Never too far to fall: how SMEs and startups thrive after failure

Once they decide to wave goodbye to the security of a pay cheque, the daily life of most entrepreneurs becomes a relentless cycle of trial and error. Rarely do many succeed at the first try.  Those who fail may find comfort in the commonly-held belief that 99 out of 100 new businesses will eventually fold.

Yet survey results from the CPA Australia Asia-Pacific Small Business Survey 2017 suggest that SME sectors in this region will flourish in 2018, even though few other statistics are available to paint a broader picture of the state of SMEs across this region. However, given that SMEs form the backbone of most economies, GDP growth is often a fair representative of the state of affairs in this sector for the respective markets.

Source: CPA Australia Asia-Pacific Small Business Survey 2017

A more detailed forecast from the CPA report studying Australia, China, Hong Kong, Indonesia, Malaysia. New Zealand, Singapore and Vietnam showed that businesses focusing on technology, exports and innovation are significantly more likely to have grown in 2017 and 2018 irrespective of the markets in which they operate.

Such outlooks certainly offer small businesses reasons to be cheerful, but entrepreneurship is like the school of hard knocks and players in this game must learn not to be deterred by initial setbacks. Take Max Von Poelnitz: After an underwhelming debut with a meal kit business, Secret Ingredient, in 2011, followed by a second venture in healthcare software that he quit after a partnership failed to pan out, Von Poelnitz is shooting for third time lucky with the healthy meal plan business Nosh.

Max Von Poelnitz

Despite Secret Ingredient's failed run, the Hong Kong-based entrepreneur is nevertheless proud that he entered the meal kit business long before the world had heard of Blue Apron, the successful delivery service. Looking back, he says the fatal mistake he made with Secret Ingredient was to be too in love with his own product and motivated by the sole desire to share it with the world. In hindsight, a space-constrained and busy city like Hong Kong, or even a city in China where food delivery is flourishing, will never be the best place to roll out such a business.

“I got my MBA in 2012. You know in MBAs they like to talk about market research, market dynamics and all that stuff, but the truth is [Secret Ingredient's launch] has nothing to do with that,” Von Poelnitz tells Campaign Asia-Pacific. While the business was fairly small, with a few thousand deliveries a week and investment of less than $5 million, it taught Von Poelnitz some hard lessons. He now believes that meal-prepping should remain the realm of those who are very rich with a lot of time on their hands.

Von Poelnitz therefore decided to sell ready-cooked meals instead, starting up Nosh in 2015 after duly studying the consumer demographic and delivery metrics of restaurants in Hong Kong. Even then, there were more hiccups and failures. The company's vending machine venture was a memorable one — it turned out to be a bad idea to sell perishable items in vending machines and it was too expensive to set one up in a place with high foot traffic. Nosh also experimented with cup noodles and a B2C model before finally settling on a B2B plan to cater lunches for offices as Nosh’s main business model. In its second year of operation, the company secured investment from Alibaba’s Entrepreneur’s Funds for Hong Kong, which Von Poelnitz said was used to develop a group purchasing app and a chatbot for its Facebook page.

No such thing as beginner’s luck

Von Poelnitz’s initial problems with Secret Ingredients are not uncommon. Many entrepreneurs and startups are prone to being too focused on their products at the expense of their business models, says Shane Neubronner, founder and general manager of PR and digital marketing agency Helium Myanmar. Too often these mistakes will give rise to cashflow issues, which are likely to lead to the early demise of the businesses.

Neubronner has seen this first hand with a startup client developing a mobile gaming app. “I kept challenging them to think about what their revenue streams would be, when they would be able to break even, when they would require additional investment at a certain stage of the company…because for mobile gaming app, the major revenue stream they would (usually) rely on is in-app advertising,” says Neubronner.  

Unfortunately for his client, the business became unsustainable after a year. “Within a few months, they were aware of the direction they were heading. But since they were still focused on the product and operation, they started going out to advertisers a bit too late until they realised they had reached a point where they could not recover,” says Neubronner. Neubronner believes such mistakes are not limited to Myanmar entrepreneurs: they cut across tech startups and other SME sectors too. “The traditional way of doing business is still a mindset adopted by a lot of businessmen, but that has to shift and change over time,” he emphasises.

Shane Neubronner (centre) with his team from Helium Myanmar at a workshop organised for clients.

While revenue is usually the deal breaker that determines the lifespan of small businesses, seasoned entrepreneur and startup mentor Cheryl Sew Hoy points out that this is not always the case in the startup world. “If you are building entreprise B2B products, you definitely have to monetize the product from day one, barring the free trials and what not. But if you are thinking about consumer products, sometimes VCs value growth over immediate profit,” she explains.

