If there’s one trait in Malaysia’s tech scene that makes it stand out in Southeast Asia, it’s the heavy government involvement. Some characterize it as a top-heavy situation, where public agencies have an outsized presence, sapping some of the creativity that is needed in a startup’s earliest phases.
To gain a full view of Malaysia’s tech ecosystem, KrASIA spoke with Aaron Sarma, general partner of ScaleUp Malaysia, an accelerator that steers startups that have built their foundations and have the blueprints for something greater.
The following interview has been edited for brevity and clarity.
KrASIA (Kr): What was the motivation behind establishing ScaleUp Malaysia?
Aaron Sarma (AS): ScaleUp was founded in 2019. Our team was formed by entrepreneurs and founders. The way it happened was almost serendipitous.
I had just sold my business, Touristly, to AirAsia and was keeping my eyes open to spot things that I could do next. Doc Siva and Renuka Sena [now senior partners of ScaleUp Malaysia] started talking about the idea of forming an accelerator program.
At the same time, Andre Sequerah and Shanli Tay [now managing partners] were also transitioning out of their existing roles and looking for something new. Cradle Fund’s Xelia Tong would officially join the team as managing partner in February 2020. We felt like there was an opportunity in Malaysia’s emerging ecosystem to support up-and-coming startups.
Kr: What sort of help did startups in Malaysia need at the time?
AS: When we were speaking to entrepreneurs to understand the problems they encountered, a lot of it was their go-to-market strategy, regional expansion, and fundraising process.
The real gap in the ecosystem was not necessarily in the earliest stages because many players were already operating in that space. There are accelerators and government agencies doing a really good job there.
We saw a gap for companies that have achieved some level of traction. They have some degree of product-market fit, they have revenue, and they are either going to grow their company and become a regional success story in the tech scene, or they run the risk of becoming an SME that is unable to scale and raise capital. This is the space in which ScaleUp Malaysia offers help.
Kr: How would you describe Malaysia’s tech and investment space?
AS: Malaysia has had many fits and starts in its tech ecosystem. We were one of the earliest countries in Southeast Asia to do something in the space with the MSC [a national information and communications technology initiative]. There have been other grants from the government and affiliated agencies.
Our entrepreneurs have a good path to launch startups, but when it comes to growing and scaling to become a regional or global player, there are few success stories. Great founders from Malaysia may also end up in Singapore to build their businesses. ScaleUp Malaysia adds value and provides support to entrepreneurs. It could be coaching or mentorship, sharing knowledge about go-to-market strategies, or technology support. This is the gap in Malaysia’s ecosystem.
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Kr: What are some of the recent major developments in Malaysia’s tech sector?
AS: There are far too many governmental agencies in Malaysia, making it difficult for founders to navigate. We need to consolidate.
One of the more interesting things to happen in the last 12 to 18 months was the announcement of the Malaysia Digital Economy Blueprint. This is something that I am passionate about. In fact, I did a stint at MDEC [the Malaysia Digital Economy Corporation] to advise on this. It’s exciting that the government is taking the digital space seriously enough to have a national digital plan in place. The government now has a mandate to foster development for 5,000 startups in the region and raise five unicorns.
There was also the formation of MRANTI, which was the result of a merger between the two agencies under the Ministry of Science, Technology, and Innovation (Mosti), Technology Park Malaysia (TPM), and Malaysian Global Innovation and Creativity Center (MaGIC). It’s an R&D-focused accelerator of sorts.
Kr: Before ScaleUp Malaysia came into existence, was there a situation where more experienced entrepreneurs were training and incubating talent on their own terms, through their own private initiatives?
AS: Malaysia hasn’t had much of that “pay it forward” mentality, but the “iron sharpens iron” attitude is what builds great ecosystems. We’ve seen this in Silicon Valley and Singapore, and we’re starting to see it in Malaysia as well. Team members who have exited companies are coming back to grow new startups.
Back when I had my startup, Malaysia had accelerator programs run by the government, which is what everybody did at one point. Cradle Fund [an early-stage startup influencer incorporated under the Ministry of Finance] had a coaching program that was run by Doc Siva and Renuka Sena. MaGIC had its GAP accelerator. The “pay it forward” model is something that people never felt they had to do early on because they had a crutch from the government.
But to build a successful ecosystem in the long run, we need entrepreneurs who found exits to return as investors, trainers, or mentors and help new founders scale to the next stage.
Kr: What are the key differences in the outlook or objective of the government-run initiatives that you mentioned versus privately run programs?
AS: That dovetails with what ScaleUp Malaysia does. We primarily focus on Malaysian startups but not exclusively so.
Also, as opposed to a government accelerator, we have an investment mandate. We want to have skin in the game. We are invested in the success of the companies that we hold stakes in, which is why we take a very hands-on approach. Our six partners spend hours every week with our companies, trying to help them with their problems.
We must deliver value for our LPs as well. We are a commercial endeavor. We need to pick the right companies to invest in and work with them to 10x or 20x their growth.
Kr: ScaleUp Malaysia has been operating throughout the pandemic. What are some actions that you’ve seen Malaysian startups perform to weather the tough times?
