Venture capital funding should be “nice to have” not a “need to have” for most businesses. There are some really exceptional businesses being built these days.

However, there are more and more businesses that are being built predominantly with external capital. Venture capital can be used to accelerate existing growth but shouldn’t be used as a lifeline in itself.

How many startups are on a perpetual tour of gas stations? Going from one funding round to another with the dream of eventually getting acquired without ever becoming a self-sustaining business.

Arguably, there are two ways that you could look at building a business; 1) The Thiel way, and 2) The Rabois way.

Thiel’s approach suggests that you should focus on a small market, dominate, and then expand. This is prudent advice for first-time founders that are proving their mettle.

Rabois’ method is to go after a large market from inception and be willing to lose money until you’ve reached dominance. Once you’ve reached dominance you can exploit the economies of scale as well as pricing power that comes from owning a market.

This post looks at where external capital isn’t suitable, companies that have successfully scaled without external capital, and some of the issues that follow when startups take on too much external capital.

Also Read: How do you raise VC funding as a student entrepreneur? Find out the answers here

Stay away from subscale

Some startups are focused on applying the Rabois’ approach when acquiring a subscale market. This makes the unit economics that come with scale a distant mirage.

There’s nothing wrong with building a business in a subscale market. There’s a real niche for operators that are able to do it well and the returns on capital can be significantly higher than you could expect from other asset classes.

However, a lot of the time, these types of businesses don’t require external capital to scale. They just take time and effort.

Startups that weren’t reliant on external capital

There are a number of companies that have been successful and turned into billion-dollar companies without raising external capital, such as:

• MailChimp — Ben Chestnut was running a design consulting agency and had a stream of clients who wanted email newsletters created. The company is now easily worth over US$2 billion without ever going through the VC fundraising process.
• Lynda: Lynda Weinman built the product tutorial-by-tutorial before the company was acquired by LinkedIn for US$1.5 billion.
• AdaFruit Industries and SparkFun: Two DIY kit companies that were able to find their market are now selling >US$30 million worth of kits each year.
• Braintree payments: Braintree helped users exchange money online without worrying about being robbed by the other side. It eventually raised US$69 million in two rounds before being acquired for US$800 million.
• Shopify: Went three years before raising its first round of external funding.
• Shutterstock: Developed by a professional developer and amateur photographer, the company’s worth US$2 billion and never needed to raise external capital.
• Tough Mudder: Will Dean was able to create a company that has US$100 million in annual revenue out of a small amount of personal savings.
• Loot Crate: The company which creates subscription boxes for geeks, didn’t raise any money for the first four years and it was still able to generate US$100 million in revenue before raising external capital.
• Mojang: The company behind Minecraft employed only 50 people and earned over a billion dollars before it was sold to Microsoft for US$2.5 billion.

The above companies either didn’t raise external capital at all or they didn’t raise external capital until they had found a successful business model that they could scale.

There are funding solutions available for entrepreneurs to prove out product-market fit but unless the market is there and it’s significant, venture funding might not necessarily be the right fit for a majority of companies.

It’s getting easier to go nowhere

It has likely become somewhat easier to raise capital over the last capital cycle because “startups are cool” and there has been a lot of press about the companies that have knocked it out of the park — although, less press about all the people that have tried and failed.

The lack of returns available through traditional asset classes combined with the hype has created one side of the marketplace — capital seeking a home. A switch in culture from wanting to work for large enterprises to “grinding it out in a start-up to change the world” has likely created the other side — people willing to try something new.

Largely, this will be beneficial for society as a whole as people get closer to realising their potential and no longer operate under the agency constraints of larger enterprises.

However, a lot of these businesses should be built organically and aren’t the typical candidates for external funding as a stopgap for real customers. It’s important to note that there’s a downside to taking on external funding.

Also read: Is your startup in need of funding? Let the e27 Pro Fundraising Highlight do the trick!

