Rough Patch Ahead But Startup Founders Need To Look At The Bigger Picture

In recent weeks, global venture capital firms have issued stark reminders to their portfolio startups to be wary of difficult times and to start “cutting back” on expenses. Memos have been sent out reminding founders to be more vigilant and be more prepared.

Renowned startup accelerator, Y Combinator has also told its portfolio founders to “plan for the worst”, signaling the difficult times head as the economy faces a rough patch. Sequoia Capital announced a similar warning in a 52-page presentation advising startups to brace through the road ahead.

Closer to home, the Department of Statistics’ April consumer price index report highlighted that 89.1 percent of items in the food and beverages group have recorded a hike in prices. UOB Asset Management Malaysia has also reported that inflation in the country is expected to remain high until Q3 or Q4 of the year.

As Malaysia’s economy shows the signs of a troubled economy, what will this mean to startups in the country?

“Any entrepreneur worth his salt should be aware of factors that will affect their business. Founders should always keep abreast of the environment in which they operate, the market and customers that they serve and external factors that impact business,” says Renuka Sena, co-founder and chief executive officer of Proficeo Consultants.

Renuka Sena

Renuka who is also a senior partner at ScaleUp Malaysia says its important for founders to have thought about short- and long-term measures to combat factors that will affect their business. For young founders, Renuka highlights the need to look around and find a problem that needs solving but ensure that solution is a “painkiller”.

She recalls one of Proficeo’s most illustrious alumni, Juristech, which found its start in 1997 during the Asian Financial Crisis. The company got its start by offering data mining and analytical tools to help banks generate more sales.

However, in view of the financial crisis, this was not the “painkiller” that the banks wanted because of the rising bad debt situation. As a result, they pivoted and instead offered debt recovery, credit management and litigation software.

Late last year, CTOS Digital Bhd proposed to acquired a 49% stake in the company for RM205.8 million cash.

Being Prepared

“Ultimately, I think investors just want to see that entrepreneurs are prepared – not just for fundraising but to actually execute the plans presented and achieve the growth rates promised. When I say prepared – I mean, have thought about it, done their research and have a practical plan that they can defend,” Renuka tells Disruptr.

She further states that many entrepreneurs cannot clearly articulate their Go-To-Market Strategy, which is especially important for entrepreneurs who are looking to raise larger cheques. Founders, she says, need to do sufficient research on their target market and market potential in the current climate.

This will help them to prepare for questions investors may ask regarding the economic climate and how they can respond to assuage investors regarding investment risks.

Bikesh Lakhmichand

Bikesh Lakhmichand, founder of 1337 Ventures also echoes a similar thought.  He stresses that founders should always have a strong foundation and ensure that the idea they are pursuing is something that has product-market fit, whether it is solving or filling a gap in the market that users are facing and is a painful enough problem that they are willing to pay for.

“My advice to these startup founders is to ensure a strong foundation before looking for further funds to expand. Gone are the days where Venture Capitals are only focused on growth; right now, we’ve seen that true product-market fit and profitability are important aspects Venture Capitals look through before considering a startup for investments,” he says.

Areas To Improve

“From our observations, startup founders should look towards the bigger picture. We understand that as early-stage founders, entrepreneurs are required to wear multiple hats while also going on the ground a lot.

“Although this is necessary, founders end up being too caught up with the day-to-day operations that they do not have time to think about the bigger picture. This, in turns, become a big problem for founders,” he says.

Bikesh also urges founders to always have the foresight and vision for the company in the macro-lense to be able to lead and motivate the team.

“If you are unable to distil the same vision and passion into your employees, especially in an early-stage startup which deals with lots of uncertainties, employees will jump ship at the sight of even the slightest dark clouds.”

Renuka on the other end believes founders need to be prepared to “kiss a lot of frogs before they find their prince.” Many entrepreneurs get discouraged when they are turned down but it’s important to understand that it’s not personal. Investors after all are fund managers and need to provide returns.

“Not all investors are the same so don’t paint them using the same brush. They need to understand the investors and their portfolio and risk appetite. It’s not uncommon to hear entrepreneurs have pitched to more than 50 investors before they find the right one,” she tells Disruptr.

She also says founders need to start fundraising before they need the money as many entrepreneurs start too late and underestimate the need to successfully raise.

Challenges Ahead

According to Renuka, founders are likely to face reduced spending as consumers and businesses will think more than twice before spending in this climate. Once again, she points out that if founders have a “painkiller” product, they will weather the storm.

“Don’t be afraid to pivot – just make sure that when you do, you know the market needs and are clearly providing a solution,” she says.

1337 Ventures’ Bikesh says some of the biggest challenges founders will face this year is sourcing great talents. Finding talents, he says, has always been hard for startup founders; finding the right individuals that are skilled, while also having the same vision, drive and culture has always been tough, especially with competition from corporates.

He also believes that with more buzz about corporates venturing into innovation and with the rise of digital banks, this problem with be exacerbated.

What More Can The Government Do?

One potential initiative, Bikesh believes the government can embark on is by providing wage subsidies for startups. By providing startups with said subsidies, entrepreneurs are able to better compete with corporates and access world-class talents.

This would then increase the competitiveness of Malaysian startups in the world stage, by providing Malaysian startups with the ability to work more ambitious projects.

Apart from fundings, especially in early-stage startups, he highlights that there is no better way to foster and grow the startup ecosystem than to encourage and spur collaboration between startups, SMEs and corporates.

“What better way to foster collaboration than by setting an example? If the government is able to adopt these solutions provided from local startups, it would provide corporates and SMEs the sense of security working with said startups,” he says.

Renuka further points out that the Malaysian government has done and continues to do a lot for founders and startups in the country. However, there are also a lot of silo-ed approaches that should be better streamlined and which she believes are being looked into.

Proficeo has worked with key agencies like Cradle Fund, MDEC and MaGIC (now MRANTI) to design and conduct a multitude of programs.

Initiatives by Proficeo & 1337 Ventures to aid the startup ecosystem

  • Proficeo now conducts programmes around Impact and Sustainability. We have a new brand for this called MIDAS – Multiply Impact and Drive Action Sustainably and have conducted several pilot programs. The Capital Markets and Institutional Investors look into Sustainability and ESG as a key factor when making investments. More and more VCs are also looking into this area applying “Sustainability Lenses” to their investments. Startups should start thinking about this too. If they are interested, they can go to www.proficeo.com and register. We will inform them of up-coming programs. – Renuka
  • We do have initiatives in place since the start of COVID to help founders throughout tough times. We have established several initiatives from programmes such as our Alpha Startups Digital Accelerator to ensure a strong foundation, corporate matching programmes, and our various funding options ranging from our VC fund to Equity Crowdfunding. We are currently in the midst of planning several other initiatives to support founders — stay tuned! – Bikesh

 

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