The past few years has seen a lot of hype when it comes to internet companies in South East Asia. More and more VCs are plowing more and more money into the ecosystem here and more startups are getting funded.
Here’s how it normally works:
1) You pick a startup in the US that has raised a lot of money and use that as a comparable.
2) In that comparable you pick a number of metrics that you use to measure growth in your startup. Sometimes it’s bookings, sometimes it’s orders and sometimes it’s revenue. That metric normally has to be something that can be bought with the money that you raise. So if it’s revenue, it had better be something you can “buy” by say offering a necessity (like groceries) at a discounted price to drive revenue.
3) Once you have spent the money you raised, chances are you would have delivered on some of your key metrics and that would allow you to raise even more money.
4) Once you raise even more money, you proudly announce the news, your friends in the startup community applaud you. You and your staff become paper millionaires.
5) You repeat the cycle again.
Of course the above is easier said that done and some people execute it better and/or luckier than others.
With the help of the media, people in South East Asia are plowing into tech. For the first time you’re seeing investment bankers and consultants quitting their high paying jobs and starting their own startups or joining a startup. You see young entrepreneurs starting businesses not in the traditional sense but with some form of technology. Some are even really traditional businesses that put some tech in their business and categorize themselves as tech companies. Why? Because tech companies are valued higher. Because tech companies are sexy right now.
Bill Gurley wrote this article about why the unicorn financing market is becoming dangerous for all and I think many of his points apply to the smaller non-unicorn companies in South East Asia.
Except for some additional factors that don’t work in our favour:
- SEA is a huge market. But it’s also a very non-homogeneous and fragmented market. So it makes it much harder for the startups here to scale like the startups we model ourselves after in the US. So when it comes to the point when our startups need to stop chasing growth and start making money, we may realize that the market just isn’t big enough for an “Uber or marketplace of something”.
- The huge startups we model ourselves after in the US aren’t exactly rushing to buy their SEA equivalents. There was a time when US based companies would buy their SEA equivalents…. think Groupon, Living Social and the likes. But US companies now tend to choose to compete rather than buy. Uber for example hasn’t bought any of its major competitors. Netflix either. AirBnB acquired a smaller German clone but chose not to buy its main European competitor. Instead they chose to compete. Lazada did sell to Alibaba recently but that was hardly the multi billion dollar cashout everyone expected.
- The major media companies in SEA still aren’t doing much acquiring. In the US we have companies like Yahoo, Google and Facebook that buy up startups there. When was the last time Google or Facebook made an acquisition in SEA that wasn’t a talent acquisition. So we look at the traditional players here. Our SPH, our Media Prima, our Astro. What startups have they bought that has given a good payout to its founders and investors?
Given these problems, when the crash in Silicon Valley hits, it’ll hit us harder. There will be less VCs to fund, less opportunities for exit and more corpses.
VCs in SEA are wising up too. There is a stronger push for profitability or path to profitability. VCs now completely discount the use of metrics like GMV and instead opt for revenue or profits. Don’t get me wrong, there isn’t a shortage of funding for the popular startups that are churning out great meaningful metrics. There’s just a shortage for everyone else who isn’t categorized as outstanding.
So the question I asked myself this morning was… what does growth really mean? What about pivoting not our startup but our entire mindset to a business that makes money, rather than a business that hopes to build something, raise money then exit.
I then reflected on my own experience. Netccentric was one such business. We never raised money and grew by reinvesting our profits over the years but since we raised money at our IPO, we too have to spend money to hit the growth targets our investors want us to hit. Just like all the other startups out there, we too start a “burn” although we still maintain healthy gross margins.
At what point do we stop thinking about how much money our business can raise and think very seriously about how much money the business can make?
Timothy Tiah – Co-Founder of Colony, Kuala Lumpur Co-Working Space