As Tech Craters, Founders Find Someone to Blame: VCs
In late May, as the global tech chill began to trigger layoffs in Jakarta, 32-year-old Gibran Huzaifah founder from the Indonesian startup eFishery, wrote a Twitter thread so fast caught fire. In it, he took venture capitalists to the task, criticizing the model of growth on profit and consumption of money propelled by investors in the region. He also took a swipe at his founding peers who used splash funding rounds for media exposure – and who would be most deeply affected by a possible funding crisis.
“Yeah, it’s the founders and VCs running this aggressively. Yes, in many cases the business model is chaotic,” a part Lily. “But it’s also about how cashburn is perceived by consumers, talent and the media.”
With 4,000 retweets and more than 10,000 likes, the post reflected a deep undercurrent of dissatisfaction: the view that VC cash had disproportionately funded discounts and promotions to win new customers and gain market share, at least instead of building valuable infrastructure and creating something truly sustainable. Academics and economy experts, too, went wild on Twitter and other social media. Huzaifah seemed to channel the frustration – in part, too late – of a tech community that witnessed and enabled an early boom in Jakarta based on the rapid turnover of venture capital money. Now it was starting to fall apart.
In June, when Rest of the world recently met Huzaifah in a high-ceilinged cafe near his headquarters on the coast of Bandung, the capital of West Java, he was calm and soft-spoken. But he came alive remembering how pushy investors had needled him during the height of the tech boom. “Why are you profitable? You should be chasing growth rather than profitability,” he recalled of one person who berated him when he tried to raise funds.
The aquatech start-up eFishery, which he started in 2013, first attracted seed capital in 2014 and became profitable four years later. Its technological infrastructure promises to streamline the fish farming process – a vast but a delicate industry to manage worldwide. In January this year, eFishery attracted marquee investors such as SoftBank Vision Fund, Sequoia Capital India and Temasek in a $90 million funding round. It’s been a remarkably slow fundraising journey for a Southeast Asian tech startup.
“I had experienced building a long-term, profitable business [business] was not properly appreciated by investors,” Huzaifah said, visibly frustrated. “[They] don’t have the same opportunities.
Venture capitalists in Southeast Asia closed nearly 600 deals last year – almost seven times the number of deals closed a decade ago – pumping more than $32 billion into startups, Data Tech in Asia To display. East Ventures, Sequoia, Wavemaker, 500 Global and Alpha JWC Ventures were among the most active investors, funding more than 12,000 startups in the region. During the pandemic, valuations soared as investors poured money into tech companies, many of which had operated by the accepted rule of the ecosystem: grow first, profit later. Some startups have corrected their course. Those who haven’t, however, are faced with the reality that when the cash dries up, they are usually forced to resort to cost-cutting measures, such as layoffs and pay cuts.
For some, the current backlash is a reaction to something obvious. “We all know how VCs work, right?” Pang Xue Kai, CEO and co-founder of crypto trading platform Tokocrypto, said Rest of the world on Zoom. “[VCs] take the valuation…and then they’ll pass it on to another VC or another fund, so they can eventually get that number of multiples up in terms of the valuation.
“I agree that this model, the grow at all costs model, is not a sustainable path,” added the Singaporean mechanical engineer turned entrepreneur.
Tokocrypto, which claims to have made a profit in the last year, has only completed two fundraising rounds since its inception in 2018 and raised only $5 million, according to Kai. (There is no public record of the company’s funding history.) This kind of modest fundraising is unusual for crypto startups, many of which carried the wave of crypto enthusiasm to its peak. Kai believed the funding base gave the company, which now has 2.6 million customers, more leeway to weather the current market downturn. The company has initiated the directors’ audit and due diligence processes, in preparation for its IPO on the Indonesian stock market.
Lingga Madu learned her lesson about prioritizing growth over profit even before the latest crisis. Once a co-founder of a rising Southeast Asian e-commerce star – Sale Stock, later renamed Sorabel – he raised $20m in Series A funding in 2015, one of the largest this year, he said.
The company, backed by Gobi Partners, Alpha JWC Ventures and Kejora Capital, among others VC, quickly grew with the promise of “honest pricing” – the idea that advertised prices would not change, catering to a pet peeve of disappointed customers who purchase a product only to find it heavily discounted the next day. Talk to Rest of the world, Madu felt the company was sound and structured to cover its customer acquisition costs in six months.
But along the way, Madu said, venture capital backers began pressuring the company to offer rebates. The number of customers has increased, but its customer lifetime value (CLV) – a measure showing the purchase value of an existing customer over the long term – has fallen.
“There was a lot of pressure to grow,” Madu said. “It was something that is misguided.” In 2020, Sorabel went bankrupt and closed. “The model just didn’t work.”
Sorabel’s investors, Alpha JWC Ventures and Kejora Capital, declined to comment. Gobi Partners did not respond to a request for comment.
Some of the companies less reliant on fundraising, like Huzaifah’s eFishery, feel vindicated, saying they have grown organically and are better able to weather the new belt-tightening and money-management environment. expectations. Hijup, a modest fashion e-commerce site that has been profitable since 2017, said Rest of the world it is no longer pursuing rapid growth and plans to expand its third-party online marketplace to compete with giants like Tokopedia and Shopee. “Our management thinks the ones that will thrive are the organic companies, going forward,” Hijup spokeswoman Annisa Nurrizky said during the interview. Rest of the worldtour of the company’s bustling warehouse.
Others publicly ignore the pressure: Edward Tirtanata, CEO and co-founder of profitable and tech coffee start-up Kopi Kenangan, told local media in late May that his company aims to open 50 new points of sale in one monthexpanding into new foods and beverages, from fried chicken to ready-to-drink coffee products.
“Our startup climate is toxic due to ridiculous evaluations from VCs and founders,” said Harry Su, managing director of Jakarta-based consulting firm Samuel International. Rest of the world. However, VCs shouldn’t be blamed entirely, he added. The recipients of their money are also complicit. “Founders are also guilty because they crave more funding and bigger exit valuations,” he said. “As a result, operational sustainability is often overlooked.”
Su pointed out that VCs investing in Southeast Asia tend to expect the growth rates of US startups, leading them to invest at comparable valuations in the US. But unlike their American counterparts, Indonesian startups lack the ability to scale globally, creating valuations that outpace performance.
Facing what looks like a long winter — the U.S. Federal Reserve comes approved another increase in interest rates, aimed at curbing inflation – VCs have also started spreading messages emphasizing profitability and positive unit economics, the founders of eFishery and Tokocrypto noted. There will also be more changes in the ecosystem, they thought.
“There is a change in mentality,” Huzaifah said. He predicted that startups in vertical niches, such as agritech and port logistics, will have more opportunities to shine.
Huzaifah, for his part, said Rest of the world that eFishery was looking for 1,000 additional employees across Indonesia this year to double its team of nearly 1,000 people. The startup is testing its first regional expansion, in Thailand and India, and aims to be present in 10 countries within three years. At the same time, the company develops its downstream activity, ie the sale of fish to restaurants and food stalls.
“What we need to focus on is actually building products,” Tokocrypto’s Kai said. “Not just products that will get people to spend, but products that will actually bring value to the people who use them.”