Startups Are Great, But Scale-ups Matter Too
Updated: Jan 16, 2021
Endeavor Entrepreneur Tuan EE Loi (Founder & Managing Director of Holstein Milk)
While most of Kuala Lumpur is still asleep, the quiet hills of Bandar Muadzam Shah, Pahang begin stirring to life. Loi Tuan Ee’s farmers rise before the break of dawn to tend to his 3000-strong herd, preparing them for their first milking session at 6 AM. The Holstein cows or “ladies”, as Loi calls them, are then mustered along 600-acres of luscious, rolling grasslands to feed for the rest of the day.
This imagery has long been associated with dairy farming, often painting the industry as slow, laborious, and reflective of a romantic, bygone era.
Now, contrast that with your average Internet business sprouting out of Kuala Lumpur, promising to be the next “Uber for X”, instantly meeting demand with a single click or touch. It is probably a lot easier to get excited about disruptive tech startups than dairy farming, a business that is as old as agriculture itself.
But then you spend an hour with Loi, and you realize that his business is actually quite special.
For one, Farm Fresh prides itself in providing its customers with some of the freshest milk available on the market, ensuring that the milk moves from the farm to your neighborhood grocery shelves in 48 hours.
Second, Farm Fresh employs over 230 people and has enjoyed an average revenue growth of 75% annually since they started in 2009. Today, they constitute 20% of Peninsular Malaysia’s total milk production. That is an impressive growth track for any business.
Above all, what was particularly striking about Loi was that Farm Fresh was not an opportunistic venture that he chose to undertake because he had easy access to capital, or because he wanted to replicate a model that worked in Silicon Valley.
Farm Fresh was built on the premise of solving a real problem: helping Malaysians gain access to 100% natural, fresh local milk.
And yet, within the context of today’s Malaysian entrepreneurial ecosystem, one cannot help but feel that Loi and his scale-up peers seem a bit like the unloved children of the ecosystem, overlooked in favor of their younger, sexier tech startup siblings.
STARTUPS VS. SCALE-UPS
Startups are commonly thought of as new, fast-growing businesses that are typically high-risk entrepreneurial ventures.
However, society often uses the catchall term “entrepreneurship” when describing or referring specifically to startups and/or tech companies.
This can be problematic because it alienates entrepreneurs and businesses that are non-tech and/or are past the startup stage. Often, this results in government and private sector enthusiastically building policies and support around “entrepreneurship” (read: early stage tech startups), while institutionally excluding scale-ups from most of the conversation.
In an emerging market where non-tech companies and scale-ups are the bread and butter of the economy, this is a tremendous loss of opportunity.
This is because research has shown that scale-ups are the ones that will have a lasting impact on our economy: creating jobs, generating wealth and affecting communities. As role models and mentors, scale-up founders have also proven to have a much more powerful effect on local ecosystems.
Scale-ups have grown past the survival stage and are a lot less in flux, demonstrating clear product/market validation and strong revenue growth. They have found their purpose and reason for existence, and are now looking to accelerate their growth.
Given such a large contribution scale-ups make to the economy, should we not be more focused on supporting and nurturing these groups of entrepreneurs?
A STARTUP-CENTRIC ECOSYSTEM
As the government, private sector, and the public grow increasingly aware of the importance of entrepreneurship, the ecosystem in Malaysia has never felt as vibrant nor as accommodating to passionate individuals with the right ideas and fervor to turn them into reality. There has probably never been a better time to start a business.
However, if you are an early-stage tech entrepreneur with a consumer-facing business, you receive a disproportionate amount of support compared to anyone else that is doing something deemed “less sexy”.
When we first started scoping out the ecosystem during the early days of Endeavor Malaysia, we discovered that there were over 100 entities and programs including government agencies, investors, accelerators, incubators, and entrepreneur support programs that focused primarily on developing early-stage companies.