In the situation where there’s an exit, if there has been too much dilution and there’s an aggressive capital stack, there might not be that pot of gold at the end of the rainbow for the founders.

The founders of Get Satisfaction didn’t get anything when they sold the company after raising U$10 million at a U$50 million valuation — the sales price was undisclosed.

Capital stacks

But how could this be so? Let me walk you through an example:

It’s important to understand the capital stack when looking at the last valuation.

• Assume that a company raises US$3 million at a US$10 million pre-money valuation using preference shares in the first round and then subsequently US$10 at a US$50 million pre-money valuation in a later round (total raised = US$13 million).
• The later investors could have a two-time liquidation preference (let’s just assume that they were able to negotiate those terms).
• The later investors might be willing to give the company a higher valuation because the headline number makes it look like the company is a rocket ship on a trajectory to the moon. This makes it easier for the company to secure future investors, customers, and employees — all important issues that need to be solved for a young business.
• However, this also creates the issue of the overlords (investors) needing to be fed before the founders and employees are able to eat.
• In the above example, US$23 million (US$3 million invested in the first round and US$10 million at a two-times liquidity preference) needs to be repaid to the investors who stand in front of the founders and employees.
• The company is typically raising at a valuation that it will grow into, which could take months or years.
• If the company is subsequently sold for US$30 million, then the other shareholders (not the investors but the founders and early employees who received equity) will receive US$7 million or only 23 per cent of the sales price.
• If the company is sold at U$50 million (the last valuation), then the other shareholders will receive 54 per cent.
• The company needs to be sold for at least US$50 million to ensure that the preferred shareholders have their liquidity preference repaid.
• The important thing to note here is that while there was only 46 per cent dilution (30 per cent in the first round, which was subsequently diluted again and 20 per cent in the second round), the founders and early employees only receive 23 per cent of the sales price if the company is sold for less than the last valuation.

It’s difficult to understand capital stacks and early employees typically aren’t given that much visibility into the investment rounds and terms. They’ll typically only see the headline number, which doesn’t tell the whole story.

The businesses that could look for venture capital should be looking to tackle a large market, have proven operators that can execute, and be able to scale quickly.

A startup should have some idea about where the customers will come from and what they’re willing to pay before raising venture capital.

Companies that are reliant on external capital will lack the resilience necessary to survive an exogenous shock that could cause a rise in funding costs.

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As a region, APAC has witnessed exponential growth in both mobile gaming and advertising revenue. APAC is home to over 1.23 billion gamers, more than every other region in the world put together.

While the high-value APAC markets such as China, Japan, and South Korea, tend to capture the most mind-share, Southeast Asia offers mobile gaming advertisers immense potential: a large, hardcore userbase with a relatively high ARPU for the region translates into exceptional opportunities.

In this piece, we’ll be looking at some of the key trends in mobile game advertising across the Southeast Asian region, identifying where the market is and what it responds best to.

What types of games are most popular in Southeast Asia?

The Southeast Asian region is unusual in that it has a relatively large user base that plays hardcore games. Titles such as Garena Free Fire, Lords Mobile, Ragnarok M, and PUBG take pole position in the region, both in terms of revenue and overall user numbers. According to a Niko Partners report, 90 per cent of Southeast Asian mobile gamers play e-sports titles.

At the same time, evergreen casual titles continue to enjoy immense popularity in the region. Candy Crush, Clash of Clans, Subway Surfers and Pokemon Go have each accumulated user base in the tens of millions.

There is an interesting mix of hardcore and casual gamers in this region. While core gamers are usually a small set, they contribute significantly to the gaming economy because of their high spending power. On the other hand, with increased smartphone penetration, it is the casual gamer base that has been rising exponentially.

Also Read: ZeusX to bring mobile gaming to the next level in 2020

Though they do not spend a lot of money, the time spent and stickiness quotient is very high. This is what makes them extremely attractive to advertisers.  This mix of evergreen titles and a hardcore user base is advantageous to advertisers. Hardcore gamers tend to spend substantially more than mid-core and casual gamers.

