Startup slugfest: Business model vs business ‘frame’
By Anwar Jumabhoy & Srikrishna Vadrevu February 18, 2016
- ‘Business model’ does not adequately describe the process of building a business
- A look at Malaysian entrepreneurs who have made it with little or no external funding
YOU will be familiar with the term ‘business model,’ most commonly used by technology entrepreneurs to describe the activity of their enterprise.
Alexander Osterwalder, Yves Pigneur and Alan Smith, authors of Business Model Generation, offer us a neat definition: “A business model describes the rationale of how an organisation creates, delivers and captures value.”
Technology and innovation, coupled with an entrepreneurial mind-set, have led to the creation of several new business models, many of which were birthed in Silicon Valley.
In our research of successful entrepreneurs, we found that the term ‘business model’ does not adequately describe the process of birthing a business idea, leveraging on strengths, and marshalling of resources – present and future – to form a business.
With the benefit of hindsight, the model seems very neatly put together and it is often coupled with a corporate vision.
The reality is quite different. Typically, we have found that entrepreneurs only have a vague sense of what they are trying to put together.
We call this a ‘business frame,’ which we define as, “A broadly defined frame that brings together hitherto unconnected capabilities, talents and opportunities, at the right time, to form the foundation of an enterprise’s exponential growth.”
Take, for example, Microsoft’s mission statement – “A computer on every desk and in every home, all running Microsoft software” is rarely, if ever attributed to cofounder Bill Gates personally and was crafted some time in 1980, five years after its deal with IBM [which saw MS-DOS becoming the default operating system for the IBM PC – ED].
It seems clear that entrepreneurs have that special ability to join the dots, pivot and adjust their offering; and the successful ones develop a strong business frame, giving the business longevity.
We found that entrepreneurs are driven by their passion to succeed and put together a value proposition which evolves with time, to eventually form a business frame.
They have to make turns and adjustments, and recognise opportunities and technologies that were not there at the beginning.
Noor Helmi, cofounder and chief executive officer of IX Telecom, started his company in 2008, after stints at the now defunct local telco Atlas-One and then AirAsia.
At a young age, Helmi had responsibility for network planning and the build-out of AirAsia’s IT infrastructure in China, Indonesia and other countries in the region.
That’s the advantage of working at a small company – you get a lot of responsibility, very early. He was on the founding team at Atlas-One and the fifth IT employee at AirAsia.
With Amzari Tajuddin, he started with the remote management of routers and appliances, the two securing their first customer in Singapore.
Helmi says, “I always knew I wanted to be an entrepreneur and I looked at starting a telco (network operator), but that required too much capital. So I thought, why not focus on virtual networks?”
Eight years later, IX Telecom has evolved into a Data VNO (Virtual Network Operator) across 200 countries, with more than 30 staff based in Cyberjaya.
Chan Kok Long (pic), cofounder of iPay88, has a similar story. After working at Time Telecom, now TIME dotCom, he saw an opportunity to sell prepaid IDD calling cards.
With cofounder Lim Kok Hing providing the initial funding of RM70,000, the two started a company in 1998 selling IDD cards. [RM1 = US$0.23 at current rates]
Lim had left his job as an engineer with Esso Malaysia and his last day was Aug 31, 1997, an auspicious day indeed – independence for Malaysia, and self-employment for Lim!
It was also only a couple of days before the Malaysian market crash of Sept 2, 1997, but Lim was committed to starting a business and decided to team up with Chan as they both felt that the telecommunications sector offered growth potential.
Their big break came in 2000 when mobile operator Celcom entered the prepaid market. Recognising their strength in distribution – they had a network of 200-plus dealers – they founded Mobile88.com. They got into the sales of prepaid mobile phone cards and top-ups.
Chong Lee Kean, who was then at The Star newspaper, set up the Mobile88 website overnight and joined the team.
The trio grew the business, taking on other distributorships, and expanded into Indonesia.
Chan, the visionary, recognised that the Internet offered an opportunity for low-cost distribution, and so they started talking to banks to form a partnership for the online sales of airtime.
That was a struggle, as Chan recalls: “We went from bank to bank and found that no-one understood what we wanted; that is, until we met Alliance Bank.”
Alliance launched the service in 2003 with three customers: Mobile88, AirAsia and Cari.com.
At the heart of the service was the online payment platform which was developed inhouse.
Another break and pivot opportunity came in 2005 when Fujifilm approached Mobile88 to use its payment platform.
Lim speaks of the significance of this event: “We said to Fujifilm, why not talk to the banks and they said they had tried but it was too difficult dealing with them. We thought, if Fujifilm is coming to us, there must be something big that we have!
“So we took a decision to get out of the airtime business and focus solely on the payment gateway. That, we did over time, because we needed the cash.”
It took them a while. iPay88 was incorporated in 2006, but as Chan says, “It required funding all through from 2005 till 2011, before we showed our first profit.”
This refocusing of resources and action-bias is typical of successful entrepreneurs. Elon Musk of PayPal made a similar decision in 2000, to focus on the eBay payment platform and ditch his Internet banking business. And, as they say, the rest is history.
