Startup investments in the Asia Pacific (APAC) region in 2022 are not expected to exceed the record-high US$193.7 billion pulled in last year, according to a July report by KPMG and HSBC. Certain sectors are facing more bearish sentiments, such as the previously hot-ticket crypto sector, which has slowed its roll following the crypto crisis and global headwinds in May this year.
Against the backdrop of weaker sentiments and a capital downturn in 2022-2023, investors are understandably pivoting to focus more on profitable and sustainable growth. Here are three considerations for startups to better navigate uncertain times to achieve quality growth.
Understand your market fit
It sounds simple, but a key part of deciding where your startup best lands on the profitability-growth continuum are truly understanding your competition and your target audiences. Convosight is a community creator monetisation platform that was formed in the heat of the pandemic in early 2020 in Delhi. The timing was opportune as lockdowns made online communities a ripe target for fast-moving consumer goods (FMCG) brands. Two years later, over 500 million members from over 50,000 communities in 75 countries use Convosight.
Co-Founder and CEO Tamanna Dhamija said, “Being first movers, much of our time early on was spent educating the market. On the demand side, we told brands the importance of online communities and how consumers are shifting to online spaces like Facebook or Reddit. Supply-side: we upskilled and trained community creators to sustain their communities and run campaigns, which adds value to brands.”
In comparison, Funding Societies/Modalku, which began as an alternative lender in 2015, was in the middle of the P2P wave that swept Asia between 2013 and 2018. Today, the Singaporean startup is Southeast Asia’s largest SME digital financing platform, a product of zigging while competitors zagged and understood subtle differences in the SME financing landscape between markets in Southeast Asia, China, and the US.
Funding Societies/Modalku’s Co-Founder and Group CEO Kelvin Teo said, “We intentionally made certain choices that differed from our peers. First, we prioritised compliance and regulations, while other foreign players indexed on growth. Second, we decided to become a one-stop shop for financing, went regional and invested in technology and data ahead of other players. These minute choices to deviate from the norm have enabled us to become a market leader over time.”
Meanwhile, Singapore-based digital verification startup Accredify is dodging 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 were excellent years for Web3 startups. However, the current process of obtaining Web3 funding is longer. Instead of talking about blockchain, we explain the unique benefits of what our technology, TrustTech, can do for clients in document and identity lifecycle management and verification. Uniquely, we’ve not been that affected by the drop in the Web3 funding cycle.”
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Today, Accredify counts on the public and education sectors as big growth drivers. In Singapore, it assists the Ministry of Health in digitising COVID-19 medical records to allow the ease of authenticating discharge memos, test results, and vaccination records. Due to the slowdown in COVID-19 testing, Accredify is exploring further opportunities in the healthcare industry, such as verifiable medical insurance claims.
Having started out in the education space in Singapore, Accredify made Australia its second market. Accredify’s decentralised mechanism helps educational institutions verify certificates, transcripts, and other qualifications frictionlessly. 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 growth and late-stage funding, they must continuously recalibrate between profitability and growth. Funding Societies/Modalku, which raised a US$144M Series C+ round led by SoftBank Vision Fund 2 in February, is passing the growth stage.
For Teo, this means giving almost equal attention to profitability and growth compared to the early days, when the scale was prioritised. The turning point was after 2018 when the revelation of WeWork’s losses saw a pivot towards profitability. “Our sense was that funding sentiments would eventually change, and we wanted to take control of our destiny, especially when there’s a funding gap in Southeast Asia for Series B-C rounds. Therefore, we made a choice of changing gears to profitability,” he recounted.
To better align with profit-focused investors, Funding Societies/Modalku’s profit and loss (P&L) statements have breakdowns between existing and new businesses. Teo explained, “For existing businesses, we prefer to break down to product unit economics. Though not strictly accurate, the numbers you get here are vital in giving you direction and guidance. For instance, our financing business is approaching profitability, while more experimental business units are consuming resources. Splitting them allows us to set expectations for when each unit can become profitable.”
Accredify, meanwhile, is still very much an early-stage startup, having wrapped up a US$2M round led by Qualgro in September 2021. Though the scale is the focus now, Quah believes Accredify’s high unit economics acts as a lever they can use to turn profitable.
“Around 50-55 per cent of our spending is on R&D, so we are building products for the future, either for our existing clients or products that can help us get new clients. At any point, we can flip that switch and be profitable. It does not make sense now at our current stage, but that option is always in the back pocket, giving us a strong bargaining position with clients, partners, and investors,” he said.
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Meanwhile, Convosight has been profitable since its founding, so the focus now is on growth and cash flows. Key metrics include burn ratio and cash flows. “We are getting into channel partnerships and hiring, which means there might be a small margin dent. Before taking this step, we stress-tested all our numbers while focusing on cash collection and ensuring that we had two years’ worth of Cash in the Bank. We want to figure out ways to shorten the cash collection cycle because eventually, it is profitability in terms of cash flows,” Dhamija said.
Always see the bigger picture
Whether it’s facing a once-in-a-century pandemic or a weakened capital environment with hesitant investors, both Dhamija and Teo took stock of different perspectives to make critical business decisions.
For Convosight, keeping a pulse on community sentiment throughout COVID-19’s various waves in India was essential. While the first wave saw large hygiene brands marketing within online communities resulting in massive demand for Convosight, the second wave was a different story.
Dhamija recounted, “It was the worst time ever, and very different from the first wave. We were amid due diligence in April 2021 and decided to halt all community marketing campaigns, even if brands wanted to run them. We told our incoming investors that we would have zero revenue as it was not right to run ads in this climate. We had to take care of our consumers and team. We were worried about scaring off new investors, but the deal went through smoothly,” she said. Convosight closed it’s US$9M Series A led by Qualgro in June 2021.
Over in Singapore, when the first wave of COVID-19 hit in 2020, Funding Societies/Modalku spoke to every economist, investor, and analyst it could get hold of to pre-empt the market.
Teo recounted, “Considering the expected growth of the market and our cost structure at the time, we realised that every company would have to rightsize. We made the painful decision to rightsize ahead of others, to protect team members so they can find (new) employers earlier. It was very painful, immediate growth slowed down, and investors panicked. In the medium term, the team became more united and resilient. They saw that we were making the right decisions.”
The results bore these out: In 2020, Funding Societies/Modalku reduced its operational costs and cash burn by 50 per cent while keeping its default rate below two per cent.
Final thoughts
If founders are still unsure about their own profitability/growth trade-off dilemma, Teo advises erring on the side of caution: prioritising profitability and lower valuations.
“The risk is asymmetric. If you’re too profitable, you can still live to fight another day. If you left money on the valuation table, 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 are dead in the water.”
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