Singapore’s foundation and lessons for entrepreneurs

Singapore became the independent, modern nation that it is today on 9th August 1965. The history of how the tiny island-nation became a significant force in Asia is a fascinating one. Its GDP per capita (PPP) is number 3 in the world and it has the highest number of millionaires per capita in Asia. Yet the country is smaller than Los Angeles in size and its population is half of of Delhi.

How did this change happen?

This article is the first half of the story of Singapore’s growth and how it became into one of the richest nations in the world. I will examine what historical events created conditions for modern Singapore’s founding Prime Minister (Lee Kuan Yew) to do what he did and what lessons Singapore’s pre-independence history has for entrepreneurs starting companies. A follow-up article will explore post-Independence policies of Lee Kuan Yew that transformed the nation (subscribe for updates to know when that post comes out).

Disruption of the Dutch Monopoly

From the 16th to 18th century, during the colonial expansion of European countries, the Dutch came to occupy power in most of the Malay archipelago. This area was strategically important to British because they made profits exporting opium from the Indian subcontinent into China. Dutch imposed heavy taxes on the British ships that passed via their ports, and the Dutch navy also regularly had their share of fun harassing British trading ships. (Colonial powers in Europe, like today’s companies such as Google, Facebook, Apple, and Amazon, relied on each other for many aspects of their operations and yet fiercely competed for dominance.)

Dutch monopoly on trade routes in the Malay archipelago

The Dutch and British East India companies were established as profit-seeking ventures and the Dutch were able to squeeze the British because they had a monopoly in the area. This ability to charge whatever price a business wants to charge from customers is what businesses pursue and it’s the source of all profit. (And because the previous statement sounds like something that shouldn’t be allowed, today’s monopoly businesses also constantly deny that they’re a monopoly.)

As it’s expected for a squeezed customer, the British wanted to explore their options and one employee of The East India Company, Stamford Raffles, took it upon himself to change this situation. Raffles left Calcutta in December 1818 to establish a settlement for British in the Malay archipelago. He was determined not to let Dutch control the entire region (as it was strategically important for the East India Company’s trade routes to China).

There are two aspects of Raffle’s initiative that I find interesting:

a) Raffles wanted to break the Dutch monopoly in the area and he knew the market (comprised of other trading nations beyond British) will support him (as everyone were sick of monopolistic behavior). Monopolies are especially prone to unforeseen modes of competition (disruption) as these new modes create an way for a new competitor to access previously inaccessible customers.

b) Raffles took this initiative pretty much by himself. He got very little support from the British government and the East India Company (he was ordered by his superiors not to provoke the Dutch). Despite the lack of support, he was determined to pursue what he thought was in the interest of the company. What caused this level of determination? Partly, it is self-selection (he had to be pretty entrepreneurial to be away from England in Calcutta). Partly, it is a testimony to meritocratic systems of The East India company. Raffles started as a clerk in the company, rose up to become a Governor and was later Knighted by The Prince of England. Raffles’ initiative taking personality was supported by the meritocratic environment he found himself in. I like this because such systems were precursors to today’s capitalism. And entrepreneur today has the opportunity to rise from zero to a billion dollars within one lifetime (and he doesn’t even have to use guns to do that!). Just like Raffles, entrepreneurs in Silicon Valley are responding to incentives for value creation that a capitalistic economy provides.

Raffles falls in love with Singapore

Raffles from his studies of ancient Malay texts knew of a tiny Island south of Malay Peninsula called Singapore. He arrived on the island in 1819 and immediately recognized the potential of the location and land. Numerous factors attracted him to Singapore: freshwater supply from rivers, widespread availability of timber for ship repairing, no Dutch influence, a small population (of 1000 people) and most importantly its strategic location that’s halfway between India and China. If Singapore was somewhere else (say somewhere off the cost from New Zealand), the same resources of fresh water and timber would NOT have been important factors. But Raffles was lucky and found freshwater and timbre at a location where it could be used on site for ships that are passing through.

Founding Singapore was an act of value creation

Value creation doesn’t happen when you have the right resources (say the ability to code, market or sell). It happens when you have the right resources and you discover an opportunity in the environment where access to these resources (or capabilities) give you an unfair advantage. Why was Singapore’s potential not recognized by the Dutch but only by the British? It’s because British, wanting total control over opium trade, had significantly more motivation to search for improvement over status quo than the Dutch (who didn’t control India, hence didn’t control Opium trade). If Dutch had their own trade routes from India to China, they would have fought hard over Singapore. British used their exclusive resource (rule over India that produced opium) to do found Singapore settlement and it didn’t both Dutch because for them it was yet another port in the region.

