Year of reckoning for later stage startups

( Read my older post for more context and detail but it looks like my prediction of cash crunch for middle to bigger startups is coming true.

http://limdershing.blogspot.com/2024/01/outlook-for-late-stage-asean-tech.html?m=1) 

What a week for our portfolio with both high and lowlights.

First the good side, 4 startups updated doing well. One refused to die and kept so lean and now finally seem to have some product market fit. The leanness and hence super low burn is key. Similarly, another one we thought in danger of dying as no product market fit, got a reprieve as a new investor came in on higher valuation no less.

Third one, continue growing well at scale but this time turning solidly profitable with 10% PAT on 8 digit revenues for 2023. Last one only small loss last year with this year breakeven on 8-10m revenue.

On the down side, two startups running out of funds. First due to product market fit problem. Not founders fault just too early on the product and market not moving to adopt.

Second one is a scaled up startup that is in bad situation due to overspending in spite of repeated warnings that’s it’s not a given new or existing investors will back.

Key learnings?

1) seed or preseed can always raise more money so long as tech and story interesting and costs are very lean. Lean means less than $20k per month. Also if lean enough can pivot until find a good fit.

2) it’s not normal to can’t turn profitable on 5-10m gross profit. Many any other unfunded entrepreneurs across various industries have done it. You may sacrifice growth for now but at least your firm is alive and you are not beholden to new or existing investors.

If you find you can’t breakeven, either you have a broken pricing/business model and/or your mindset is not hungry enough. Rightsize in terms of manpower, geography , product lines. Many non tech businesses with 5m gross profit are already generating 0.5-2m net profit for their founders. 

3) money is not in until it’s in your bank. Stop trusting investors. I already know of several pulled term sheets and even pulled tranches. So don’t be so trusting and optimistic for something so critical.

Very disappointed with the minority of founders who clearly intellectually understand there is funding winter but feel it doesn’t apply to them or their company. Their internal risk reward assessment is very poor. So their actions don’t show real drive to take pain to get profitable. There are continued expenses, slow to cut, continued illogical pursuit of bad revenue.

Likewise the investors who string founders along but leave them hanging last minute should examine their own communication and policies so that they don’t make things worse. Not willing to back say not willing, don’t create a distressed situation by your inability to decide or communicate. 

4) I will venture to project there will be many more distressed failures or sales this year. Shoikmeats is one recent distressed m&a, many many many more of that scale and much larger coming. 

It’s generally not a sustainable business if you make 50m revenues and lose even more than 10m annually.  And there are too many financials I see like this or worse even in 2022/3. Many famous names.

5) As an investor, we are continuing our go slow for angel and new investment. Half of peak sum allocated. we want to see good exits next 2 years first before changing our minds. The  down cases I share validate the key tenets of correct bite sizing and making sure we invest diversely in many startups. Also overall allocation into this space must be something you are very comfortable with.

Let’s see what happens in the year ahead. Good case is some major failures happen but at same time quality stories emerges and they get funding and IPO going. That will change things for 2025 onwards. Bad case will be many failures but no big successes. 

My base case is for the former as we have some startups at scale that are doing good stuff. Sea and Grab are examples. These need their ability to turn a profit to shine thru and will deserve to IPO and get more funding if they so require.  

But there will be much learning, much pain and what ifs all around as we get thru the process.