This is a guest post by Richard Armstrong who is an early stage investor in many startups in both SE Asia and globally. Plus Richard has cofounded several companies.
Guest Author: Richard Armstrong
In 2024, the startup ecosystem is undergoing a transformative shift, significantly impacting the way entrepreneurs and venture capitalists (VCs) view the landscape of innovation and funding.
The days of abundant capital and the pursuit of growth at any cost are taking a backseat to a more cautious and sustainable approach. This new era emphasizes running lean operations and achieving profitability sooner rather than later.
In this context, startups find themselves in a challenging yet potentially rewarding situation, where the keys to success are adaptability, efficiency, and a sharp focus on being profitable quickly.
The Changing Tide of Startup Funding
The current climate in the startup world marks a stark departure from the previous decade, where VCs were quick to ignore basic fundamentals in their fever to discover the next unicorn.
The landscape is littered with startups that had poor business models and fundamentals who are now almost dry of cash and going belly up. Littering the startup ‘beach’ with their carcasses.
Now, as the global economic landscape shifts, driven by factors such as inflationary pressures, geopolitical uncertainties, and a reassessment of risk, access to funding has become much tighter.
Investors are now prioritizing startups that demonstrate clear pathways to profitability, robust business models, and prudent cash management over those with high burn rates and speculative growth metrics.
Startups are trying to ‘reinvent’ themselves under this new model
I’m seeing lots of startups that were of this old ‘growth over all else’ mindset reinvent themselves. Trying to pretend to be one of these companies that have sound fundamentals and are on their way to profitability.
Typically it comes with a big round of layoffs and a cutting of the ‘fat’ (ie. other expenses that were not critical to their business).
This is part of why we are seeing layoffs from the vast majority of VC-backed startups in the region right now. And no doubt it will continue for awhile.
Some of these startups might even get ‘close enough’ to convince investors to throw more cash in. But I think many of them will not.
They’re finding this transition to be one that they were just not ready for. They were not ready to be within reach of breaking even anytime soon because their model just doesn’t allow for it.
And these are the founders that are laying awake in a cold sweat at night.
Profitability: The New North Star
Achieving profitability early on has become THE critical milestone for startups. In an environment where the next round of funding is not guaranteed, a self-sustaining business model is the ultimate safety net.
This focus on profitability encourages startups to deeply understand their unit economics, optimize their revenue streams, and build strong relationships with their customers.
It’s a testament to the fact that, while innovation is crucial, the ability to create a financially viable company rules over all other priorities.
The VC Perspective: Quality over Quantity
From a VC’s standpoint, the current landscape requires a recalibration of investment strategies. The emphasis has shifted towards investments in startups that not only have groundbreaking ideas but also possess the operational discipline to execute on those ideas efficiently.
This approach has led to a reduction in the volume of deals but an increase in the quality of investments. VCs are now more involved in guiding startups towards operational excellence, profitability, and long-term sustainability.
And in a way it also shows who are the investors that can actually truly guide these startups along that path… and who was just faking it.
VC’s that have been in the trenches taking their own previous startups along this difficult path tend to be the ones best fit to guide their portfolio companies through these difficult times.
Whereas the ones that have not will often just remain on their high perch and give vague instructions. Hoping that the founders they invested in figure it out.
Conclusion
The year 2024 stands as a watershed moment for startups, marked by a renewed focus on lean operations and profitability. This evolution reflects a broader recognition of the need for sustainable growth and long-term value creation.
For entrepreneurs, the message is clear: adaptability, operational efficiency, and a keen eye on the bottom line are indispensable.
For VCs, the current environment presents an opportunity to invest in startups that are not just chasing growth but are building resilient, profitable businesses.
In the end, the startups that thrive in 2024 will be those that can balance the drive for innovation with the discipline of fiscal responsibility.
And just remember Amazon… they were born during the first dot com bubble back in the late 90’s. They focused on core fundamentals and survived when that bubble burst.
Then they zoomed forward as things began to improve. In part because so many of their previous competitors were now dead carcasses on the beach.
Who will be these Amazon equivalents in SEA… that come out of these tough times like a freight train cruising forward at top speed?
