Malaysians often feel short-changed when they compare themselves to their Singaporean peers, who are better paid despite being equally competent, well-educated and having skills on par with talent in Singapore and other developed nations, he said.

But starved of venture-capital (VC) funding and similar investments, experts say many Malaysian start-ups don’t have the luxury of scaling or building their businesses with a long-term growth model and are instead compelled to quickly turn a profit.

This confluence of factors has created a breeding ground in Malaysia for innovative start-ups that become rapidly profitable, yet do not attract VC funds. But observers say a turning point may be approaching as investors’ playbooks change.

Shah Zeck, CEO of Big Dataworks, a big-data solutions provider, can attest to the vast amounts of opportunities in Malaysia that small firms like his can tap.

Big Dataworks not only digitalised government compliance at national corporate regulator the Companies Commission of Malaysia, it established an online portal allowing the public to buy data from the regulator without having to turn up in person for “counter services”.

While many governments globally have automated their services, Malaysia still has plenty of bureaucracy desperately in need of a digital revamp, Zeck says.

Getting funding to grow is tricky, however, as there is no centralised hub to connect investors with Malaysian start-ups.

“You have to go out and look for them. Unless, through the magic of public relations, you’re discovered,” Zeck said.

Home-grown companies like Big Dataworks are driving profits as Malaysia’s government looks to improve efficiency in the public sector, said Nordin Abdullah, who chairs the Malaysia Global Business Forum.

‘Bootstrapping’ business approach

The number of people enrolling in tertiary education in Malaysia has exploded over the past three decades, with the proportion of the workforce holding a university degree or equivalent rising to more than 30 per cent from about 6 per cent previously, according to Malaysia’s Khazanah Research Institute (KRI).

Yet half of all fresh graduates are on a starting salary of less than 2,000 ringgit (US$424) a month despite having highly skilled jobs, a KRI report released last month found. In neighbouring Singapore, the median monthly salary for new graduates is S$4,200 (US$3,140), a local graduate employment survey released earlier this year showed.

Wage growth in Malaysia has been sluggish over the past decade despite the implementation of minimum wage, KRI said, as local employees have low bargaining power and many employers rely on migrant workers.

Living expenses, meanwhile, are disproportionately high. A single public-transport user in Malaysia’s Klang Valley, for example, would have living expenses of nearly 2,000 ringgit per month, according to an expenditure guide released last year by the Employees Provident Fund and University of Malaya – the same as a new graduate’s entire pay cheque. For people with cars and other expenses, that pay cheque would be insufficient.

This is part of the reason so many Malaysians start their own businesses. More than 97 per cent of people in the country are either self-employed or work for small and medium-sized enterprises, KRI data shows, compared to about 70 per cent in other low and lower middle-income countries.

But despite having a wealth of innovative start-ups, research shows Malaysia does not attract the same amounts of VC funding as heavy hitters like Singapore and Indonesia.

Singapore attracted roughly 80 per cent of the region’s VC funding last year, according to a private capital update from market intelligence firm Pitchbook last month, while Indonesia scooped up more than 10 per cent and Malaysia was a distant third.

“Malaysia has yet to have a large volume of pure VC activity, as many deals are done through high-net-worth individuals or wealthy families,” the report said.

Joel Shen, who heads the Asia technology practice at corporate law firm Withersworldwide, says there is little VC excitement about Malaysia in comparison to its more populous and wealthier neighbours.

“⁠Indonesia has a big market … ⁠Singapore is affluent and connected … ⁠Malaysia is neither,” he said. “It is not big enough to be sexy, and not rich and connected enough to act as a sandbox for start-ups building for the region.”

This funding malaise is what drives Malaysian start-ups to become profitable but not necessarily build their businesses for scale and sustained growth at all costs, says Aaron Sarma, an entrepreneur, venture capitalist and general partner at ScaleUp Malaysia, an emerging-companies accelerator.

“So Malaysian entrepreneurs have a challenge, right? If they can’t raise capital to grow, then they need to actually build very profitable companies, typically like an enterprise IT company, or like a services company,” he said.

“But when they do things to ensure profitability, it may not make them as attractive as a growth start-up.”

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This can mean entrepreneurs tend to focus on low-cost business models, avoid risk and don’t opt for “the most scalable revenue streams”, Sarma said.

It creates a vicious circle, he said, whereby there are plenty of “successful” profitable start-ups in Malaysia but few “venture-backed, high-growth start-ups”.

VC funds are thus not enticed by Malaysia, as investors are attracted to volume deals, and the vicious cycle continues, says Kevin Brockland, a general partner at VC seed fund Indelible Ventures.

“We have small pockets of quality deals, but not at the volume to justify a dedicated country fund, nor at the level that justifies many VCs to set up a country office,” he said.

Brockland described Malaysia as a “capital desert”, forcing many companies to take a “bootstrapping” approach to business using minimal external capital.

“Without much availability of early stage capital, companies are forced to get to profit quicker. The flip side of this is that many of them do not grow their top-line as rapidly as regional or global start-ups,” he said.

Changing VC landscape

While Malaysia’s VC funding value remains low, the number of deals done is rising and keeping pace with Vietnam, said Withersworldwide’s Shen, referencing a new report from government agency Enterprise Singapore published on Wednesday.

This meant that VCs were doing lots of tiny deals in Malaysia and could signal a rise in investors’ interest in the country, he said.

In recent years, VCs have been more attracted to riskier, highly scalable start-ups over profitable but smaller-scale endeavours like food stalls or shrimp farms. But the days of gunning for “growth at all cost” could be ending, Shen said.

“Last year, I saw VC term sheets issued to cosmetics companies, handbag retailers, personal-care brands, chicken farms, sushi restaurants, that is, bricks-and-mortar businesses that would not have raised VC money before,” he said.

“VCs, flush with cash because they haven’t been investing, are looking at businesses that would not traditionally attract VC attention.”

ScaleUp Malaysia’s Sarma agreed, saying that even VCs without lots of cash on hand were pivoting towards profitable start-ups over riskier ventures.

Malaysian’s government is losing no time in helping VCs make that pivot.

Last month, the Employees Provident Fund, a statutory body that manages the savings and retirement plans of private-sector workers, committed up to 250 million ringgit (US$53 million) towards “catalysing mid-to-growth stage companies in Malaysia” in partnership with VC firm Gobi Partners.

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On Tuesday, the science and technology ministry and Malaysia Venture Capital Management unveiled their “Malaysia Venture Capital Roadmap” setting out regulatory reforms, plans to unlock more government capital and create a centralised platform for VCs that would make it easier for them to tap into the country’s start-ups.

If these efforts open the VC floodgates, an expansive future could lie ahead for the likes of Epic Unicorn’s Lee, who has big dreams for his start-up.

“I want to really make it and build businesses, sell businesses, buy businesses. I have always had a vision of myself being that kind of a person, not a nine to five one,” he said.