Almost every start-up, if not all, dreams of growing bigger and getting listed on the stock exchange one day.

The start-up scene in Asia is vibrant. In 2021, Credit Suisse reported that 19 start-ups in South-east Asia became unicorns, or companies with valuations of US$1 billion or more. DealStreetAsia reported that Southeast-Asian start-ups are raising more money—from US$9.4 billion in 2020 to US$25.7 billion in 2021.

But it’s not happily-ever-after for some newly-listed companies. Over the past one year, a number of high-tech companies have listed, some through special purpose vehicles which short-circuit the long and expensive listing process, but showed signs of struggling thereafter. Examples in Asia include Zomato and Paytm from India, Grab from Singapore, Bukalapak from Indonesia, and Didi from China, among others.

Interestingly, many of the companies such as Grab and Paytm hold leading market shares in their respective industries. Low profits, or in some cases even large negative profits, led to a disconnect between valuation by the public markets versus valuation by private investors such as venture capital firms (VCs). These IPO flops suggest four important lessons that start-ups should heed to avoid a similar fate.

Venture capitalists are often not correct

Viewed as a strong validation of the future potential and viability of their business, investment (and high valuation) by VCs has been the holy grail for many start-ups. But, after many IPO flops, we should temper the belief that VC funding is a good proxy for the future potential of a start-up.

Undeniably, VCs are able to spot some emerging technologies and promising companies, but they also have their share of duds. The hits in VCs’ portfolios compensate for the duds, leading to a good portfolio performance and their reputation as savvy investors. But VCs may also be subject to some of the same biases as the rest of us—such as the fear of missing out, and hence invest in companies that may not have good performance in the medium and long term.

Start-ups should view the funding by VCs, even at a lofty valuation, only as a positive signal and a resource to execute their strategies. The key focus of any start-up has to be on executing its strategy without getting carried away by VC support (or the valuation attached). This would suggest achieving outcomes such as profitable growth, rather than just growth.

A bird in hand (profits today) is better than two in the bush (profits in the future)

Under the assumption that profits can be made later once a large market share is achieved, many new technology companies sold their products or services below full costs. In fact, heavy investments in marketing and technology, again motivated by the pursuit of leading market positions, have been key contributors to the losses of many tech start-ups.

But, future market position and profits are uncertain, as discovered by John D Rockefeller more than 100 years ago when he tried to establish a dominant position for the Standard Oil Company. The strategy of sacrificing the present for future gains did not work then and it is unlikely to work today. It was inappropriate for VCs to encourage (explicitly or implicitly, by attaching different valuations to growth without profits) the pursuit of market share at the cost of present profits, and naïve for start-ups to follow the strategy.

To this end, a realistic strategy for many start-ups may be to make investments that are commensurate with own resources. High efficiency, rather than extravagant spending, will also improve the likelihood that any sales achieved will be profitable, while also conserving and generating resources for a rainy day.

Simplicity is more powerful than complexity

The recent wave of new technology companies and investments spawned new fangled words such as two-sided platforms, which supposedly required new strategies such as being the first to build the busiest platform. The term “this time is different” was used to rationalise excesses such as over-investment, the pursuit of market share by selling below costs and the attachment of unrealistic valuations to unprofitable businesses. The same phrase was often heard during the dot-com bubble and we all know how badly that story ended.

Simple concepts that have withstood the test of time, such as barriers to entry, work better than complex ones. In fact, a dominant market position in any business with low (or even moderate) barriers to entry is unlikely to be valuable, as we are seeing in the case of e-commerce.

Amazon’s e-commerce business, a platform itself, has lost money during most quarters despite its huge size, maturity, and first-mover advantage. Because of the moderate barriers to entry, Amazon also continually faces new innovative competitors such as Shopify, Shopee, Flipkart and Alibaba.

Start-ups’ and their stakeholders’ interests may be served well if they focus on the fundamentals of the business such as demand and supply balance at present and in the future, and industry economics (including barriers to entry) rather than their platform strategy. As noted by Warren Buffett, even brilliant managers find it difficult to achieve profits in an industry that is fundamentally unattractive and start-ups are no exception in this regard.

The importance of a plan B (or even plans C, D and E)

In their eagerness to go full speed, many start-ups may overlook the importance of having a plan B. Over-investment can be especially damaging to a contingency plan because it depletes precious financial resources and sometimes commits a start-up to a path that may be difficult or expensive to change later. Often, the environment evolves in an unpredictable fashion, necessitating a change in strategy, in turn requiring more resources. Every start-up should have a plan B at least for internal purposes, if not for external fundraising, and a rainy-day fund that can sustain it during lean times or if a strategic change is required.

In conclusion, despite the challenges faced by recent tech IPOs, it is an exciting time to be a start-up in Asia. Technological advances and easily-accessible capital are leading to tremendous opportunities. Though the broader environment in Asia has been munificent for quite a while, it is important to remember that change is often the only constant and that start-ups need a clear strategy and a strong focus on execution.

The article is an edited version of the first one published in Bangkok Post.