Growing and Grooming the Local Talents in the SME Ecosystem

2022-09-28 /02:09 pm

Tham Lih Chung is the Co-founder and Chairman of Eatcosys, a multi-disciplinary company offering retail and fintech solutions to support businesses in their transformation journey and re-inventing business models for the next generation.

BusinessToday: How do Malaysian SMEs fare against their Southeast Asian counterparts in terms of innovation, digital technology adoption, investment, productivity growth, and overall economic contribution?

Tham: Overall, Malaysia’s entrepreneurial ecosystem fares relatively well compared to our regional peers (i.e. Indonesia, Thailand, Vietnam, Philippines and Singapore) considering that SMEs account for 97% of total businesses in Malaysia, generating over 38% of GDP, providing employment for over 7.3 million people in 2021. However, we still lag behind countries such as Singapore, Thailand, Philippines and even Vietnam in terms of digital adoption and digitalisation.

SMEs that have basic digitalisation in place require additional funds to further advance digitally and innovate technologically to scale their businesses. Fundings for scaling exercise is weakest in Malaysia and particularly challenging as SMEs and start-ups cannot access the capital market for more funds. Compared to most of our SEA counterparts, there is a limit to how much Malaysian SMEs can grow sustainably given our small population size. Many of our SMEs are unable to progress beyond Series A financing as it is almost impossible to grow their revenue by 10 – 30 times domestically (a key indicator to attract sophisticated investors in Series B and C) given our small market size. SMEs need to expand regionally to grow RM30 mil – RM60 mil in revenue which they lack funds and market access to do so.

To put things into perspective, the Indonesian Stock Exchange encourages start-ups such as Buka Lapak and GoTo to go for public listing, despite not recording profits, to gain more resources – funds, talents and market share. Buka Lapak raised approximately US$1.5 bil from its initial public offering (IPO) to grow and compete on the international market. Foreign Direct Investment (FDI) to Malaysia is comparatively lower against countries such as Singapore, Thailand, Vietnam, and Indonesia due to recent political instability and the looming recession. Again, SMEs are unable to invest in advanced technology and solutions due to insufficient funding, resulting in slower productivity growth. We, as a nation, will be stuck in an era of cheap labour if this persists.

Besides government support, established players such as GLCs, MNCs and privately owned conglomerates, too, play a critical role in enabling potential start-ups and innovative SMEs to compete regionally by investing funds and other resources while ensuring they are equipped to capitalise on the growing FDI to Asia.

BusinessToday: What are the factors that contribute to the widening of the digital gap, and how can these be bridged?

Tham: There are two fundamental issues that contribute to this phenomenon: a serious lack of digital mindset and culture among businesses in Malaysia, especially SMEs that have established themselves as traditional businesses.

BusinessToday: Many businesses, particularly SMEs, were not sustainable in the face of the pandemic and had to shut down. How has this phenomenon impacted investor confidence in local SMEs, and why?

Tham: Overall, local investor confidence has reduced only slightly based on on-ground sentiment in the ECF sector as some companies that raised funds through ECF platforms have folded and resulted in retail investors losing money. In spite of that, many SMEs and start-ups continue to leverage the ECF market as an additional channel to raise funds as well as gain brand visibility, creating more opportunities for retail investors to diversify their portfolios.

In fact, there has been a huge increase in the transactions, with more issuers listed and funds raised on ECF platforms. Having learned from their past lessons, retail investors are now better educated and equipped to invest in quality start-ups and SMEs. They are more cautious in their line of thoughts and investment considerations, as evidenced by the type of questions raised during ECF pitches. SME owners, too, learned the necessary skills to attract likely retail investors, deliver a winning pitch and successfully raise funds through ECF.

On the other hand, angel and institutional investors globally are always spoiled with choices and bigger opportunities given their funds size, and are unlikely to invest in conventional SMEs.

These investors evaluate SMEs and start-ups based on three (3) key factors: disruptive products, services or offerings; the ability of the founder/s and management team to articulate their vision and ambitions given that there is not much system put in place yet to run the company autonomously, which is an inherent issue that we have with SMEs and start-ups; growth and expansion potential in a shorter investment horizon (i.e. five (5) years).

What factors investors (i.e. venture capitalists, retail and angel investors) should consider prior to investing in SMEs?

Tham: Besides the aforementioned factors, venture capitalists (VCs) also assess the viability of SME investments based on available fund size, areas of expertise and the company’s scalability. Different venture capitalists (VCs) will have their own evaluation matrices focusing on Seed (range from RM300,000 – RM1 mil per investment), Series A and/or late-stage start-ups i.e. Series C. (Note: Companies in Series C category typically aim to raise USD50 mil and above)

The venture capital arm in Eatcosys also considers the growth potential of the industry, emerging trends that will last for 3 – 5 years, the prospective investor’s business roadmap for the next 3 – 5 years, the strength of the management team, and how the company will complement our existing ecosystem.

Internally, we break down the strength of the management into strength in selling the founder’s vision and brand story and strength in execution (i.e. selling the products or services). Personally, I believe that the founder’s ability to communicate his vision to his addressable market segments, coupled with the right execution strategy, is crucial to the success of a company. A founder who can convince others of his vision is likely to attract the right talent to jointly grow the company.

In terms of industries and trends, I’d advise exploring sectors or companies that are ESG (environmental, social and governance) compliance as well as those with technological or IR 4.0 components, such as automation, EduTech, BioTech, and HealthTech.

