This article is adapted from Jenny Lee’s segment on Tech in Asia’s 2022 conference.
I’d even go so far as to say that in my 22 years as an investor, this is probably the most complex environment I’ve seen globally – startup winter is truly here.
There are many macro issues at play today. The political battles waged between the world’s superpowers aside, there are also ongoing wars. As a result, inflation and economic pressure have arisen in many countries.
This is the reality we all face today, regardless of our status. As grim as the world’s situation may be, there are steps you can take to weather this global economic downturn and emerge stronger than ever.
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History of economic downturns
The global economic downturn we are all living through isn’t exactly new to us. When I first got into venture capital in 2001, that was a similarly challenging time for the world. The dot-com bubble crash had just happened, and the 9/11 horror was also fresh on everyone’s minds.
On top of that, I had just broken my 11-year scholarship bond with ST Aerospace and racked up an enormous $300,000 penalty debt.
Despite all these difficulties stacked against me, I was driven by the necessity to overcome them and survive. And the first step was to relearn Chinese and use it regularly.
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Find opportunity in adversity
So why did I bring up my personal experience from way back in 2001? While today’s problems are undeniably more complex than in the past, one thing remains unchanged for all businesses: focusing on solving specific problems through your product or service.
Even as you tread the uncertain waters of today’s turbulent economic climate, your mission to solve the pain points you identified should never waver. And when challenges emerge along the way? I urge you to reframe how you look at them and see them as opportunities ripe for picking.
The usual mantra of “business as usual” will not work anymore. You must be prepared to adapt to the changes in the world around you. Take the fintech sector as an example. The consumer climate was defined by anxiety about heavy spending, which impacted the market for big-ticket purchases.
The problem was especially pronounced in emerging economies, where people were largely unbanked and had no access to credit cards. Instead of seeing this as an unsolvable challenge, companies came up with Buy Now, Pay Later (BNPL) schemes that allow customers to pay for big-ticket purchases in three or four interest-free instalments without a credit card.
This example of BNPL demonstrates that what you knew and did before may take a different direction to open new vistas of opportunity. As entrepreneurs, you need to anticipate these changes and take advantage of these opportunities as they emerge.
You’ll emerge as a great leader if you play your cards right. So don’t be afraid of breaking away from the norm to try something different – this could very well be your ticket to success.
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Valuation is not as important as you think it is
Apart from reframing your approach to the current economic adversity, it’s equally important for you to reframe how you forecast your valuation growth. As a founder, you see examples of businesses growing three to ten times – it’s easy to assume that your valuation will grow on the same track.
But you need to remember that the markets are inherently connected. Public valuation is used as a barometer by investors in the private market to gauge the health of the overall market. However, the public market has been devastated in recent years.
So what does this all mean? Basically, when you think about valuation, do not draw comparisons with the vacuum you were in over the last few years. Instead, take a step back and evaluate the bigger picture on the global scale.
For example, let’s say you’re in the software as a service (SaaS) industry. This was a hyper-growth sector for a time – in the United States, for example, the top five SaaS companies were trading at 50-60x at their peak in the last two years. However, their prices have plummeted by 7-8x in the past eight months.
This includes public companies which made it to scale – these companies have also seen their valuations go down. With the entire industry coming down – including the public companies – what happens is that everyone is now competing for the dollars that flow into the local public market. This market will bounce back quickly, especially in contrast to dollars that go into individual startups – these usually take a few years to recover.
While valuation is sliding and the cost of capital is going up, comparing these factors relative to the public market, there are now opportunity costs in that selection. So let’s say someone comes up to your 2-3x company and asks for a 10-20% discount – it’s actually not that bad.
On top of that, we have also seen the valuation of public companies drop by as much as 80% on extreme days. If you take this as a reference point, valuation becomes moot under tough market conditions.
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Clearly outline a cash runway plan for the next 36 months
Instead of fixating on valuation, I recommend you craft a clear cash runway plan for at least the next 36 months. We at GGV are looking out for this in our portfolio companies.
With such a huge load of cash on hand, you don’t always have to be on the defensive. You can even switch things up to go on the offensive, especially when an opportunity that calls for cash arises.
But if you haven’t reached a revenue-generating level, that’s okay too. Instead, I advise you to hunker down and focus on ensuring that your business model works well for your target market(s).
To me, figuring out different ways to monetise in this complex environment is the most important thing you need to do right now. In doing so, you become self-sustainable, which will go a long way in helping you build strong foundations for your business.
Apart from monetisation strategies, keep your eyes peeled for government grants available in your country of operations. In Singapore, for example, the government is very supportive of the startup landscape, offering various grants and subsidies to businesses in this space.
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Focus on your people
With the practical side covered, let’s consider another crucial facet of your business: your people. COVID-19 has impacted the world in many ways, and the Great Resignation is one of its most significant consequences.
Attitudes towards work have changed tremendously today, with many people prioritising their wellbeing over being loyal to their jobs. We’re facing a talent fight at the highest level as things stand now. It’s not about the number of people you can hire.
Instead, you should focus on hiring and retaining people with the right mentality to stick with you for at least the next two or three years. And to do that, you need to nurture a startup culture that wins the loyalty of quality talent – I’d say this is especially important if you’re a founder or CEO based in Asia.
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Economic downturns are not the end
The current economic downturn is grim, but it doesn’t spell the beginning of the end. By reframing the way you approach it, you’ll be able to find opportunities amidst this adversity and safeguard the future of your startup.