While regional ARPU numbers remain relatively low, strong year-on-year mobile ad spends growth means that this hardcore user base with increased spending power will drive growth in the years to come. At the same time, the strong, user base for casual titles offers potential in terms of stable ad revenue streams.

Southeast Asian mobile ad market growth

While ARPU varies from US$8 in Indonesia to nearly US$80 in Singapore, breakneck year-on-year ad spending growth means the region has tremendous potential. Between 2016 and 2017, for instance, the region witnessed a 250 per cent increase in mobile ad spend. Mobile ad consumption is growing at an even faster pace than ad spends: The Philippines registered a nearly 430 per cent year-on-year increase in mobile ad consumption.

Both advertisers and publishers benefit here. Drastically increased ad consumption means greater revenue for game publishers. It also increases the TAM for advertisements, meaning ads reach more people, yielding higher product sales.

Mobile ad formats for Southeast Asian audiences

Hardcore and e-sports titles often monetise through in-game items that offer a competitive advantage. Southeast Asian gamers appear to be particularly receptive to monetisation approaches like in-game video. The Philippines, Indonesia, and Vietnam are among the world’s top ten countries in terms of mobile video ad consumption growth.

Because of the region’s relatively low ARPU and large gaming user base, alternative monetisation methods like opt-in video ads work to great effect. An effective strategy to monetise the user base would be offering premium currency and rewards to users in exchange for opt-in interstitials and videos.

Also Read: How this entrepreneur is stepping up the game for gaming tech e-commerce

It’s also important here to assess the kind of advertisements that work best in the region: Surprisingly, technology and social media-related ads account for less than 12 per cent of total ad views in the region. Retail, food and beverage, and health ads collectively account for over 50 per cent of all views. Advertisers from these sectors will see the best outcomes in terms of CTR.

With a population of nearly 700 million and a US$3.3 trillion economy, Southeast Asia offers immense opportunities to businesses in all sectors.

With smartphone penetration increasing, a hardcore e-sports oriented userbase, high opt-in rates for rewarded ads, and rapidly expanding mobile ad spend, the region offers developers, publishers and advertisers alike the chance to tap into a major new revenue stream as East Asian markets in Japan, Korea, and China mature.

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Is it a good idea to start your business while the world is grappling with a disastrous pandemic-recession combo? The answer could not be a simple yes or no. There are many factors to take into account.

For one, you have to evaluate the COVID-19 situation in your area. Some Asian countries such as Vietnam and Thailand are doing fairly well. Startups with local target markets have better chances of succeeding in these locations.

On the other hand, you should also examine pertinent information about the demand for the product or service you want to offer, the availability of suppliers or resources, logistics, and profitability.

The coronavirus health crisis and the economic damage that came in its wake have created difficulties. However, they also present business opportunities.

Make sure you choose the right business

Not all businesses can survive let alone thrive in the current economic situation. It is illogical to set your sights on a (conventional) movie theatre, recreation centre, or other similar businesses that cram people together in an indoor space. A travel and tourism venture is similarly out of the question.

The US Chamber of Commerce has come up with a list of 15 businesses that are most likely to succeed in different parts of the world.

Also Read: Why you should start a business in your 40s

The list is as follows: cleaning services, delivery services, drive-in movie theatres, grocery stores, liquor, and wine stores, meal preparation and delivery, canned and jarred goods, game making, and selling, fitness equipment sales, landscaping and yard care, bread-baking, coffee subscription, gardening supplies, mask manufacturing and selling, and telehealth services.

Two important attributes stand out in this list of businesses: serving essential needs and reduced human interaction.

If you want a business that succeeds in the midst of a pandemic, you need to focus on basic necessities and businesses with minimal personal interaction. “COVID-19 will force a rebirth of many industries as we all sit at home in lockdown, re-assessing and re-imagining modes of consumption, supply, interaction, and productivity,” says Mohit Joshi, President of the World Economic Forum.

