A traditionalist's take on tech entrepreneurship

By Endeavor Malaysia September 12, 2016

Stumbling early in life will better equip entrepreneurs to run their businesses
Businesses today are fueled by a system of irrational capital

In THE late 90s at the height of the Dotcom boom, many smart and driven Malaysians flocked to entrepreneurship eager to make something good out of the Asian Financial Crisis that struck the region. Young, impassioned entrepreneurs relished the wealth of ideas and possibilities flowing out of Silicon Valley. They crafted plans to build internet businesses and aspired to be the next Southeast Asian Pets.com.

Afzal Abdul Rahim (pic above) was one of them.

“I wanted to build this web optimization platform called Cantaloupe, where every time you clicked on a page, we would pay you 1 USD per click, and with that we thought we would make 100 million dollars by the end of the year.”

It was, however, a fantasy reinforced at weekly community gatherings where like-minded entrepreneurs would exchange business ideas and fish for validation. Afzal recalls, “We’d meet people at these First Tuesday, Second Friday gatherings who’d say: Hey my name is X and Y, we are a two-man company doing web development but we’ll be a thousand by the end of the year. And we would say in return: Hey, that’s great!”

This culture of constant mutual endorsement and backslapping consequently created an insulated environment, blinding entrepreneurs to commercial realities.

“The problem was that we created this bubble where there was little to no connection between business indicators and real measures of success. We drank each other’s Kool Aid, and we bought each other’s bullshit.”

Afzal was fortunate enough to experience an awakening, which he attributes to the tough love he received from his mentors, particularly his friend’s father, “your typical Chinese Uncle who ran a traditional business, who bootstrapped and counted every cent on his way up to success”. This inspired Afzal to approach business from a more grounded perspective.

“If we had been given a dose of reality [at these gatherings] - more people would have been more thoughtful about the way they built their businesses, before they mortgaged their houses and gave up professional careers”, Afzal laments. “Our country lost good, motivated people, who would never visit entrepreneurship again and went back to being professionals because no one gave them tough love.”

Afzal sees history repeating itself within the current Malaysian startup ecosystem – with the only differences now being the increased influx of capital into the region, as well as the wider visibility of entrepreneurship and tech businesses as a whole (thanks to the age of Instagram and TechCrunch).

School of hard knocks
Stumbling early on in life and having near-death experiences will better equip entrepreneurs to run their businesses. This is the first principle of being a traditional entrepreneur, according to Afzal.

“In the past, you’d really have to make it or break it in three to six months because your savings would run out. You would know what it is like to camp out in a customer’s office for six hours in Pandamaran for a two and a half thousand ringgit check, and you would do it, because otherwise, you wouldn’t make payroll.”

Afzal believes that, fundamentally, businesses should be funded by the market. These days, he worries that entrepreneurs are more preoccupied with fundraising and growing their valuations. “I do not like the way that capitalization tables are run. All this Series A, Series B bullshit – entrepreneurs should be spending more time growing their businesses.”

With the amount of support from within the entrepreneurial ecosystem in Malaysia, he fears that tech entrepreneurs are being sheltered from the full realities of entrepreneurship. Such an illusion produces a generation of entrepreneurs that may not have the basic skill sets and acumen to run an actual business. In particular, it inhibits their ability to manage cash flow - the most important tenet of building a business.

“If they don’t have the basics of cash flow management, if they’re running a business with a spreadsheet or a concept or model, I think it affects their commercial radar.”

A traditionalist's take on tech entrepreneurship

Irrational capital
With the sudden influx of capital and the promise of accelerated growth and innovation, local entrepreneurs are moving away from the bootstrapping, traditionalist approach. Instead, businesses today are fueled by a system of irrational capital, where entrepreneurs have access to large sums of capital at exaggerated valuations.

“Entrepreneurs [today] don’t get it because they’ve been given wads of cash based on an inflated business plan - they’re only ever concerned about running out of cash.”

The consequences of this new trend are serious. Not only do startups enter the game without fully experiencing entrepreneurship, they are lulled into a false sense of security. This dependency on external, available funds and support has fundamentally altered how entrepreneurs think about their business. Afzal believes that this paradigm shift is dangerous.

“They tie their progress to where they are in the funding cycle as opposed to whether they are making money or what they should be doing with their customers”, he says. “They’ve accepted the premise that fundraising is building a business. It is not.”

