USD per startup. This seems like a lot and it is for startups just setting up. However in order for these startups to ever have a chance at making it big they need a lot more income.
Even in countries which are fairly behind Malaysia economically like Vietnam, startups have found much easier access to capital. This increased capital allows new startups to take more risks and be more innovative. This increased innovation in turn increases the amount of startups making it big by dominating a new market or technology.
Alongside this Malaysian startups have much less access to market. With only 32 million residents most of it’s neighbors like Thailand or Indonesia dwarf it with 2-8 times the population. The increased domestic market means more consumers available to the startups without having to deal with the hassle of international regulations and different laws.
In terms of access to the international market Malaysia pales in comparison to Singapore. The Singaporean government encourages and makes international market access easy for Singaporean startups. Meanwhile Malaysia’s startups suffer from less international agreements and government policies making international trade easier. With all these roadblocks how are Malaysian startups doing?
The Malaysia startup boom
From the big names like Grab and Carsome to smaller names like Boost, Malaysia is punching above its weight in South East Asia. These three companies alone value at 40 billion USD, 1.3 billion USD and 320 million USD respectively. These companies are quickly gaining a foothold all over Malaysia and even all over South East Asia.
Even when companies like Grab shifted their headquarters over to Singapore much of their activity was left in Malaysia continuing to benefit it. These companies showed a clear ability for Malaysian startups to compete and grow in such a competitive climate.
In the micro level, the average return on investment was higher showing a clear increase in profitability with Malaysian startups. With a lack of easy funding they quickly made up with more profitable business models allowing them to gain the capital necessary to grow.
In terms of levels of entrepreneurship the recent Global Entrepreneurship Index gave Malaysia a score of 32.7, above the rest of South East Asia excluding Singapore. But what was filling this gap in investment, how did Malaysia succeed?
The keys to success
The Global Entrepreneurship Index has broken up startup culture into 14 different aspects. Malaysia excels in 3 of these aspects of startup culture, is average in 9 and lacks in 2. The main strengths of Malaysia lie in it’s human capital, process innovation and networking.
Human capital is the value of a person’s experience and skills. In this category Malaysia scored a 9/10. In terms of education, Malaysia consistently ranks around 15-30th best education systems in the world. Around 5.5 million Malaysians currently hold a university degree making up about 21% of the working population.
This education level combined with high employment rates for university graduates allows their experience to grow as well. This increased education and experience in modern jobs made Malaysia’s startups more susceptible to new technology and more capable of innovating with cutting edge tech.
With this human capital there came process innovation. Innovation in improving the way things are done, in factories for example that is better production, in apps that could be streamlining services. Because Malaysian companies lacked ease investment opportunities they had to make a more profitable business model.
This search for more profitability made startups more innovative in making their companies more efficient and innovative. Companies like Carsome (which is a platform for selling used cars) would be quick to take advantage of new and different ecommerce platforms to partner with and learn from.
On top of this networking has shown itself as a strength of Malaysian startups. Ironically the lack of investment opportunities combined with an innovative population made Malaysian startups more adept at networking. Building the skills from the start allowed the startups to be better off when facing foreign investors. Once having built those networking skills and connections it was easier to leverage those with other groups and investors.
The road ahead
Malaysian startups culture is still lacking, not just ease of investment but also in product innovation and increasing sales growth.
Lack of investment is a clear issue, you can delve deep into it with our other article on how real estate investment killing startup culture. In summary however the lack of easy startup capital makes startups less willing to take risks. This is a good thing as it keeps the company from going to crazy but at the same time it limits innovation as people are less willing to take big risks on new product ideas.
This leads into the second issue, a lack of product innovation. The risk averse and well planned out nature of Malaysian startup culture means a lower willingness to risk it all on a brand new idea. Instead many choose to focus on improving the way things are done and building off existing ideas present in the world. To achieve world class startup culture both types of innovation have to be encouraged.
Finally a focus on profitability by Malaysian firms cuts back at the potential sales growth. Companies like Amazon were not profitable for the first decade of their existence choosing instead to focus on sales growth. They were able to do this with an increased risk tolerance and a easier access to investment to make up for the constant losses. Quick Sales growth meant quickly cornering a market and establishing market share to profit off later down the line.
Malaysia’s startup success has shown the necessity of strong human capital, process innovation and networking capabilities. With these skills many startups have overcome all the huge hurdles but in order to foster more innovation and growth we need more. More risk tolerance, more product innovation and more ease of gaining investments. Malaysia will continue to be a startup success, but we are yet to see if it can grow even further.
Check out the other article from the Search for Startups series: How a Focus on Real Estate is Killing Startup Culture.