This is how startups get an entry: not by attacking competitors directly, but doing something existing competitors won’t consider an existential threat. (Or, as it was NOT in this case, by doing something that competitors are incapable of responding to in time and the startup grows big in that time period). History of the environment constraints what opportunities are available and what aren’t. An entrepreneur cannot create a business out of thin air; the environment must have an unfulfilled potential first. Entrepreneurs are explorers first, inventors second.

“Your margin is my opportunity”

After arriving in Singapore in 1819, Raffles immediately declared it to be a free port. This meant that ships and merchants weren’t to be taxed while passing through Singapore port. He did this so that Singapore could compete with other Dutch ports and the revenue earned through storage and warehousing of these goods could sustain the small British settlement. In making the passage free, he adopted the freemium model before it was cool. The policy of no taxation soon attracted hundreds of trading ships who were sick of paying high taxes to the Dutch. To fulfill traders’ needs while they were on the island, many permanent settlers also arrived and settled there. This set network effects in motion (more trade = better economy = more people = more trade) and Singapore’s population grew from 1000 in 1819 (when Raffles landed there) to 10,000 in 1824 and 100,000 in 1871. All of this increase in population happened because of one man’s decision to make Singapore into a free port and that unleashed all these network effects that go into making an economy. The story of Singapore reminds me of early Facebook growth: a free platform driven by network effects started in an environment (Harvard University / India-China trade route) ripe for a new entrant because existing monopolized options was disliked by customers (Myspace / Dutch ports).

There’s no free lunch

With lack of taxation (revenue) and increasing population (users), the British administrators in Singapore walked a tight grip. As per Wikipedia’s excellent article on History of Singapore:

Despite Singapore’s growing importance, the administration governing the island was understaffed, ineffectual and unconcerned with the welfare of the populace… While the population had quadrupled during 1830 to 1867, the size of the civil service in Singapore had remained unchanged. Most people had no access to public health services and diseases such as cholera and smallpox caused severe health problems, especially in overcrowded working-class areas. As a result of the administration’s ineffectiveness and the predominantly male, transient, and uneducated nature of the population, the society was lawless and chaotic. In 1850 there were only twelve police officers in the city of nearly 60,000 people. Prostitution, gambling, and drug abuse (particularly of opium) were widespread

The negative side effects of freemium model is documented in the tech community today, but British saw that happen in Singapore hundreds of years earlier.

Growth is hard to kill

In spite of these deficiencies, Singapore continued to grow in importance as trade between China and rest of the world continued growing. The opening of Suez Canal in 1869 further boosted the trade. Fast forward to World War II and the same prosperity made Singapore one of the chief targets for the Imperial Japanese Army. Obvious in retrospect, but I learned it the hard way that profits attract competitors when we (at Wingify) launched a web push notification product called PushCrew. Because of our of timing in the market and the new use case of push notifications for publishers, we attracted many customers. But the technology was easy to build and the switching cost for customers wasn’t significant. Within a few months, we saw 20+ new competitors emerging that offered the exact same functionality for free or at really cheap prices (some competitors even copied our terms and privacy policy, including our company’s name!). We expected some competition, but the level of competition we saw with PushCrew was insane. That is when I also learned that what is easy for you is also easy for others. If you built a Minimum Viable Product in a week, so can someone else (unless you have an unfair, exclusive or hard to replicate advantage).

With PushCrew, I saw it first hand how prosperity sows the seeds of its own demise by attracting less prosperous agents who want to take what is yours. In geopolitics, nations acquire land because of resources they can harvest from there for its own citizens. They use military power for capturing such profitable resources. But in business, attacks on profits happen because the law permits them to do so. Remember all the cries when Instagram copied stories feature from Snapchat?. This is what TechCrunch said about Instagram’s VP of Product:

“But rather than showing guilt, remorse, or reluctance about copying what’s worked for Snap, he sees it as a foregone conclusion — the inevitable march of progress where you either step in line or get left behind.”

Anything successful attracts competition. Remember that the next time you happen to be involved with something that’s becoming successful. Value creation is about fulfilling customer desires, but value preservation is equally important. So many entrepreneurs believe that if you remain obsessed with customers, all will be well. Just ask Snapchat who saw their lunch eaten by Facebook while they were focused on customers.

Japanese ate Britisher’s lunch too and took over Singapore in 1942. After their defeat in 1945, Japanese surrendered to Allies and Singapore fell into chaos and looting. The World War II caused a significant blow to its economy: infrastructure was destroyed, food supplies were low, and the port suffered major damages. What happened after this and how Singapore rose to what it is today will be covered in a follow-up post. Stay tuned.

Imagine YOU are the president of Zimbabwe

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