Moreover, innovation and creativity are vital. It is worth noting that some of the most high-profile companies at present were born during or immediately after an economic downturn.

Uber, Slack, Airbnb, and Venmo are excellent examples. They introduced novel ideas that addressed needs in creative ways. Hopefully, the current crisis results in more innovative startups that help expedite economic recovery.

Harness technology

The role that technology plays in the new normal is undeniable. Businesses and consumers now rely on web-based communication, e-commerce platforms, and secure payment systems and other fintech innovations to do business. It is the worst time for business owners and managers to be Luddites.

Also Read: How startups can tap community networks to pivot for growth amidst the pandemic

“The COVID-19 pandemic has accelerated ten key technology trends, including digital payments, telehealth, and robotics. These technologies can help reduce the spread of the coronavirus while helping businesses stay open,” share Yan Xiao and Ziyang Fan of the WEF Digital Trade.

The rest of these ten tech trends are online shopping, digital and contactless payments, remote work, distance learning, online entertainment, supply chain 4.0, 3D printing, and 5G and ICT.

If you want to survive the challenges of COVID-19 and an unprecedented recession, you need technology working for your business. Tech does not only create conveniences; it also opens opportunities.

“What new technology does is to create a sandbox for innovation in addressing what a customer needs or wants, oftentimes with automation in mind. Businesses can get a significant boost by integrating these new tech solutions,” says Tyler Gladwin, CMO of Alpha Roc.

“The pandemic- and recession-stricken business landscape is filled with all sorts of challenges. You need reliable leverage, and that could be technology. Use it well and you can be assured of palpable benefits,” Gladwin adds.

Also Read: How to start a business in China as a foreigner

Reasons to consider starting a business

“Digital is not a choice, it is the new norm! Companies need to transform into digital enterprises if they want to stay relevant to their customers,” says Xander van der Heijden, Founder and Chief Executive Officer of UNL Global. “This means they need to reinvent themselves, create new digital business models, implement a unified channel strategy where online is fused with offline, engage with their customers, and establish the ultimate customer experience.”

Going back to the question raised in this post’s title, yes, it makes sense to start a business even while serious health and economic challenges persist. There are many reasons to be optimistic in launching a business venture, which includes:

• Cheaper raw materials, logistics, and human resource costs
• Less crowded industries especially for businesses that offer innovative solutions
• Better credit options through Central Bank rate cuts and government stimulus programs
• Leaner operations with more employees receptive to remote work arrangements
• Support from aggressive investors

“Downturns or challenging times are seen as good times to start a business for two reasons. One is, there is less competition for resources. The second reason is that whatever changes we face, positive or negative, bring up new customer needs. And customer needs are at the core of any business,” says Rashmi Menon, an entrepreneurship expert at the University of Michigan’s Zell Lurie Institute for Entrepreneurial Studies.

Take risks, cautiously

Launching a startup in the face of a pandemic and global economic turmoil is not necessarily a bad idea. If you undertake the necessary due diligence to ascertain that you have the right business model and you take advantage of technology, you may just end up hatching a company that is as successful or even better than Airbnb or Uber during their heydays.

Also Read: From sales-led to product-led: PatSnap founder shares how COVID-19 shifted their growth strategy

The developing Asian economy has been growing steadily before COVID-19 came. It does not make sense to play defeatist and pessimist. There is a lot more to exploit in this massive market that is set to drive the global economy after the pandemic.

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Southeast Asia (SEA) is home to four of seven of the world’s highest-performing emerging economies: Indonesia, Malaysia, Singapore, and Thailand.

According to McKinsey: GDP per capita for these countries has grown at least 3.5 per cent per annum since 1965. More recently (since 2000) we should include Vietnam and Myanmar to this list with an average GDP per capita growth of seven per cent and over the past eight years, the Philippines has also exceeded the yearly GDP growth per capita by 3.5 per cent.

