How to Get the Best Bounce for Your Buck When Starting Up a Business in Asia
This FTI Journal article originally appeared on Forbes.com
When Senior Managing Director Michael McCreadie wanted to open a trampoline fitness center in Asia he discovered all sorts of cultural roadblocks. It took a ton of patience and a sense of humor to get the job done. Here are his hard-won lessons.
About four years ago, the idea of starting a business in Asia captured my imagination. Like many others, I saw a rapidly growing middle class with disposable income and an increasingly business-friendly attitude among Asian governments hungry for foreign investment. And, as I had spent nearly 20 years working as a financial advisor to global companies, helping them formulate operational strategies and business plans in Asia, I figured that knowledge and experience would give me a leg up in starting my own.
It did, and it didn’t.
It would not be entirely honest to say the experience of running a business in Asia didn’t leave a few scars. But I have no regrets. In just a few years, I built a thriving and profitable business. In the process, I learned a lot.
Now I can share the lessons I learned to help you safeguard your business in Asia.
Getting Jump Started
My first step was to pick a business in which I wanted to invest. Having spent a long time advising companies in Asia, I knew one thing for sure: Asia is hot. It is steamy. The heat and humidity are particularly tough on kids. It’s hard for them to play outdoors. Apart from hanging out in malls, the recreational choices for youths in Asia are slim.
I believed indoor play spaces represented an unfilled need and therefore an opportunity. I also knew that trampoline parks had become a craze in Europe and the United States. My new company, Jump Street Asia Trampoline Parks, would give Asian youths (and adults) a healthy way to escape the wilting heat.
Next, I had to decide if I wanted a local partner.
I knew that because the differences between Asian and Western markets can be extreme, investors are often advised to partner up with local interests. But partners aren’t always the best option. Although they can be valuable in navigating the terrain (and in some Asian countries, regulations require them), local partners also can pose significant risks. No one can know everything about a potential partner and that can be perilous in Asia, where business people often have complex and opaque family and political connections rife with possible conflicts of interest. Also, even with local knowledge on board, there is no substitute for being there yourself.
I decided to go it alone.
Deciding Where to Plant the Flag
Going it alone meant I had to identify countries that allowed foreign investors to own 100 percent of a company. Indonesia has long allowed full foreign ownership of companies and, with some 250 million residents, it is one of the largest markets in Asia. It was my first choice. But I found several unexpected hurdles there.
For example, in creating my business plan I decided that it would take too much time and money to buy land and build the trampoline centers myself. I decided to lease facilities with the square footage I needed, in good locations, with adequate ceiling height for a trampoline park. (You don’t want people bumping their heads on the ceiling when they bounce.) And there were plenty of options in Indonesian cities that were close to middle-class neighborhoods with lots of children. But once I arrived in Indonesia to scout locations, I learned that it is standard practice to require lessees to pay all the rent for the entire term of a lease upfront. Since I was looking for long-term leases, this would have drained too much capital from the business too soon.
LESSON LEARNED: I would never have found out about the leasing issue sitting in my office in Australia. And if I had entered an agreement only to be hit with an immediate demand for several years’ rent, Jump Street would have begun life behind the financial eight ball. Again, it pays to have feet on the ground.
Ultimately, I decided to incorporate my business in Singapore. It is the simplest country in which to secure the basics, such as a business license and bank account. In Singapore, getting a license to do business requires filling out a few forms. In many other parts of Asia, the process can drag on forever and require scores of forms for a wilderness of licenses.
Singapore also has liberal franchising laws. This turned out to be a godsend. Although I picked Malaysia as the location for our first Jump Street Asia centers (because of its relatively low labor and real estate costs), I discovered later that a company can’t sell franchises in Malaysia until it has been in business for at least three years. That would have clipped my growth strategy’s wings by forcing me to expand solely by opening more centers. Fortunately, Singapore has no such constraints, and I could sell franchises from there. I would have been in trouble if that wasn’t the case.
