Navigating the Changing Startup Funding Landscape

By: Henry Kusuma Adikara

KOPI, Jakarta – The high-flying office rental startup, WeWork, crashed and burned last October 2019 following the aborted attempt to go public one month earlier, leading to the ejection of its CEO and founder, Adam Neumann. In parallel, the co-working company’s valuation went down extremely to as low as USD8 billion from USD47 billion previously. WeWork was then taken over by its biggest investor, Softbank. Following the fiasco, Softbank has changed its investment tack, where the investor has now asked its portfolio companies to focus on earning profits and stop chasing growth for the sake of growth.

A few months earlier, one of the world respected unicorns, Uber, flopped on the Wall Street. Before the IPO, Uber’s valuation was hovering at USD120 billion; but after going public, its market capitalisation went down sharply to USD69 billion, accounting for a 43% drop. It was then crowned as the stock market debut that lost more in dollar terms than any other American initial public offering since 1975!

The ‘new normal’ startup funding environment

The above notorious cases, to a higher degree, have impacted the startup funding environment in a global scale.

Venture capitalists would impose stricter selection criteria to startups firms looking to fund their businesses. This would mean that investors would ‘dismantle’ their currently prevailing focus on startup growth. So far, most investors have been pumping cash to any promising startup company’s business for the sake of growth as growth would mean escalated valuation of the startups’ businesses. However, the “down-round” IPOs of WeWork and Uber have given a lesson learnt to any investor of the danger of merely relying on the paper profits.

Hence, more and more investors are preferring to invest their money into startups that offer not only growth trajectory, but also sustainable profit potentials into the future. This new requirement has made it even harder for startups to get funding for their businesses. Consequently, startups offering growth potentials with a few sustainable revenue potentials would most likely not be considered for funding.

The very situation is now even already obvious in Indonesia. As reported by Tech In Asia in December 2019, a number of Indonesian tech startups had experienced difficulties to raise funds. There are a string of reasons leading the said case, namely the shift in investors’ interest post WeWork era; investors’ preference towards startups with better valuation, revenue growths, and path to profitability; and how good and genuine the business models of startups raising funds.  

Thoughts for the changing nature

Given the fact that investors have changed their old mantra from focusing on growth to concentrating on businesses with healthy business fundamentals instead, startup companies, especially in seed and early stages, are advised to take very significant moves to navigate this changing funding nature.

Firstly, crack on a winning business model. A startup company should ensure that her business model is of a good business model capable of withstanding any adverse business environments and any business cycle stage. Christensen Clay of Harvard Business School suggested that a winning business model should comprise four elements, namely a customer value proposition, a profit formula, key resources, and key processes (Harvard Business Review, 2011). In the context of a startup venture, a founder and cofounder of a startup should define comprehensively what their business has to offer to potential customers; what problems to be solved; how it gets revenue and how sustainable the revenue streams over time; what unique profit formulas their startup has; how to procure key resources to be able to compete in a fierce business environment; and what key processes to install and embed to win the markets.

Take a look at Grab’s business model. To fight for dominance in Southeast Asia (SEA), Grab had already set an infrastructure, system, and incentives for her driver partners, to ensure them stay exclusively with them. By crafting and executing effectively its winning business model, Grab managed successfully to be the first Decacorn startup firm in SEA, with the approximate value of USD11 billion.

Secondly, focus on sustainable profitability. More investors are focusing on long-term profitability, instead of the valuation aspect. They are now seeking companies with good business fundamentals, such ones with clear path to long-term profitability potentials, revenue growth, and management quality. Even though the valuation approach is still considered as a part of initial screenings of business funding proposals, it now acts more as an accompanying tool, instead of as the pivotal tool.

As such, seed and early staged startup founders, should revisit business basics when developing their startups in any stage of business development, from the seeding stage to the later stage. They cannot only focus on the valuation side and technical and technological aspects of their business, but should also be able to demonstrate that their businesses offer clear and sustainable monetisation and sustainable profitability. From the outset, they should ensure their businesses are based on the going concern principle, meaning that a business will stay in operation into the future, not merely is built on the basis of hype or trend, without any clear direction that profit would ever come after an entrenched period of cash burning.

Gojek, a super app of Indonesia, for example, from the beginning has had a winning business model, combined with the strong profit potentials into the future, as Indonesians are in dire and constant needs of convenient and reliable transportation alternative for their mobility. Also, Gojek’s management team consist of individuals with strong business acumen and fundamentals, capable of navigating the fierce business environment. Armed with those modalities, Gojek managed to be the second Decacorn startup of SEA, with the valuation of exceeding USD10 billion.

In summary, the startup funding environment has imposed a changing risk appetite for investment. In response to this, seed and early staged startup founders should ensure that their businesses offer investors with a winning business model and sustainable profit profile. With these two modalities, startup founders are more certain to attract the right investors and buttress up their dreams.

Author: Henry Kusuma Adikara, MBA, FMVA, CIA; A Corporate Strategist; The former corporate development and investment strategist at Cheetham Garam Indonesia (the subsidiary of Cheetham Salt Limited, Australia).

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