Almost every startup, if not all, dreams of becoming bigger and going public.
The Dream Big mentality is understandable. In recent years, the startup scene, including the Asian one, has come alive. In 2021, Credit Suisse reported that 19 startups in Southeast Asia became unicorns — or companies valued at US$1 billion (34.8 billion baht) or more. DealStreetAsia — a Singapore-based financial news website, reported Southeast Asian startups are raising more money — from $9.4 billion in 2020 to $25.7 billion in 2021.
But for some newly listed companies, it’s not a happy ending. Over the past year, a number of high-tech companies have shown signs of trouble. Examples in Asia include Zomato and Paytm from India, Grab from Singapore, Bukalapak from Indonesia and Didi from China.
Interestingly, many of the companies, such as Grab and Paytm, hold leading market shares in their respective industries. Low profits, or in some cases even large negative profits, created a discrepancy between the valuation by the public markets and the valuation by private investors such as venture capital firms (VCs). These IPO flops suggest four key lessons startups should heed to avoid a similar fate.
Venture capitalists are not always right
VCs are the holy grail for many startups. But after many IPO flops, we should temper the belief that VC funding is a good predictor of a startup’s future potential.
Undoubtedly, investors in VCs can spot some emerging technologies and promising companies, but they also have their share of duds. The hits in VCs’ portfolios offset the duds, leading to good portfolio performance and their reputation as savvy investors. But VCs can also be subject to some of the same biases as the rest of us – like the fear of missing out and therefore investing in companies that may not perform well over the medium and long term.
Startups should see VC funding only as a positive signal, even with a high rating, and as a resource to execute their strategies. The main focus of any startup must be on executing its strategy without getting carried away by the VC endorsement (or the attached rating). This would suggest achieving outcomes such as profitable growth rather than just growth.
A bird in the hand (wins today) is better than two in the bush (wins in the future)
Many new technology companies sold their products or services below full cost, with the assumption and hope that profits can be made later once a large market share is achieved.
It has to be mentioned that many tech startups face financial losses after investing massive money in marketing and technology to achieve a leading position in the market. But future market position and profits are uncertain, as discovered by John D. Rockefeller – an American business tycoon and philanthropist more than 100 years ago while attempting to establish a dominant position for the Standard Oil Company. The strategy of sacrificing the present for future gains didn’t work then and probably won’t work today.
To that end, making investments that match their own resources could be a realistic strategy for many startups. High efficiency instead of extravagant spending also increases the likelihood that all sales made will be profitable, while at the same time conserving and generating resources for bad days.
Simplicity is more powerful than complexity
The recent wave of new technology companies and investments has spawned newfangled words. For example, the phrase “this time is different” has been used to rationalize excesses such as overinvesting, striving for market share by selling below cost, and attaching unrealistic valuations to unprofitable companies. The same phrase was heard many times during the dot-com bubble, and we all know how badly that story ended.
Simple concepts that have proven themselves, such as B. Barriers to entry work better than complex ones. Indeed, in a business with low (or even moderate) barriers to entry, a dominant market position is probably not valuable, as we see in the case of e-commerce.
Amazon’s e-commerce business, itself a platform, has lost money for most quarters despite its massive size, maturity, and first-mover advantage. Due to the moderate barriers to entry, Amazon is also constantly faced with new innovative competitors such as Shopify, Shopee, Flipkart and Alibaba.
The interests of startups and their stakeholders can be well served by focusing on the fundamentals of the business, such as: B. the current and future supply and demand balance and industry economics (including barriers to entry) rather than their platform strategy. As Warren Buffett noted, even brilliant managers find it difficult to turn a profit in an industry that is inherently unattractive, and startups are no exception.
The Importance of a Plan B (or even Plans C, D, and E)
In the quest to get big and fast, many startups may overlook the importance of having a plan B. Overinvesting can be particularly detrimental to a contingency plan because it depletes valuable financial resources, sometimes forcing a startup down a path that can be difficult or costly to switch later. Often the environment evolves in unpredictable ways, necessitating a change in strategy, which in turn requires more resources. Every startup should have a plan B, at least for internal purposes if not external fundraising, and a rainy-day fund that can sustain it during downturns or when a strategic shift is needed.
In summary, despite the challenges faced by recent tech IPOs, it is an exciting time for a startup in Asia. Technological advances and easily accessible capital lead to enormous opportunities. Although the broader environment in Asia has been generous for quite some time, it is important to remember that change is often the only constant and that startups need a clear strategy and a strong focus on execution.
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