Additionally, adopting this framework allows entrepreneurs to no longer chase long-term sustainable businesses but rather, to be entranced by valuations and a lucrative exit. Afzal believes the best entrepreneurs build strong, high-impact businesses that last.

“The motivation should be a lot more than just making money; it is about building businesses that solve real problems. It is about building businesses that matter.”

Acquired market share & rampant expansion
Besides the shift in focus towards fundraising, the rise of irrational capital also leads to rampant, pre-mature expansion. The strategy shifts to buying up market share with this excess capital.

As a result, startups with barely any market or product validation are obsessed with burning cash (they don’t have) to tap into foreign markets – a problem further exacerbated when they have little to no understanding of local context, replicating existing business models wholesale.

Afzal finds this approach a dubious gamble at best.

“Whether it’s Uber subsidising their taxi rides or Lazada subsidizing the marketplace [with discounts], people end up with artificial market share and artificial market validation.” Acquiring market share should be the outcome of the business model and not the model itself.

This approach has long plagued the regional tech scene. “Entrepreneurs are fixated on expanding their operations prematurely, which distracts them from the stuff that actually matters - strengthening their business in their existing core markets.”

“This will keep on happening as long as irrational capital exists. But it will soon diminish at some point,” Afzal adds. And maybe he’s right; we’re already seeing signs.

We are not Silicon Valley - Yet

In Asean, history has shown that the nature of entrepreneurship here is one borne out of local necessity. This is especially true within less urban areas which often lack opportunities, infrastructure and support. When contrasted to the style of entrepreneurship from ‘Silicon Valley’, there are obvious differences in the way in which entrepreneurs came to be. So the immediate adoption of the ‘Silicon Valley’ way of things may not be a step in the right direction.

“That [Silicon Valley] model cannot be replicated, least of all here in Malaysia”, says Afzal. He argues that we have yet to have proper infrastructure or policies in place to ensure a healthy and mature ecosystem for talent to support and thrive within that system.

Instead, Afzal posits that the opportunity here is local context and cites Grab as a winning example of a company that seized the opportunity to localize business models.

“But how many Grabs are we going to see?” He hopes there will be more.

A traditionalist's take on tech entrepreneurship

Entrepreneurship as a lifestyle
While it is still uncertain as to whether the new generation of startups will experience a situation similar to the Dotcom Bubble, there is a fascination, and perhaps, a glorification of entrepreneurship these days. So what compels people towards this accelerated style of enterprise?

“It’s not the appeal of accelerated growth of their businesses - it’s the younger generation rejecting the traditional employer-employee relationship model.” Call him old school or a purist per se, but Afzal was never an entrepreneur with glamorous intent.

“A business is a business. It’s not glamorous. It’s glamorous when it pays dividends and it affords you a glamorous lifestyle but it has to be hard work, it’s not glamorous doing it.”

“And maybe this is a little bit unfair, but more often than not, the motivation to be an entrepreneur these days is to look good amongst peers.“ Afzal observes that many young entrepreneurs believe they are what they are not, simply through the habit of distilling information and internalizing what they want to hear.

Not all is bleak for Gen Y entrepreneurs. Having access to a wealth of information is a game changer that Afzal believes the new generation ought to capitalize on. If young people venture out into the world to start businesses with the intent of solving real problems and find that they do succeed, it is still ultimately a net positive.

On mentoring
Afzal returns to the idea of tough love, the one missing link that caused the Dotcom Bubble to burst in Malaysia, and explains why he constantly plays devil’s advocate to entrepreneurs, ensuring that they get the dose of reality many before them never had.

What can be done to steer the new generation of entrepreneurs back on track?

“By giving them tough love. By giving them the much needed exposure to traditional entrepreneurship and running a business. By placing a mirror up to their dreams, ideas and what they’ve accepted in their assumptions, as to why it may not be robust, or artificial, or off-skew, or off-tangent.”

The motivation to offer grounded feedback is exactly what attracted Afzal and many other seasoned entrepreneurs to launch Endeavor in Malaysia, in addition to giving back to the community of entrepreneurs. “The board members, the mentors and the team get nothing out of Endeavor other than seeing the entrepreneurs succeed.”

After all that has been said, what does Afzal know now that he wished he’d known back then?

“I shouldn't have questioned my gut feel so much. I should have been more dominating and less preoccupied about keeping people around me happy.”

*The opinions expressed in this article are those of the subject and do not necessarily reflect the views of Endeavor Malaysia.