Today, iPay88 is the leading payment company in Asia, with 110 staff based in Malaysia, Vietnam, the Philippines and Indonesia.
Another example is Burhanuddin Md Radzi, managing director of Les’ Copaque Production, creator of Upin & Ipin, the hugely successful animation franchise.
Burhan recognised the potential of serving up local content to local audiences. This was at a time when local broadcasters felt that only syndicated foreign content was good enough to get ratings, which were required to attract advertising dollars.
Not able to get support from local TV stations for their programme, Burhanuddin and Les Copaque kept knocking at doors.
His first break came in 2007 when TV9 agreed to buy six 5-min episodes of Upin & Ipin to air during the Muslim holy month of Ramadhan.
The story was of two kids, fasting for the first time, and it was a big hit. The following year, in 2008, TV9 asked for 12 episodes, again for a Ramadhan broadcast, and Upin & Ipin became famous!
The movie Geng: The Adventure Begins (pic) in February 2009 was a huge success, taking in RM6.3 million at the box-office.
Burhanuddin says, “I always felt there was a demand for a high-quality local story that had good moral values. Don’t forget, this was a time when there was only one TV in the house and watching TV was a family activity.”
Today, with its Training Academy, restaurants, merchandising business and two movies due for release in 2016 and 2017, Les Copaque is the most successful local studio, employing 180 production staff, all Malaysians, of whom 90% are fresh graduates. It also has 50 staff handling licensing and merchandising.
Not bad for a local success story that was funded by Burhanuddin, with some assistance from government agencies.
Venture funding has been available in the United States since the 1940s, but was given a significant boost through the passing of the Small Business Investment Act of 1958, which provided funders with a government-supported programme to invest in qualified businesses.
The Act essentially was the reason for the growth of the US-VC (venture capital) industry, and it came to Silicon Valley.
The US-VC approach to customer acquisition is simple: “Pay what you need, but get them quickly,” and that required huge sums of money.
PayPal, for example, gave incentives to acquire early customers – US$20 credit initially, which was reduced to US$10, then US$5 before it was stopped as it had achieved the network effect.
In an interview in Khan Academy, Musk said PayPal spent “about US$60-70 million, which was not a lot,” to achieve growth, adding that it was “like growing bacteria in a petri dish.” It registered 100,000 accounts in the first month.
Local companies, sadly, don’t have access to large funding sources. Funding is normally measured and oftentimes companies run out of money before the business frame is formed.
This means that even local VC-funded companies take a while to build a customer base, what more for the self-funded ones.
Fusionex, for example, listed on London’s AIM in December 2012, was self-funded. Ivan Teh (pic), managing director and founder, used RM100,000 of his money to start the company in 2007.
As he recalls, it was a struggle to get companies to take a risk with data analytics services from his company: “In the early days, with a zero track record back then, it was tough to get customers used to dealing with the likes of Oracle or SAP to opt for Fusionex.”
“Not winning in the early days only taught us to be more resilient. We challenged ourselves to improve our products and offerings more quickly and with superior quality. We worked extra hard, stepped up a gear, persevered and we got our first break in Singapore and then the United Kingdom.
“We offered a very humanised platform that was powerful and intuitive, with good value for money,” he declares.
Over the years, the hard work has certainly paid off, as Teh has successfully grown Fusionex from a base in Malaysia, to an international organisation with staff, clients and business in Singapore, Hong Kong, Macau, Thailand, the United Kingdom and the United States.
Entrepreneurship driving employment, for now
IX Telecom, iPay88 and Fusionex had no VC funding and invested a total of RM200,000, and today offer employment to about 500 people, primarily based in Malaysia.
Les Copaque needed to fund a large-scale animated movie and required more investment, about RM4 million. Now, its ambition is to build the Upin & Ipin Theme Park, which can be a flagship opportunity for Malaysia.
It will also promote inbound tourism and provide employment opportunities, but to make that happen, substantial funding support will be required.
For businesses that target the consumer directly with undifferentiated products, like the now-defunct ring-tone business or airtime top-ups, advertising and distribution work. However, for software applications and specialised services, entrepreneurs in the local environment have a tough time.
With very few exceptions, companies are so averse to ‘buying local’ that local software companies struggle. IX-Telecom and Fusionex both found their first customers in Singapore. In the case of IX-Telecom, its first customer was Malaysia Telecom-Singapore, which then opened doors for them in Malaysia, something they were not able to do on their own!
We need to support local entrepreneurs by buying their products and services. And we need to do that soon because with the signing of the Trans-Pacific Partnership Agreement (TPPA), we will see established foreign companies coming to our shores.
They will have the advantage of a larger customer base, more developed solutions (through a deeper and longer customer iteration and learning process), and will probably be cost-competitive.
If we want to build local champions capable of going out into the region, we need to support entrepreneurs in a much more aggressive manner – else we would have closed the door on local technology entrepreneurs!
Anwar Jumabhoy & Srikrishna Vadrevu are passionate about bringing entrepreneurship into large companies through the adoption of the ‘nine entrepreneurisms’ which they have identified. Their book, Beyond Corporate Entrepreneurship, is due to be released in 2016. #9entrepreneurisms
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