AS: Every single startup has had to make some sort of pandemic response. Depending on the industry that they’re in, they might have done very different things. For example, one of our portfolio companies is the travel tech firm TixCarte, which had to make some painful decisions and let staff go. The idea was to reduce their spending as much as they could. Now that people are starting to travel again, TixCarte has had their best month in history. They’ve also adjusted their business model to grow and scale.
Another ScaleUp portfolio company is an edtech company called AOne. They offer a subscription program that involves tuition centers and learning centers, but they started supporting other services like a marketplace. Now, they are cash flow-positive and profitable. They’ve grown beyond Malaysia to Hong Kong, the Philippines, and Indonesia.
Resilient entrepreneurs who are smart realized a couple of things during the pandemic: they will have to look at their business models and make some difficult choices to sustain and survive. Some of them ended up in a much better position two years down the road. But those who sat on their hands had a tough couple of years.
Kr: Did the pandemic change how ScaleUp Malaysia operates?
AS: For our second and third cohorts, the investments were made completely virtually—that’s around 20 teams. We did not meet the teams. This opened our minds, and we accepted that we could invest in non-Malaysian companies. We could communicate remotely and make those investment decisions.
Kr: Can you explain ScaleUp Malaysia’s “Pegasus Model”?
AS: When we started ScaleUp Malaysia in 2019, we felt like companies were doing some scary things—they were raising a lot of capital and burning a lot of money. This was a macro trend. One thing that we wanted to do was help entrepreneurs refocus.
The Pegasus Model plays with the mythical idea of unicorns. We believe entrepreneurs should not be building growth for growth’s sake. We focus a lot on revenue generation and profit, or at least a path to profitability. The main idea is that business models must be sound. We can’t just raise capital with the hope that the money will be used to acquire business.
We spend a lot of time looking at business models, making sure the margins and cost structures make sense. There needs to be substance in a business.
Kr: How else is ScaleUp Malaysia different from other startup accelerators?
AS: The kind of interventions we perform for companies that already have some level of traction is very different from what others might do for a team that is figuring out their pitch deck. We let other great accelerators and programs deal with product development. We help with the business model, polishing up a startup’s positioning. ScaleUp ensures that cap tables and other documentation are in place. That way, when the team meets an institutional investor, they can have a productive and efficient conversation.
Startups like us because we focus on coaching. Every company in the program gets one of the ScaleUp partners as a coach. After we make an investment, we continue coaching for up to 24 months, while most accelerators last for three to four months. Even after a startup completes the program, we commit at least an hour each month to spend time with someone from the startup. We are like an invisible advisory team, which many founders have told us is the real value of ScaleUp’s program.
Kr: How have you dealt with creative differences with the founders of ScaleUp’s portfolio companies?
AS: We haven’t really had major creative differences. We don’t necessarily see ourselves as people who tell others what to do. I’m a believer in the Socratic method, where you ask questions and help others think through things. We see our role as providing a framework for thinking through different challenges.
A great entrepreneur has a clear sense of vision. That vision may be clouded or there could be some distractions along the way. ScaleUp helps weed out those distractions. Ultimately, the entrepreneurs need to know exactly where they want to go. If we end up driving that vision, then there is a problem in the pursuit. We’re here to enable, empower, and bring focus. But it is up to the entrepreneurs to set the direction for their own companies.
Kr: What does ScaleUp Malaysia look for in applicants?
AS: We receive applications from more than 200 companies each time we announce recruitment for a new cohort. During the last call for our third cohort, there were applications from 22 countries. I mentioned that there needs to be some degree of traction for the product.
We perform deep dives into the products of the startups that apply, just to make sure the products do what is promised. Another thing that is important to us is the marketplace. There needs to be a large, attractive market that we want to be a part of or capture. We need to concur that there’s considerable potential.
The third thing is that we look for entrepreneurs who are passionate, driven, and have a clear vision. They also need to be curious and want to learn—there needs to be personal growth. The strongest entrepreneurs who have worked with us are people who completed the program as very different people compared with who they were when they started.
ScaleUp is on the cap table. Being invested in a company is like having a long relationship, almost like a marriage. Divorce can be very, very painful. An unhappy relationship can be equally painful. We want to make sure that we have the right chemistry.
Kr: What impact have the startups in ScaleUp Malaysia’s first two cohorts made on the country’s startup ecosystem?
AS: We’ve invested in more than 30 startups so far. Let’s talk about one example. One of the companies in our first cohort, IIMPACT, started out by providing a loyalty program. At first, we thought they would get squashed by existing providers who offered similar services with way more traction. But we looked more closely at their product and realized it was solid. The team had spent time building pipes to government agencies, payment solution providers, and telco companies.
It felt over-engineered, but then we realized we could flip the model. What if we could sell this to other companies? Now, IIMPACT’s product is its API, which can turn any app into a super app. Their transaction volume last year was to the tune of USD 380 million. They also became the first Malaysian company to receive an investment from Sequoia Surge.
We’re really excited about IIMPACT because through ScaleUp’s program and coaching, they were able to transform their business, and now they’re on a phenomenal path.
Kr: We’ve heard that you’re the resident hipster and coffee snob of ScaleUp Malaysia. What’s your morning coffee routine?
AS: Ha! I make filter coffee in the morning. I like Ethiopian beans—they’re usually Guji.