Another mistake that entrepreneurs and startups make is spending too much on customer acquisition, says Sew Hoy, who was the founding CEO of MaGIC, a government-backed accelerator in Malaysia. A prime example is the incentive offered to encourage users to download an app or refer a friend. “If you pay $10 for a user to refer a friend, is he going to spend at least $30? That is unlikely to cover your cost, and if your customer cannot spend $50 in their lifetime, then your business model is terrible,” says Sew Hoy.

Small businesses vs. the big guys

The main make-or-break issue for many small businesses, however, is uphill competition from conglomerates and international brands. Look at the mom and pop grocery stores that are forced to give way to supermarket chains, or the young business owners such as Von Poelnitz who end up on an uneven playing field with retail monopolies and big online names such as Deliveroo and Uber.

“When we first launched the business, we wanted to be a virtual restaurant. The idea was to work with delivery providers distributing food from a central kitchen to different parts of the city,” says Von Poelnitz. “But it turns out that the business model was just too challenging because we didn't control the consumers, the Foodpandas of the world controlled the consumers. We weren’t able to do that." He eventually settled for engaging Foodpanda and Deliveroo for the B2C arm of his meal business.

Neubronner notes that this situation is no more apparent than in recently liberalised economies like Myanmar, where foreign brands are flooding the market. Myanmar's Uber-like service Oway Ride quickly lost its market share to Grab, which entered the market last year. Fortunately for Oway, however, it was given a shot in the arm recently with a $5 million investment by Japan-based Daiwa Securities. “It is about having the vision and foresight, forming partnership in anticipation of the coming players, outlining what are the plans for the next five, 10 years. I don’t think a lot of local companies are prepared at this point in time,” says Neubronner.

Nevertheless, market monopoly doesn't mean there is no room at all left for small business owners. The rule of thumb to remember is to up the competition and solve the right problem for consumers, says Sew Hoy. “[For example], the restaurants on Foodpanda are very low quality, very fast-food driven, so if you want gourmet, you have to come up with a very different business focus or angle to compete,” she says. Such a product requires insights into fine dining, Sew Hoy stresses, as serving gourmet food in a box is akin to solving the wrong problem. “Honestly, my gut feeling tells me that that would be the wrong strategy because if you really talk to high-end consumers, they are willing to pay for the ambience in a restaurant. Gourmet food in a box just doesn’t feel right,” says Sew Hoy.

Market dynamics

Competition aside, other external factors that affect the success or failure of small businesses  can include weather, political stability, minimum wages and market economics. All of these played their part in the experience of Neubronner, who left Ogilvy to set up Helium Myanmar in 2016. While business owners in the country can look forward to improving infrastructure and a burgeoning mobile economy, the main challenge they still face is the fluctuating value of the Myanmar kyat. “Imagine if you are an FMCG company, importing products in US currency and retailing in the local currency. You have to absorb the depreciation rates and that in itself gives you a 10 to 20% difference in margins,” says Neubronner.

Again, this issue is not specific to emerging economies but typically hurts SMEs in the manufacturing sectors. On the other hand, government regulations are usually not a good excuse for businesses to blame. The general consensus among the startup community about the reason for oBike's recent exit in Singapore was that it failed because it didn't adapt its Chinese business model to the local market rather than anything to do with the government’s strict transportation rules.

Kuala Lumpur-based online vape juice retailer VapeClubMY faced a similar issue when the government launched a crackdown on vaping in the middle of their operation. This hurdle came on top of restrictions on paid advertising for tobacco products, says co-founder Jeannette Goon (the company finds a way to get around this through content marketing and SEO optimization). The silver lining from this scenario was that it helped VapeClubMY reach out to more overseas users who had a penchant for Malaysia-originated menthol flavoured juices during the summer season.

“Six months after we started, we realised that people from overseas were buying but we didn’t have the mechanics to service them properly or efficiently,” says Goon. “[This is because] we didn’t even know it was a possibility to think big in the beginning, we were a bit too focused on the local market and thinking too small scale.” Since 70% of the site’s traffic came from search, Goon and her team changed tracks in their SEO by dropping local references to generate more international appeal.

Jeannette Goon, co-founder of VapeClubMY

Does it all come down to age in the end?

For all the best ideas and strategies entrepreneurs can generate, the factors affecting whether they sink or swim may sometimes come down to things largely outside their control. According to the Global Failure Index compiled by the organisers of Fuckup Nights, which organises events for people to share 'stories of business failure', the median age of founders of failed startups falls between 16 and 39. The CPA survey came out with different findings, however: respondents aged under 50 were more likely to report that their business grew in 2017 compared to those aged over 50, and the older groups were also less likely to expect their business would innovate and expand to older markets this year.

Alvin Foo, a mentor at China Accelerator, believes that the prospering tech startup scene in China exemplifies the innovation drive of younger entrepreneurs. However, the pragmatic among us may assert that young people win out not only because of their innovative streaks but also because of the largely youthful consumer base in China. "As long as there are kids born in this nation, China will never be short of startups," says Foo. "The multiples are greater, and they are able to scale in how the tech companies here scale," he concludes.