Almost every startup, if not all, dreams of growing bigger and getting listed on the stock exchange one day.
The dream-big mentality is understandable. During the past several years, the startup scene including those of Asia is vibrant. In 2021, Credit Suisse reported that 19 startups in Southeast Asia became unicorns -- or companies with valuations of US$1 billion (34.8 billion baht) or more. DealStreetAsia -- a Singapore-based financial news website, reported that Southeast-Asian startups are raising more money -- from $9.4 billion in 2020 to $25.7 billion in 2021.
But it's not happily-ever-after for some newly listed companies. In the past year, a number of high-tech companies showed signs of struggling. Examples in Asia include Zomato and Paytm from India, Grab from Singapore, Bukalapak from Indonesia and Didi from China, among others.
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, led to a disconnect between valuation by the public markets versus valuation by private investors such as venture capital firms (VCs). These IPO flops suggest four important lessons that startups should heed to avoid a similar fate.
Venture capitalists are not always correct
VCs have been the holy grail for many startups. But, after many IPO flops, we should temper the belief that VC funding is a good proxy for the future potential of a startup.
Undeniably, investors in VCs are able to spot some emerging technologies and promising companies, but they also have their share of duds. The hits in VCs' portfolios compensate for the duds, leading to a good portfolio performance and their reputation as savvy investors. But VCs may also be subject to some of the same biases as the rest of us -- such as the fear of missing out and hence invest in companies that may not have good performance in the medium and long term.
Startups should view the funding by VCs, even at a lofty valuation, only as a positive signal and a resource to execute their strategies. The key focus of any startup has to be on executing its strategy without getting carried away by VC support (or the valuation attached). This would suggest achieving outcomes such as profitable growth rather than just growth.
A bird in hand (profits today) is better than two in the bush (profits in the future)
Many new technology companies sold their products or services below full costs, under the assumption and hope that profits can be made later once a large market share is achieved.
It needs to be mentioned that many tech-startups face financial losses after injecting massive cash in marketing and technology in a quest to become a leader in market positions. But, future market position and profits are uncertain, as discovered by John D Rockefeller -- an American business magnate and philanthropist more than 100 years ago when he tried to establish a dominant position for the Standard Oil Company. The strategy of sacrificing the present for future gains did not work then, and it is unlikely to work today.
To this end -- a realistic strategy for many startups may be to make investments that are commensurate with their own resources. High efficiency, rather than extravagant spending, will also improve the likelihood that any sales achieved will be profitable while also conserving and generating resources for a rainy day.
Simplicity is more powerful than complexity
The recent wave of new technology companies and investments spawned new-fangled words. For example, the term "this time is different" was used to rationalise excesses such as overinvestment, the pursuit of market share by selling below costs and the attachment of unrealistic valuations to unprofitable businesses. The same phrase was often heard during the dot-com bubble, and we all know how badly that story ended.
Simple concepts that have withstood the test of time, such as barriers to entry, work better than complex ones. In fact, a dominant market position in any business with low (or even moderate) barriers to entry is unlikely to be valuable, as we are seeing in the case of e-commerce.
Amazon's e-commerce business, a platform itself, has lost money during most quarters despite its huge size, maturity and first-mover advantage. Because of the moderate barriers to entry, Amazon also continually faces new innovative competitors such as Shopify, Shopee, Flipkart and Alibaba.
Startups' and their stakeholders' interests may be served well if they focus on the fundamentals of the business, such as demand and supply balance at present and in the future and industry economics (including barriers to entry) rather than their platform strategy. As noted by Warren Buffett, even brilliant managers find it difficult to achieve profits in an industry that is fundamentally unattractive, and startups are no exception in this regard.
The importance of a plan B (or even plans C, D and E)
In a bid to go big and go fast, many startups may overlook the importance of having a plan B. Overinvestment can be especially damaging to a contingency plan because it depletes precious financial resources and sometimes commits a startup to a path that may be difficult or expensive to change later. Often, the environment evolves in an unpredictable fashion, necessitating a change in strategy, in turn requiring more resources. Every startup should have a plan B, at least for internal purposes, if not for external fundraising, and a rainy-day fund that can sustain it during lean times or if a strategic change is required.
In conclusion, despite the challenges faced by recent tech IPOs, it is an exciting time to be a startup in Asia. Technological advances and easily accessible capital are leading to tremendous opportunities. Though the broader environment in Asia has been munificent for quite a while, 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.
Nitin Pangarkar is Associate Professor in the Department of Strategy and Policy at the National University of Singapore Business School. The opinions expressed are those of the writer and do not represent the views and opinions of NUS.