The population of SEA consists out of roughly 600 million people. SEA has more than 360 million internet users. Out of which a 100 million internet users were added in just the last four years.

Venture capital activity

According to Temasek the region will have 10 new companies valued at over US$1 billion each by 2024. The internet economy in SEA will reach US$100 billion in 2019 and triple to US$300 billion by 2025.

Fundraising backed by venture capitalists, private equity funds, and corporate investors is reaching record levels in SEA.

Also Read: Angel investing is full of risks –but that is why it is so rewarding

What kind of opportunities should an angel expect?

US-based VCs tend to back a lot of breakthrough innovation and transformational technologies and experiment with new business models.

Venture investing in SEA tends to focus on companies with technology and solutions that are already proven in developed markets, with the required adjustments to grow in a developing market with different demographics.

The Future

SEA is now in a golden era for tech startup growth as people’s livelihoods improve. In 2018, the average per capita income of SEA countries reached US$4,600, similar to that of China in 2007 when the country started its tech boom.

Covid-19
Another essential feature of these emerging countries has been their ability to achieve macroeconomic stability, even at a time of global volatility, by adapting policies to fit their local context and changing conditions. For example, governments took quick action to ensure rapid recovery from volatile episodes, such as the Asian financial crisis of the late 1990s and the global financial crisis of 2008 and 2009.

Even though COVID-19 is not a financial crisis we can expect SEA to recover faster than other regions.

SEA vs. Europe and the US?
Investors are looking towards the East to find value and diversify their portfolio:

• Europe is facing a lot of internal issues such as Brexit and Southern European countries on the verge of bankruptcy (even though the internal regulations of the European Union, in theory, make for an amazing market, they have not fully overcome their immense cultural differences)
• The US has just ended a long cycle of recovery and expansion, which has been underpinned by record-low interest rates and tax cuts

Also Read: Report: SEA digital investment climate to become more diverse, “strong” growth in most deal sizes

Growth of the middle class
As mentioned, millions of households are starting to earn higher incomes and moving into the middle class, which means increasing demand for consumer products and services.

The population is young, productive, and growing. Also, the SEA market is immature and there’s room to boost efficiency. Both conditions are helpful for value creation.

Global tensions and safe havens
As friction mounts among major trading countries, especially between China and the US, the emerging markets of SEA are increasingly seen as a safe haven for global investors and new avenues to seek diversification.

Industries
Driven by consumer needs, more and more startups are reaching unicorn status. SEA is one of the fastest-growing consumer markets in the region and increasingly natural addition to the global investor’s portfolio.

Alongside consumer-related industries, the latest data shows that investors are also drawn to the emerging segments of technology such as mobile payments, smart cities, and e-commerce in the region.

It’s difficult though to generalise about the attractiveness of industries on a regional basis. One has to look at individual countries to identify opportunities.

The nations individually have a diverse set of structural capabilities, natural resources, and labour skills. Singapore has emerged as a financial and legal powerhouse that offers easy access to investor capital and a well-established legal system known for its rule of law.

Countries such as Indonesia have extensive natural resources in a variety of sectors, while Vietnam, Myanmar, and Cambodia still maintain attractive labour markets.

Also Read: Angel investing is full of risks –but that is why it is so rewarding

Cross-border growth
Cross-border growth opportunities are yet to be fully exploited in SEA and should be one of the prime areas for an angel to look at. Companies that successfully crack the cross-border code have direct access to one of the largest economies in the world.

There are few regional champions that are strong across multiple SEA geographies. This is due to challenges faced with raising capital to grow a business into different cultures, work with different regulations and languages.

However, on January 1, 2016, the Association of Southeast Asian Nations (ASEAN), inaugurated the ASEAN Economic Community (AEC). The AEC aims to create a single market and production base for the free flow of goods, services, investment, capital, and skilled labour within ASEAN.

