Start-up founders and executives agree that today’s investors prefer ventures with better business projections than those that prioritize valuation based on customer growth.
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Investors are starting to reduce their money-burning strategy for start-ups. Several start-ups that were developed without valuation are now attracting more investors.
JAKARTA, KOMPAS — Start-up founders and executives agree that today’s investors prefer ventures with better business projections than those that prioritize valuation based on customer growth.
Founders and CEOs of start-ups that did not rely on a “money-burning” strategy told Kompas over the last week to Monday (20/1/2020) that they had always focused on long-term profits instead of valuation. They said that their businesses did not use to be attractive to investors, but were becoming so nowadays.
The phenomenon first emerged when global start-up Uber failed to achieve its targeted valuation on its initial public offering (IPO). In addition, WeWork cancelled its IPO, as investors in the private market were unconvinced by its business model.
Founder James Prananto of Kopi Kenangan said that he had always stressed the importance of becoming a profitable business since the launch of the coffee shop chain three years ago. Consequently, Kopi Kenangan’s beverages were priced affordably to meet the market demand of customers who only had two options before: pricey, foreign-branded coffee drinks and cheap instant coffee. Product quality is maintained from processing raw materials to displaying the finished product. With this strategy, he said he was sure that Kopi Kenangan would never employ the “money-burning” subsidy scheme as regards its customers.
“The economic value must make sense from the outset. So, there never was any money-burning,” said James, who added that Kopi Kenangan launched with eight branches. He and two other founders provided the initial capital from their own pockets. Afterwards, venture capital company Alpha JWC Ventures injected money into the business.
In June 2019, Kopi Kenangan raised US$20 million in additional Series A funding from several venture capital companies, and now operates 240 branches.
Kulina founder Andy Fajar Handika said that investors were more prudent today, while start-ups were entering the phase of showing returns. Following the recent series of developments, investors were beginning to understand the start-up world and now wanted to see detailed business plans for every start-up they invested in.
Therefore, even though Kulina was small, it was still expected to turn a profit by the end of the year. The key to the business’ success was in its ability to build customer trust and loyalty.
Sought by investors
Meanwhile, PrivyID CEO Marshall Pribadi said that deciding to forego the money-burning strategy at the beginning had been tough. However, since investors were becoming more prudent, six investors had contacted him in the past three months. In this “money-burning” ear, investors were not interested in business models with a slow customer growth rate.
However, since investors were becoming more prudent, six investors had contacted him in the past three months.
“I heard that even global funding company SoftBank is looking at potential future profit. Right now, it’s fine not to be profitable, as long as you have a clear roadmap to profit,” he explained.
Stock markets
Venture capitalists are not the only source of start-up funding. PT Yello Integra Datanet Tbk (Passpod) finance director Wewy Suwanto said that the company, which provides internet services for overseas tourists, was seeking to raise funds through the stock market.
Passpod joined the Indonesia Stock Exchange’s IDX Incubator In February 2018, and then held its IPO in October 2018.
Passpod’s 2018 annual report showed that it booked Rp 27.41 billion (US$2.01 million) in net profit, Rp 2.9 billion in current year profit, Rp 85.7 billion in total assets and Rp 80.5 billion in equity. Wewy said that securing capital had been easy since the IPO, as the company could always rely on public funds. (MED/MAR)