The makings of greatness: How Malaysia can become a top-tier startup ecosystem

December 21, 2020

Malaysia is well-known for a number of things, from its wide variety of delicious cuisines to the pristine white sands of its numerous beaches.

And according to a report by innovation policy advisor Startup Genome, it could soon also be known as a top-tier startup ecosystem. In its Global Startup Ecosystem Report 2020, Startup Genome ranked Malaysian capital Kuala Lumpur as the 11th emerging startup ecosystem in the world.

“What we’ve seen in the last five years is a really rapid growth of the startup ecosystem in the country,” says Startup Genome founder and CEO Jean-Francois Gauthier. “It’s starting to become even bigger than some of the top 30 startup ecosystems, and that was not the case when we started working with the Malaysian Global Innovation and Creativity Centre in 2015.”

An ideal place to start

Malaysia is the birthplace of a number of big-name startups, including used-car marketplace Carsome and video-streaming service Iflix. Regional ride-sharing giant Grab also started out in the country as MyTeksi in 2012 before moving to neighboring Singapore in 2014.

And it’s easy to see why. In 2019, Malaysian startups raised a total of US$226 million, with approximately US$99 million of that going into early-stage funding. Startup Genome’s report positioned Kuala Lumpur as an ideal location for startup incubation, citing low costs, high quality of living and progressive talent, fast-tracked visas, and robust government support as prime reasons for entrepreneurs to consider.

The country is known as one of the pioneering trailblazers for Southeast Asia’s digital economy. It’s one of the first countries in the region to establish a special economic zone for high-tech businesses, developing one in central-southern Selangor in 1997. Since then, Malaysia has continued to develop itself as a top tech destination for local and regional startups alike.

The Malaysia Digital Economy Corporation (MDEC), for instance, has launched several initiatives such as the Global Acceleration and Innovation Network program, which aims to skyrocket local tech companies onto the global stage. Since it was established in 2015, the program has helped over 130 participant companies generate a collective US$1 billion in revenue. The program’s Malaysia Digital Hub initiative also helps supercharge local co-working spaces with capabilities so they can enable startups to unlock their potential. Then in 2017, the government agency launched the Malaysia Tech Entrepreneur Program, offering foreign entrepreneurs visa passes to attract them to set up businesses in the country.

Other government initiatives, such as the Cradle Investment Program, also offer direct financial support to Malaysian startups.

Bottlenecks in scaling

But although it’s a good place to launch a business, Malaysia still has a long way to go before it can stake its claim as Southeast Asia’s startup hub.

“Malaysia is definitely in the top 25% worldwide in terms of the range of policies and the aggressiveness of the government policies, which really fuels its growth,” says Gauthier. “But while they’ve been very effective, they’re still very much early-stage policies.”

According to data from Startup Genome, while Malaysia sees a good amount of local startups emerging and a fairly healthy amount of early-stage funding coming in, it’s seeing a large gap in the number of scaleups valued at over US$100 million compared to similar ecosystems around the world. Gauthier attributes this to local founders “not seeking regional dominance.”

“When startups start going outside of their country really quickly, we see that they grow twice as fast as others,” he explains. “But the culture of the investors, accelerators, and founders in Malaysia is to start local, when they should instead start in [both] Malaysia and Indonesia immediately. If you want to create Southeast Asia-leading innovation, you need to start working outside of Malaysia right away.”

Another gap Gauthier has observed is in the country’s deep-tech talent funnel. Though Malaysia has no shortage of engineering talent, a large number of them become employees instead of starting up businesses of their own.

With more local engineers taking high-paying jobs at multinational corporations, a larger proportion of Malaysian founders are “soft-skill people” – essentially business people who have to pay to hire coders instead of being able to do the coding on their own. According to Gauthier, this leads to more startups creating “simple first products instead of more complex ones.”

“You don’t have [experienced] C-levels in marketing and sales who are based in Kuala Lumpur to tell others how to scale from US$1 million in revenue to US$200 million in revenue,” adds Gauthier. He contrasts this to what had happened in the early days of Silicon Valley, where senior executives at top tech companies like Google went on to advise the teams of smaller upstarts such as Square and Twitter to accelerate their growth.

“That’s why there’s a high number of startups but a low level of innovation quality [in Malaysia],” he argues.

Power to the private sector

Despite the challenges, Gauthier is still bullish about the country’s prospects as a startup ecosystem.

“Southeast Asia is Malaysia’s to grab. There’s nobody else doing it,” he claims. “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.”

However, startups shouldn’t rely on government support to do this. The ability to achieve that goal, Gauthier argues, is in the hands of the private sector.

“The role of the government is to build a private ecosystem that is self-sustainable,” he says.

Gauthier adds that government support in the form of grants, which may be beneficial in the short term, are actually detrimental to the growth of a startup ecosystem.

“Grants replace angel investors, but angels have the most important role: They come with business expertise and have been entrepreneurs themselves,” he explains. As veterans of their fields in their own rights, angel investors are often able to not only assist startup founders with gaining capital, but also help introduce them to investment or business opportunities.

A healthy ecosystem, Gauthier explains, is one in which angels are able to grow from becoming mentors to startups and to continue imparting their knowledge – along with their capital – to the next generations of entrepreneurs.

“Every ecosystem that thrives in creating scaleups is made up completely of private enterprises,” Gauthier says. “The government needs to get involved in the beginning, but always with the goal of creating private sector success factors, such as funding accelerators. The government should not touch the startups; it should support the support organizations.”

MDEC echoes Gauthier’s views. In early 2020, the government agency initiated a corporate innovation program to encourage local corporations to invest in and nurture local upstarts. To date, MDEC has engaged 66 corporate partners to enable this, including China-headquartered technology firm Huawei and Silicon Valley stalwart Microsoft.

With MDEC driving digital transformation by empowering Malaysians with digital skills, enabling digitally-powered businesses, and driving digital investments, Malaysia is poised to achieve its bold aspirations of achieving Malaysia 5.0 and becoming the “heart of digital ASEAN.”

Learn more about the Malaysia Digital Economy Corporation on its website.

This content was produced by Tech in Asia Studios, which connects brands with Asia’s tech community. Learn more about partnering with Tech in Asia Studios.