Cross-border development and efficiency gaps continually threaten AEC goals (because, for example, of fears of brain drain or a race to the bottom), and cross-cultural and political differences have proven irreconcilable with the consensus building.

However, as the AEC continues to mature, opportunities will arise for companies looking to expand in or into the Southeast Asian market and foreign direct investment is one of the publicly-stated priorities for the AEC.

Bottom-up research
And so even though investors should view SEA as one focus region it is important to analyse bottom-up and look for industries in specific countries that have the potential to grow cross-border and not top-down where one might miss country-specific problems (a mistake commonly made by foreign investors and founders that seem to think: ‘if it works in country A, I can also easily scale in country B’).

Deeper due diligence & longer investment horizons

For angels looking to invest in SEA, there are layers of complexities: the varying levels of development between countries, differing legal systems, and multiple languages and cultures.

Also Read: What should you consider before becoming an angel investor?

Hence, a deeper level of due diligence is required to navigate the intricacies of the region.

Also, due to the fact that the investment ecosystem is still less developed compared to the US and Europe, angels might have to accept a longer investment horizon (10 to 15 years) than they might be used to in developed markets (three to eight years), however, one can benefit from a potentially higher IRR as the region is emerging fast.

Ingredients for success

Scaling in SEA
Many successful (traditional) businesses have scaled successfully across the region. As long as one applies the right bottom-up methods and embraces the different cultures and regulations, there are no scaling barriers in SEA.

Follow-on capital
There is a consistent growth in the number of early stage companies and new VC funds, yet the amount of capital in early stage funds is not growing as much as more VCs prefer bigger and later stages.

Hence VCs are competing for the outflow of new companies funded by angel investors while this investable void (the space between ‘family & friends’ and VC capital) for angel investors remains large.

Sufficient talent
Finding talent is always a challenge. There’s currently simply more economic growth than talent. The upside is that the expansion in the region attracts a lot of foreign talent that is willing to start new businesses.

Either tech talent from India or successful founders from Europe or the US.

Opportunities for exits
Most exit opportunities are realised through M&A. There have been few large IPOs (Razer and game company SEA). As the region continues to attract more VC capital more and more PE funds will enter to seize later stage opportunities.

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Indonesian state-owned telco operator Telkom has named Fajrin Rasyid, co-founder and president of local e-commerce giant Bukalapak, as the new director of its digital business arm.

The appointment was announced in a shareholders meeting on Friday, June 19, in Jakarta, according to various media reports.

It was part of the telco’s strategy to become “more profitable and reduce its dependence on mobile service,” according to CNBC.

Following the appointment, Rasyid has stepped down from his position as president in Bukalapak.

Also Read: Afternoon News Roundup: Bukalapak denies reports of user data breach

Prior to being promoted to President position, Rasyid was the CFO of the South Jakarta-based startup for seven years.

Graduated from Bandung Institute of Technology (ITB) with a 4.0 GPA, Rasyid started out his career as a consultant at Boston Consulting Group (BCG).

Throughout his career, Rasyid has won several awards including SWA magazine’s CFO of The Year and Endeavour Entrepreneur 2016.

With this appointment, all three of Bukalapak co-founders —Achmad Zaky, Nugroho Herucahyono, and Rasyid– have exited the company.

Bukalapak itself has secured its unicorn status in 2018. In an interview with e27, Rasyid likened the unicorn status to “stopping at a gas station.”

“Being a unicorn is a means, not an end. It is just like gas stations; we need to stop at a gas station to add fuel [to our vehicle] so that we can reach our destination … We don’t build companies in order to look for investments. We are here to serve the customers,” he said.

Also Read: Bukalapak co-founders launch Init 6 to back early-stage startups in Indonesia

Bukalapak is yet to name the replacement of Rasyid in the company by the time of this article’s publishing.

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Image Credit: Bukalapak

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