The entrepreneurial ecosystem, both public and private, has somehow evolved into startups being the center of their interests, based on the core belief that more businesses = stronger economies.
But is that really true, and how much has this benefited the country as a whole? As it turns out, more businesses do not necessarily mean more economic growth.
Let us not forget that in Malaysia, the backbone of our economy still lies in the traditional, non-tech businesses — which contrary to popular belief — has tons of growth potential.
At Endeavor, we’ve discovered that scaffolding, tiling, semiconductor testing companies, and businesses like Loi’s have shown as much, if not greater growth potential than your average Malaysian tech startup.
At the end of the day, as much as we are trying to create a conducive environment for the next Grab, we should also not exclude the future AirAsia’s and Karex’s from being part of the conversation.
SO HOW CAN WE HELP SCALE-UPS BETTER?
1) Better access to capital (equity & debt)
Although there is significant capital in the ecosystem, most of it is currently skewed heavily in favor of early stage tech businesses. We need to do a far better job at helping Malaysian businesses that are scaling (especially those outside of tech) gain access to growth capital.
Outside of private capital from high net worth individuals, there is only a small amount of institutional equity capital available for non-tech growth stage businesses in Malaysia – these businesses typically fall outside of the mandate of VCs, and often do not yet come within the minimum cheque sizes of the larger private equity funds.
Often, exciting growth potential and product development for these companies are looked upon by banks and lenders as far less important. Without a strong historical track record, most of these businesses are also unable to source debt capital for growth.
Bridging this funding gap is key in ensuring that the growth efforts of high-potential scale-up businesses are not hampered.
2) Help them attract, hire and grow talent
Scale-ups also struggle to attract and hire talent (particularly at senior levels) to support their rapid rate of growth, which can often become a major stumbling block for progress.
This is largely due to the misconception that working for an entrepreneurial venture is risky and less rewarding from a career-building standpoint.
In reality, a lot of high-growth scale-ups offer talented individuals an amazing opportunity to lead a fulfilling and rewarding career (often, more financially attractive over the long-run), while sacrificing little to none of the perks of working for a large corporate. Companies like Feruni Ceramiche, a local tiling company, are trying to drive change in the way scale-ups are perceived.
Additionally, as a business scales, the organization itself becomes significantly more complex – the challenges of growing and retaining talent at 25 employees is vastly different from one at a 100. It’s no surprise then that at Endeavor Malaysia, one of the most common challenges we find ourselves working with our entrepreneurs on is organizational development.
Helping leaders within these scale-ups hire, grow and retain key talent within their organizations will be critical to them being able to sustain growth and fully realize the potential of their businesses.
3) Less fragmented support ecosystem
We have an extensive entrepreneur support ecosystem (some would argue a little too extensive), and that is not necessarily a good thing. In fact, most scale-ups that we work with find navigating the fragmented public and private support ecosystems confusing and tiresome, often leading them to avoid exploring any of the options provided.
Particularly in the public sector, growth-stage entrepreneurs would be much better served by a single point of contact that coordinates services and support across the entire spectrum, rather than having to deal with a different agency and initiative for different kinds of support.
If we are serious about getting scale-ups to fully utilize the range of incentives and aid we have put in place to support them, then we should make it as simple as possible for them to gain access to it.
SHIFTING FOCUS TO SCALE-UPS
At Endeavor, we are incredibly selective about the entrepreneurs we support. They go through several stages of selection by various stakeholders before they are given the Endeavor badge.
This philosophy stems from the understanding that, with limited resources, we have opted to invest in those that we think have the highest likelihood of entrepreneurial success and subsequently the biggest impact on our economy and local ecosystem.
There is a real need to single out and support scale-ups who are out there to solve problems and that have the most potential to grow.
This is starting to happen all over the world – and we are excited to see international governments, independent organizations and the private sector alike working towards supporting scale-ups.
Now is the time for us to pay attention to scale-ups in Malaysia too.