Why New Startup Creation Should Be Malaysia’s Top Priority

As an ecosystem builder, if I had the opportunity to offer a singularly powerful recommendation to policymakers, it would be this:To create 1,000 new tech startups in as short amount of time as possible. Here’s why.

The notion of a startup ecosystem is modelled after biological ecosystems such as the tropical rainforest, arguably the richest and most vibrant ecosystem on the planet. Rainforests account for 80% of all documented species on Earth. When it comes to startup ecosystems, if I wanted to find the Amazon equivalent (the rainforest, not the company), it would be Silicon Valley in the USA. Just as the Amazon is rich in species, ‘the Valley’ is rich in active startups, with some estimates ranging between 13,000 and 20,000.

Policymakers around the world have tried for decades to create startup ecosystems in their own countries by emulating ‘the Valley’. The traditional playbook has been to throw money into funding ecosystems, entrepreneur training and development, startup events, corporate innovation labs, accelerators, and pitch competitions. While there have been some successes, the overall results have been mixed. While well-intentioned, the only KPI that should have been obsessively tracked was how many new startups were being created.

Before we go further into why creating a large number of new startups is crucial for any startup ecosystem, let’s create a little context by looking at the evolution of the technology landscape in our own backyard.

The Malaysian technology sector has existed since 1996 with the creation of the Multimedia Super Corridor (MSC) by then and current Prime Minister Tun Dr Mahathir. In that era, global technology companies became rich by selling technology — hardware products, software solutions, and services. As a result of the MSC and its programmes, hundreds of MSC-status companies mushroomed as they capitalised on the early digitalisation of the Malaysian economy.

Between then and now, the global technology landscape evolved. Powered by the advent of the smartphone, an increase in venture funding, new growth accelerators like Y Combinator, and Lean Startup Methodology, a new breed of technology company emerged.

This new breed of tech startup was not just a technology company. Instead, it was a glorious marriage of a disruptive business model to a family of cutting- edge technologies. The chief characteristic of this new animal was like a laser- focus on speed-to-market and growth. Often, the profitability metric was something to be figured out only after almost monopolistic market dominance had been achieved.

Here in Malaysia circa 2013, the Malaysian government created an agency called the Malaysian Global Innovation & Creativity Centre (MaGIC), with Silicon Valley import Cheryl Yeoh as founding CEO. Like a new startup itself, MaGIC rolled out a slew of programmes and initiatives aiming to create a new breed of Malaysian startup entrepreneurs, inspired by the iconic founders of Uber, Airbnb, Dropbox, Grab, and many more.

In the three years that followed, the Malaysian startup ecosystem saw a spike in the number of new startups created, numbering in the hundreds. MaGIC’s ecosystem building efforts had played a key role here, but a crucial and essential factor behind this spike was the significant increase of pre-seed funding sources.

During that time, the number of early-stage VC funds increased significantly – most visible here was 500 Durians led by the indefatigable Khailee Ng. Equally prolific was government agency Cradle with their R M 150,000 (CI P150) pre-seed grant. It was also during this time that Malaysia saw regional VC interest for the first time, receiving regular visits from the likes of KK Fund, Jungle Ventures, East Ventures, and Golden Gate Ventures.

In the past two years, however, one gets a sense that the rate of new startup creation has slowed. Ecosystem builders will attest that they see less new faces at startup events. Local tech media do not seem to be featuring new startups as often as they once did, and regional VCs don’t seem to be visiting as often as before. There are several factors behind this slowdown, but we will explore them at a later time.

A 2018 ASEAN Startup Ecosystem report by e27 puts the number of tech startups in Malaysia at around 1,600 tech startups, which tallies with a similar estimate from MDEC. The same e27 report puts Singapore at 2,100 startups, but Enterprise Singapore reports a larger number of 4,300 tech startups. Given our larger population and a more diverse economy, there should be no question that Malaysia should have far more tech startups.

Numbers matter because startup ecosystems tend to be funnel-shaped. In order to see successful companies emerge at the narrow end of the funnel, large numbers of startups have to be generated at the mouth. This failure rate that can sometimes be as high as 90% is almost a natural law that is part and parcel of startup ecosystems. Creating this critical mass of new startups carries a risk that our private sector is either unable or unwilling to bear. Policymakers must see that cost as an investment will create more success stories, more activity, and ultimately result in a self-sustaining ecosystem.

Here are just five benefits that will arise if 1,000 new startups were created in our local ecosystem:

1) Greater Digital Option. Startups are , powerful engines of digital adoption because they compel consumers and businesses to use new technologies and innovative business models. By creating more tech startups, the nett effect will be a powerful engine of digital adoption driven by these new business models i.e. cutting-edge technology, better distribution, and improved user experience. It is essential to note the differences between tech startups and SMEs, most strikingly that the latter often become customers of the former and not the other way around.

2) Increased Funding Availability. With , an ecosystem thriving with 1,000 new startups, we don’t need to convince regional VCs to invest in Malaysia – they will come on their own accord thanks to the increased prospect of vibrant deal flow. Locally, we can expect to see more private sector VCs being established as capital-deploying opportunities abound. All of this increased funding will, in turn, create even more new startups.

3) Global Talent Draw. With 1,000 new startups in Malaysia, global talent will take notice. The main attraction for digital nomads and global tech talent is not the visa, but the opportunity of jobs and equity
options in these new startups. Locally, we will see more startup talent created from the experience of working in a startup; you cannot study entrepreneurship in school.

4) More Success Stories. Just by aT. increasing the number of startups, the odds of more success stories will jump significantly. Furthermore, in a broader ecosystem with more startups, failed startups will not go to waste; typically failed startups are either consumed by competitors, or the entrepreneurs and staff tend to redeploy themselves within the ecosystem. This collective experience and efficient use of entrepreneurial talent is one of the secrets of how Silicon Valley creates so many successful companies.

5) Economic Diversity. Creating 1,000 . new startups ensures that a broader number of industry verticals are engaged. This diversity of startups will drive more considerable impact on the economy at large because more sectors will be engaging with startups and the disruptive business models and technologies that they offer. ‘Create 1,000 new startups’ may sound like simplistic advice, and there are obviously many nuances to that. We cannot just label any SME as a tech startup. Tech startups are companies that must obsess on growth, while technology must power their business model significantly. They must have a goal of being VC-investible to power growth, and founders typically must have a view on a successful exit. In recent years, the startup ecosystems in Indonesia, Thailand, and Vietnam have already pulled ahead of our own. If Malaysia wants to compete for regional talent and funding, we need to urgently put in place policies and programmes that will directly and dramatically increase the number of new startups created.