Separately, SMEs and start-ups planning to fundraise should note that VCs usually come in as cornerstone investors with ‘smart money’ – expertise, sharing of knowledge and ideas, network, financial and non-financial resources – and expect a discount in valuation compared to retail investors.

BusinessToday: What are the market and institutional factors that foster private investments in SMEs – and how does Eatcosys play a role in this?

Tham: To sum it up: The company’s competitive advantage against its counterparts; The growth potential of the company and the industry or sector; Untapped value creation potential; Emerging or latest trends in the industry; The abilities and ambition of the founder and management team.

Based on our experience, most of the SMEs are ill-prepared for fundraising – they lack a clearly defined business model, the ability to recognise untapped opportunities, advanced digitalisation, and a wide network or channels to distribute their products, services and brands.

Eatcosys is a one-stop integrated solutions provider fronted by a team of experts in various fields vital to the growth of retail businesses. We offer retail and financial solutions that assist or support SMEs and start-ups in re-defining their business models, enhancing their systems or processes and subsequently preparing them for fundraising through our SME accelerator arm (Alevate Solutions). Our recent investment in Fundnel Malaysia – part of Fundnel Group, SEA’s largest marketplace of alternative assets – enables us to leverage Fundnel’s regional network and widen the investor prospects for local SMEs. There is also the possibility of our venture capital arm (Fidelity Funding) taking a stake in businesses that fit into our ecosystem, such as those in automation, retail related solutions, advertising and media platforms solutions.

BusinessToday: What is Eatcosys formula for improving the prospects for SMEs (particularly the investee companies) and ensuring their business viability?

Tham: At Eatcosys, we focus on strengthening the three (3) key elements that ensure long-term viability of any businesses: revenue, profitability and cash flow. Businesses need all three (3) elements to succeed.

To that end, we’ve built Eatcosys in such a way that helps SMEs and start-ups build the above mentioned elements into their business by streamlining their entire business operations – from reducing operational costs and increasing revenue to assisting them in getting funding – while eliminating the need to engage multiple vendors and suppliers to fulfill different business functions. This way, it also ensures that the solutions insofar digital technologies provided integrate seamlessly with one another.

We also provide our investee companies with mentorship through Fidelity Funding and access to our network of more than 20,000 merchants, ranging from large enterprises to MSMEs across five (5) countries in the SEA region. As our management team comprises serial entrepreneurs from various backgrounds, we are able to empower investee companies with adequate peer support and our own real-life case studies on scaling start-ups to a group company.

Some of our investee companies include XTS Technologies specialising in robotics automation, Dadvance Agarwood Solutions specialising in biotech, adtech platform MyRodeo, fitness lifestyle app Heyjom, and alternative insurance distribution channel AXXESS. We supported them by providing strategic business counsel, retail marketing solutions, and access to our network of clients and investors for their respective market expansion or fundraising exercises. For instance, we recently assisted AXXESS in establishing partnership with Digi to launch SIGNAL, a unique takaful cum telecommunications plan.

Conservatively, valuation for these investee companies has increased by 30% respectively within 6 – 12 months since our participation in their business and fundraising exercises.

BusinessToday: As an established industry figure, what advice do you have for aspiring nvestors/entrepreneurs on setting up their business for success, increasing their chances of thriving in this burgeoning digital economy?

Tham: For entrepreneurs, dream big and plan your business for regional expansion from the very first day instead of positioning yourselves as local champions; design and create your products or services catering to regional markets. Only then can you attract the right talents, investor interest and subsequently funds from VCs and institutional investors. Malaysian entrepreneurs should not position themselves as local champions only given our domestic market size. They also need to
improve on their presentation skills and articulate their vision and ambitions for the company – a key skill that most Malaysians lack, unfortunately. De-learn and relearn to evolve alongside the business world; adopt a digital culture in the company; be a leader who listens to your stakeholders; and have the growth mindset (i.e. already planning for regional expansion).

For investors, don’t just invest in a company because of their potential to become a unicorn. Invest the time and resources in companies that demonstrate growth potential to be listed on Bursa Malaysia.

BusinessToday: What is the biggest challenge you faced thus far? How did you turn that challenge into an opportunity?

Tham: Personally, I consider the Malaysian brain drain phenomenon as one of my biggest challenges throughout my career in both corporate and entrepreneurial worlds. The issue can be traced back to as early as 2000 when the Organisation for Economic Co-operation and Development (OECD) recorded one out of ten graduates in Malaysia migrated abroad for better work opportunities.

As with other local companies, Eatcosys lacks local talent who can grow alongside the group company as the entrepreneurial landscape continues to evolve. It is also not financially viable for local companies to employ foreign talent considering the additional expenses and resources required for other purposes such as visa, accommodation and lifestyle arrangements.

However, there is an increasing number of qualified professionals venturing into entrepreneurship with their unique skill sets, insights and offerings. They contribute to a vibrant start-up scene locally and generate plentiful exciting collaborative opportunities in many forms, including investment, acquisition and joint venture.

So instead of depending solely on our internal staffing, the team in Eatcosys grows through strategic mergers and acquisitions and integration of suitable solutions providers into our ecosystem. This approach afforded us the added advantage of strengthening our group’s talent and capabilities, enhancing our portfolio of solutions, and notably the opportunity to advance local start-ups and our surrounding communities.