LESSON LEARNED: Do not make business assumptions from afar.
Choosing the Right Legal Structure
Getting Jump Street Asia’s corporate structure right was critical. As I was planning to open several centers, any of which could run into trouble, I made each a separate legal entity. It was good that I did. Less than a year after opening my first center in Kuala Lumpur in 2014, I established a second one in Penang, a state on Malaysia’s northwest coast. Revenues and profits in Penang were not what I projected, and the landlords refused to renegotiate the rent. But because each center was a separate legal entity, the first center could not be held liable for losses incurred by the second.
LESSON LEARNED: No one, especially entrepreneurs, likes to plan for failure. But a good business strategy, especially in Asia, should budget for future challenges.
Even if you go it alone, you don’t have to go it alone when it comes to funding. If you have a good idea, there will be locals who will want part of the action. I found several investors who were eager to put money into Jump Street Asia. But our relationship never gelled. I hadn’t realized that many of my investors were angling for full- or part-time jobs with the company. That was never the plan. Consequently, our relationship was somewhat tense, and that made it impossible to get follow-on funding. I had secured only enough capital to open the first center. I had assumed that once that center became profitable, I could get another round of funding from my investors. I was wrong. That left me with the banks.
As I was opening my second center, I approached banks for a loan. I was turned down flat. Asian banks, especially in Malaysia, are a tough nut to crack for 100 percent foreign-owned startups. They are sensitive to exposure to new companies owned by foreigners. Reeling a bit from the rejection — the second center was now getting close to opening and bills were coming due — I called in a favor from a colleague who was the chief risk officer at another Malaysian bank. But even after pulling every string he could, I got only half the amount I asked for and had to start repaying the loan almost immediately.
I found myself thrust into the realities of bootstrapping. To pay for the second center, I had to use the cash flow from the first. That meant I couldn’t make needed investments in the first one. And when the revenue from the second center wasn’t covering its expenses, the monies from the first had to cover those as well. Cash was tight, and that was stressful.
Not being able to get easy and adequate credit from the banks was only part of the problem. I struggled to get our customers’ money from them as well. As is the case with a great deal of infrastructure in Asia, Malaysia’s banking system is antiquated. At one point, our bank decided to upgrade some of its computer systems. While it was doing so, Jump Street Asia couldn’t accept credit cards for several weeks. Naturally, that constrained cash flow even more. And, while the bank was upgrading, and for several months thereafter, I couldn’t get regular bank statements, forcing me to fly blind.
LESSON LEARNED: Make sure you understand the motivations of your investors in the same way you would with a potential partner. Make sure you are clear about the amount of capital you will need to raise. Asian banks often are loath to loan to startups, especially those that are foreign-owned.
Getting the Right Cast and Crew
In Malaysia, many people ride motor scooters and wear helmets with visors. Consequently, no one thought anything of the young man hanging around in the center with his helmet on and visor down. That is, until he pulled a gun and told us to empty the till. It was scary, and it affected the staff more profoundly than I thought it would. In Asia, employees expect the owner to protect them. I had to secure the center with sophisticated monitoring equipment to soothe their concerns and prohibit customers from wearing their helmets inside the facility.
Securing the centers was just one part of the employee challenge. Treating employees right is exceptionally important, often more so than in Western countries. Malaysian society is very diverse (as it is in many Asian countries), with large populations of Malays, Chinese, Indians, and others, all with their own religions. Employees are very sensitive to anything that smacks of favoritism or discrimination. It was critical to the harmony of the workplace to maintain a good ethnic balance among my staffs.
Another challenge is the fact that people in Malaysia are relatively poor, which can be problematic in a cash business. Jump Street’s first center manager, for example, walked off with the equivalent of a day’s receipts.
To discourage theft, I tried to create a positive culture to encourage loyalty. I promoted staff from the floor to the office as often and as quickly as I could to make it clear I had their best intentions at heart. I also offered performance bonuses on a regular basis.
