From growth at all costs, to path to profitability: Why are VCs now focusing on monetisation?

The past few years have seen monumental shifts in technology and rapid growth for many startups — crypto companies have drawn massive amounts of attention to themselves, while ride-hailing giants like Grab and Gojek have gone public with IPOs. 

Yet, what goes up must come down, and with the crypto winter, Russo-Ukrainian War, and deteriorating China-US relations, the optimism that global capital has shown for investment seems to be on the decline. 

Many have wondered if this denotes a change in the investment landscape — one where investors and founders must shed the widely-held optimism of the past few years, and replace it with something else. 

At the 11th annual Tech in Asia conference held today (September 21), Jenny Lee, Managing Partner at GGV Capital, gave her take on the investment landscape, and offered advice on how startups should navigate upcoming challenges.

The world is changing, and startups must change with it

Answering the question of whether or not the world is currently at an inflection point, Lee very much agrees with it. In fact, she suggests that we may soon see a new world order, as economic winds change and companies scramble to deal with these new changes. 

For companies to adapt to these changes, Lee advises that the same methods that have worked before may or may not work again, especially in terms of fundraising for startups. 

When I first got into the VC business in 2001, it was a different time. We were all facing a different set of issues and challenges, with our heads down, and working on the businesses that we were building. Today, we are facing challenges that are even more complex.

For Lee, this means that companies are going to have to face more challenges when it comes to building their businesses. Interest rates are on the rise, and this means that VC firms like GGV Capital are tightening their belts when it comes to lending money and investing in startups.

This is something that will impact startups in many sectors — not only is funding drying up, but consumers are also more hesitant to spend money. Therefore, companies may face an uphill battle when it comes to actually monetising their business.

As such, monetisation is an important aspect that startups now cannot ignore. Previously, the startup scene has been characterised by a ‘growth at all costs’ mentality, but now, investors are looking for startups that can grow sustainably and profitably.

Cash is once again king

So why are VC firms and partners like Lee so keen on monetisation?

Well, for one, the ability for a company to monetise itself is an indicator of its success. According to Lee, valuation for companies is now becoming less important. While previously, growth and valuation were closely correlated, now, the key correlation seems to be valuation and cash flow with growth. 

As such, cash flow, and consequently, the ability for a business to monetise itself, is now becoming something that investors are keenly paying attention to.

For Lee, the reason for this is simple. In a world where funding is becoming more difficult to secure, companies that hope to do well must be able to do so without said funding. As such, “it’s never too early to monetise”, according to Lee. 

While companies may continue to worry about their product market fit, Lee suggests that part of this is also about finding the right product monetisation fit — experimenting with what works and what does not when it comes to monetising a startup or business. 

Businesses should figure out where their monetisation will eventually come from. When the opportunity cost for cash is high, companies that have cash to burn will be able to move from a defensive position to an offensive position.

As part of this, Lee suggests that it is advisable for companies to have significant cash reserves, regardless if it comes from funding through investments, or product monetisation.

“Valuation is never the most important. What’s important now is for companies to be able to run without new funding for a period of three years,” stressed Lee.

Talent competition is tough, and it’s a double-edged sword

While companies compete for funding and market share, the competition for top talent remains unabated. For Lee, the up-and-coming story for talent competition is going to be China and Chinese talents. 

There is a tendency for investors to follow talent, and top talents have decided to make their home international. These entrepreneurs are mobile, and when they move to Southeast Asia, they will bring capital with them. But these are also very strong entrepreneurs, who have fought in brutal markets. When they come to Southeast Asia, they are going to compete with our own startups.

At the same time, she also pointed out that “it’s not just about how many top talents you can hire, but also who you can keep.”

Lee says that Southeast Asian startups have to be able to compete with these startups and entrepreneurs, and with the changes that the world is seeing, she believes there is hope.

In particular, she pointed to food tech and clean energy transition as key areas where Singapore could turn up as a hotspot for interesting business models.

Key to this is the ability of startups to expand, not just within Singapore, but also beyond Singapore. According to Lee, “capital will always find the best markets, the best entrepreneurs, and the best business models. But to get noticed, startups also have to be big enough to compete on the global market.”

As the investment landscape evolves, it seems that VC firms like GGV Capital do believe that to some extent, the time of easy money and growth at all costs is over. Instead, the path to profitability is now taking centrestage.

Entrepreneurs would do well to take note of the shifting sands and adapt accordingly. After all, if the marketplace is a battlefield, one will not succeed by fighting the last war. It must constantly learn and adapt to new situations in order to come out on top.

Featured Image Credit: Screenshot of TIA Conference 2022