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Venture capitalists learn lessons from Softbank’s big loss
Venture capitalists are getting more cautious about investing in start-up firms as they now require start-ups to present a clear path to profitability following Softbank’s loss from its investment in We Work
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span>Venture capitalists are getting more cautious about investing in start-up firms as they now require start-ups to present a clear path to profitability following Softbank’s loss from its investment in We Work.
Next Indonesia Unicorn (NextICorn) Foundation chairman Daniel Tumiwa told the press on Wednesday that many venture capitalists were now holding off on investing in start-ups as they wanted to ensure that their investment would earn profits following the Japanese conglomerate holding company’s loss in the third quarter of this year.
Softbank suffered a US$8.9 billion loss from July to September, its first quarterly loss in 14 years. This was due to what chief executive officer Masayoshi Son referred to as “poor investment judgment” as it turned a blind eye to problems, such as corporate governance, at American workspaces-sharing firm WeWork, Reuters reported on Nov. 5.
SoftBank was forced to spend more than $10 billion to bail out the start-ups after its initial public offering (IPO) attempt flopped.
Daniel said venture capitalists were used to basing their growth projections on factors such as number of users for start-ups, even for firms in advanced stages of funding.
“Nowadays, they are starting to include revenue as a factor in calculating growth,” he said in Jimbaran, Bali.
In the near future, he projected that start-ups’ cash-burning stage would be shorter and that there would be more accountability.
Profitability may not be that important in the early stages, but as long as they can show plans to achieve it, I think that should be enough for us.
Amid the tech industry’s rapid growth, economists and market analysts around the world have called for technology companies to focus on profit-and-loss-oriented business practices rather than just gross merchandise volume (GMV), which has long been an indicator for start-up valuations.
GMV measures total sales volume transactions through digital platforms, which most of the time act as mediators for transactions rather than as direct sellers. Meanwhile, revenue comes from the income of doing business as the mediator, through fees or advertising.
Renowned Indonesian economist Chatib Basri said recently that he did not believe in GMV, especially amid a threat of global recession that could adversely affect start-up funding.
“If they rely only on raising funds, someday when there is a sudden shock in which funding is stuck, they will no longer be able to burn money and the impact will be systemic,” said Chatib.
Astra Digital International business development head Suwandi conveyed that his company was taking into account whether or not a start-up firm that it invested in had a clear road map to profitability in the near future, aside from the criteria of whether it could bring more value to its parent company, publicly listed diversified conglomerate Astra International.
“Profitability may not be that important in the early stages, but as long as they can show plans to achieve it, I think that should be enough for us,” he said on the sidelines of the NextICorn International Summit on Thursday in Jimbaran.
He went on to say that the company would also look at whether the start-up had a sustainable business in the long term, especially after it passed its cash-burning period.
Astra Digital International measured sustainability potential by observing customer interest in its platforms following the use of incentives to attract users.
Despite the cautious mood, Association of Venture Capitals for Indonesian Start-ups (Amvesindo) vice chairman Donald Wihardja expressed optimism that Indonesian start-ups would not befall the same fate as SoftBank and WeWork.
Discussions on the start-ups’ path to profitability began about two years ago, not only for unicorns but also for those in the early rounds of funding, he said.
“We have demanded clear economic figures of their businesses even during their early stages of funding, which makes Indonesian start-ups’ valuations more reasonable than WeWork’s,” he explained.
Such a strategy, Donald said, was necessary to help start-ups to reach the next round of funding and eventually reach unicorn status, attracting global investors and foreign venture capitalists.
Artificial intelligence firm Kata.ai CEO and cofounder Irzan Raditya echoed a similar sentiment, saying that stricter requirements from venture capitalists had made start-ups more mindful of their growth.
Even if they had to burn money in the process, he added, it would only be used in the early stages of development to capture market share and not to “growth at all costs”.