Hiring managers and executives can be tricky. Although local executives often require lower salaries than foreigners, expat managers may instill more confidence among employees and customers, especially when it comes to safety issues. But to recruit expats, one must use agencies (paying their fees) and assume relocation and other costs.
Is the difference in cost worth it? I made my decision to hire some expats after hearing what happened to one of my competitors. A company opened a trampoline center about six months after I did. It had a local manager who cut corners by buying non-flame retardant foam and cheap air blowers for the center’s safety bags. Unsurprisingly, the blowers overheated and set fire to the foam; the center burned to the ground six weeks after it opened. Thankfully, there were no injuries. But it took the company two years to reopen.
LESSON LEARNED: Asia has many cultural idiosyncrasies. Without a deep understanding of them, you can easily put the success of your business at hazard.
On my first center’s opening day, several policemen arrived asking for my signage license, without which, they said, I couldn’t open. There is no such thing as a signage license. They knew it; I knew it; but there they were, their hands out, suggesting that they could make this problem go away if …
Sadly, bribery is endemic across Asia. Although it is difficult to avoid completely, I found ways to make my business less of a target. I cultivated relationships with high-level officials, including a senior government minister. I invited him to our centers and supported his government’s initiative to reduce childhood obesity, one of its major agenda items. Having that relationship, and advertising it (I always encouraged ministers to drop by with their families), made my business a much less attractive target.
Asian bureaucracies can also be mind-numbingly convoluted. In Malaysia, for example, there is a slow way and a fast way to secure a business license. The slow way is to trek to the relevant government offices, fill out dozens of forms, and wait — often for months or even years. The fast way is to invite local officials to your business and introduce them to the benefits of trampolining and what we are trying to achieve. Again, I would encourage them to bring their families to the center to bounce. This inevitably helped speed up the application process.
LESSON LEARNED: Although bribery is common in Asia, there are ways to avoid it. By developing relationships with officials and supporting their broader goals you become an asset to them, which reduces the odds of being approached for a bribe. And, if you are, you have an ally to appeal to.
Getting the Money Out
Jump Street Asia trampoline centers caught on. Not only are children using them, corporations are turning to us for offsite team building events with executives jumping together and falling into each other’s arms.
It was never my intention to make a career of running indoor trampoline centers. I wanted to build a company, make it profitable, and sell it. But putting money into Asia can be much easier than getting it out. Just as I was ready to sell in 2015, a perfect storm of events blew up my exit strategy.
First, Malaysia rather clumsily implemented a goods and services tax (GST). As with a VAT, a GST levies a tax on the value added to a product at each stage of its route along the value chain. Most countries invest in educating businesses about how to implement the tax without raising the price of their goods or services. They advise companies to absorb the tax in the value they add for the next link in the chain, thereby diluting the tax’s impact on revenue and thereby on price. But that didn’t happen in Malaysia. Instead, businesses added the entire tax to their prices at each step, which drove up inflation and slowed growth.
Then oil prices fell off a cliff. As oil is the largest part of the Malaysian economy, the economy plunged. The local currency, the ringgit, lost 25 percent against the dollar almost overnight, which drove up Jump Street Asia’s operating costs substantially. As if that wasn’t enough, the country’s prime minister was accused of pilfering more than $1 billion from a government economic investment fund.
The business climate turned sour, and my potential buyers disappeared.
So now I am staying the course by selling franchises. That doesn’t require capital on my part. I currently have three trampoline centers. I employ over 100 people, and today there is growing interest on the part of potential franchisees. But an exit strategy that is now in a holding pattern underscores my biggest lesson learned:
LESSON LEARNED: Being an entrepreneur, especially in Asia, can be a lonely business. You are responsible to your investors and your employees, and you will never be able to anticipate everything that may arise. To be successful, you must learn to be nimble enough to adapt to circumstances as they change. Because they always will.
© Copyright 2016. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
Senior Managing Director