According to a July report by KPMG and HSBC, startup investments in the Asia Pacific (APAC) region in 2022 are unlikely to surpass a record $193.7 billion that was pulled in last year. Certain sectors are facing more bearish sentiment, such as the previously hotly-coveted crypto sector, which has slowed its role following the crypto crisis and global headwinds in May this year.
Against the backdrop of weakening sentiment and capital falling in 2022-2023, investors are understandably more focused on profitable and sustainable growth. Here are three considerations for startups to better navigate uncertain times and deliver quality growth.
Understand your marketability
It sounds simple, but an important part of deciding where your startup lands best on the profitability-growth continuum is really understanding your competition and your audiences. Convosight is a monetization platform for community builders founded in Delhi in the heat of the early 2020 pandemic. The timing was right as the lockdowns have made online communities a mature target for fast moving consumer goods (FMCG) brands. Two years later, over 500 million members from over 50,000 communities in 75 countries are using Convosight.
Co-founder and CEO Tamanna Dhamija said, “As pioneers, we spent much of our time educating the market. On the demand side, we explained to brands the importance of online communities and how consumers are moving to online platforms like Facebook or Reddit. Supply-side: We have qualified and trained community builders to sustain their communities and run campaigns, adding value to brands.”
In comparison, Funding Societies/Modalku, which started in 2015 as an alternative lender, was in the middle of the P2P wave that swept Asia between 2013 and 2018. Today, the Singapore startup is Southeast Asia’s largest digital financing platform for SMEs, a product of Zigzag while competitors jagged and understood the subtle differences in the SME financing landscape between the Southeast Asian, Chinese and US markets.
Kelvin Teo, Co-Founder and Group CEO of Funding Societies/Modalku, said: “We deliberately made certain choices that differ from our competitors. First, we have prioritized compliance and regulations while other foreign players have focused on growth. Second, we decided to become a one-stop shop for financing, taking a regional approach and investing in technology and data ahead of other players. These tiny decisions to deviate from the norm have made us the market leader over time.”
Meanwhile, Singapore-based digital verification startup Accredify is bypassing the funding slowdown affecting other blockchain startups by understanding and serving its target audiences. CEO and co-founder Quah Zheng Wei said: “2020 and 2021 have been excellent years for Web3 startups. However, the current process for raising Web3 funding is longer. Instead of talking about blockchain, we explain the unique benefits our technology TrustTech can bring to customers in document and identity lifecycle management and verification. Uniquely, we weren’t as badly affected by the decline in the Web3 funding cycle.”
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Today, Accredify counts on the public sector and the education sector as major growth drivers. In Singapore, it supports the Ministry of Health in digitizing COVID-19 medical records to facilitate authentication of discharge notes, test results and vaccination records. Due to the slowdown in COVID-19 testing, Accredify is exploring other healthcare industry opportunities such as: B. Verifiable health insurance claims.
Acredify started in education in Singapore and made Australia its second market. Acredify’s decentralized mechanism helps educational institutions smoothly verify certificates, diplomas, and other qualifications. This mechanism allows Accredify to scale quickly and export its education solution to new markets very easily.
Let your stage inform your metrics
As startups progress from seed to early stage and then to growth and late stage funding, they must continuously recalibrate between profitability and growth. Funding Societies/Modalku, which raised a $144 million Series C+ round in February led by SoftBank Vision Fund 2, has gone through the growth phase.
For Teo, this means that almost the same attention is paid to profitability and growth compared to the early days when scaling was a priority. The tipping point came after 2018, when disclosure of WeWork’s losses prompted a swing toward profitability. “Our feeling was that eventually the funding sentiment would change and we wanted to take charge of our destiny, especially when there is a funding gap in Southeast Asia for the BC series rounds. So we decided to change gears to profitability,” he said.
To better align with for-profit investors, Funding Societies/Modalku income statements show a breakdown between existing and new companies. Teo explained, “With existing companies, we prefer to break down to the economics of the product units. While not entirely accurate, the numbers you are given here are crucial in giving you direction and guidance. For example, our financing business is nearing profitability while more experimental business units are consuming resources. By dividing them up, we can set expectations for when each unit can become profitable.”
Accredify, on the other hand, is still an early-stage startup that closed a $2 million round led by Qualgro in September 2021. Though size is the focus now, Quah believes that Accredify’s high volume acts as a lever they can use to become profitable.
“About 50-55 percent of our spend goes into R&D, so we build products for the future, either for our existing customers or products that can help us win new customers. We can always flip that switch and be profitable. At our current stage, it doesn’t make sense now, but that option is always in the back pocket, giving us a strong negotiating position with customers, partners and investors,” he said.
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Meanwhile, Convosight has been profitable since inception, so the focus is now on growth and cash flow. Key metrics include burn ratio and cash flows. “We’re entering into channel partnerships and hiring, which means there could be a small margin squeeze. Before we took that step, we stress tested all of our numbers while we focused on collections and made sure we had two years’ worth of cash in the bank. We want to find ways to shorten the cash collection cycle because ultimately it means profitability in terms of cash flow,” said Dhamija.
Always see the big picture
Whether it’s a once-in-a-century pandemic or a weakened capital environment with hesitant investors, both Dhamija and Teo have taken stock of different perspectives to make key business decisions.
It was crucial for Convosight to keep a close eye on community sentiment during the various waves of COVID-19 in India. While in the first wave, marketing by major hygiene brands within online communities led to massive demand for Convosight, the second wave was a different story.
Dhamija said: “It was the worst time ever and very different from the first wave. We were in the midst of due diligence in April 2021 and decided to stop all community marketing campaigns, even if brands wanted to run them. We have told our incoming investors that we will have no revenue as it is not right to run ads in this climate. We had to take care of our customers and our team. We were worried about turning off new investors, but the deal went smoothly,” she said. Convosight completed its $9 million Series A led by Qualgro in June 2021.
When the first wave of COVID-19 hit Singapore in 2020, Funding Societies/Modalku spoke to every economist, investor and analyst it could reach to get ahead of the market.
Teo says: “Given the expected market growth and our cost structure at the time, we realized that every company had to adjust its size. We made the painful decision to position ourselves in front of others to protect team members so they can find (new) employers sooner. It was very painful, immediate growth slowed and investors panicked. In the medium term, the team became more cohesive and resilient. You have seen that we are making the right decisions.”
The results back it up: In 2020, Funding Societies/Modalku reduced its operating expenses and cash burn by 50 percent while keeping its default rate below 2 percent.
If founders are still unsure about their own profitability versus growth dilemma, Teo advises playing it safe: prioritizing profitability and lower valuations.
“The risk is asymmetrical. If you’re too profitable, you can still live to fight another day. If you left money on the scoreboard, you can come back and claim it in the next round when you have better financial results. Conversely, if your valuation is too high, your down-round risk will be massive. If you run out of money, you’re dead in the water.”
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