Thank you all for the introductions! To start, Carmen, you are part of an organisation with multiple funds, which are presumably spread across different stages, sectors, and countries. How do you streamline your workflow?
It’s a four-letter word: busy! At Vertex Ventures Southeast Asia and India (Vertex), we have an execution plan with companies, and we work with them on their growth journey. But sometimes, the business is not predictable that way, many variables could pop up which requires our quick thinking and attention. Such situation provides us with good training opportunities and we can train our younger staff. For example, how they should oversee multiple aspects of the fundraising process, such as reviewing legal documents. However, when it comes to growing a company, more attention is required in finding and hiring the right people. I would look into my contacts database and connect businesses with people I believe would generate a two-way value exchange. So, I would not say the workflow is very structured, as every day is different from the next – it is dynamic.
That is fantastic! Thank you! Now, I would like to shift the spotlight to Chen Chow and Allen. I have a question on survival growth and exit – how do you feel at each stage, and do you think your perspectives and learnings have changed since the beginning of your journey?
I have never really thought of the business in such distinct phases because the first two – survival and growth, are constant. It is almost like the proportion of one versus the other. In the beginning, it is 99% survival, so there is constant reprioritising and not yet a need to have an annual plan until you eventually reach a degree of predictability that you can start to invest behind.
But there is a point in the middle, when you have a few hundred employees or tens of millions of revenue. Here, it would be best if you made an effort to grow, and this is where you are the driver of growth compared to when growth happens accidentally. This phase is exciting and disruptive because you could be introducing new leaders, systems, processes, structures, or new countries. It may not feel as dire as in the early days of survival, but you must constantly reinvent. Exits are generally amazing regardless of the outcome because you have generated value and wealth.
In Slack’s case, we were very fortunate to generate a lot of that wealth, and our investors were thrilled. When I think about the folks now, people are not leaving Slack, as much as they are going to fund their own company. So with that, the cycle of entrepreneurship begins again! That is the story of Silicon Valley, and I hope it is also something we can start here, in Southeast Asia.
I would say that for start-ups, the journey is not one I would consider straightforward. There are moments of excitement, but there are also fear and some frustrations too. When we first started in 2015, we were fortunate to be able to raise funds for the pre-seed round fairly quickly. However, our early investors came in at a high valuation, and the number of investors dropped significantly over time, making it more challenging for us to fund the next rounds. The reality behind each round is facing multiple rejections before we can get one or two investors on board. As a founder, it boils down to how we take that rejection and yet stay confident in front of our team.
There were, of course, multiple highs and lows. From 2016 to 2017, we acquired Groupon subsidiaries and proceeded to merge and rebrand. From then till 2019, were great growth years until we were hit pretty badly in 2020 with the Covid-19 pandemic. Given the current market valuation now, the whole cycle is shifted to focus on sustainability versus growth, so that is an aspect that we would need to see optimised, as well.
Thank you both for the open sharing. In the next section, I would like to discuss the macro environment, especially when taking into account a pandemic, inflation, and tech valuation reaching its peak. What are your thoughts?
Our Partners have been in the Venture business for many years and have seen the previous crisis such as Dotcom bust, Asian Financial Crisis, Global Financial crisis to name a few. So when COVID happened, we called all portfolio companies and warned them that this situation may be around for some time. With the collective wisdom at Vertex, we informed the founders that they would need to trim their expenses, prepare enough cash flow for at least 9 to 15 months, and be in survival mode.
When employees started to work from home, founders should focus on communication and online team bonding, yet not lose sight of the target of survival. 2021 was crazy because the valuation went through the roof. However, we believe that there is sufficient investible capital in Southeast Asia for startups, but, in my mind, startups should not overvalue themselves prematurely, and should price themselves at a fair valuation.
Pertaining to our situation in Southeast Asia, I feel that there has not been a win-win mindset but a win-lose mindset. In comparison, all companies in Silicon Valley can learn from each other and share experiences – it just requires a bit of willingness.
Regarding the current pullback in valuation: Cycles happen. Nobody knows precisely when. But your product remains the same, and you should focus more on what makes you successful: customers, quality, and employees. You do not need more. You need better. That focus creates a discipline that would strengthen your culture. So never waste a crisis because a company’s culture always gets formed during these trying times.
Those are excellent points! Speaking of culture, Fave Group’s exit saw an integration to Pine Labs, a much larger group. Chen Chow, can you share some of the notable differences or challenges throughout that process?
It is interesting because there are such notable differences in the business model, as well as in the working culture. It all comes down to learning and adapting to the group.
For example, when I went to India, even the meetings were conducted very differently. It was an eye-opening experience because people in Southeast Asian culture are generally cordial, and you would have to read between the lines. But in India, the team had no issues with being forward and debating in the meeting room. So there is a lot of unlearning and relearning to do.
From another perspective, Allen, do you have any tips on integrating new team members to the team? And what was the most difficult, growing pain you experienced when growing Slack from a team of 20 people?
There is always tension between old and new employees, especially at critical growth junctions. As a result, the hiring process is exceptionally challenging as you want to mitigate all potential risks. What would be great is to try and create diverse hiring panels, which would allow you to get different perspectives on how to screen for a person.
In terms of growing the team, I am a big believer in the rule of 3 and 10. Every time the company triples in its employee size, it becomes a new company because your communication and perspective must be reinvented. For slack, when we were growing as quickly as we were, it was easy to speed past different milestones without realising them. However, when the team reached 300 employees, we realised our processes and structure needed to be vastly upgraded.
We also found that things were always the hardest when we were overly optimistic. We see this happening in the whole tech economy in the United States, where companies got too optimistic, over-rotated on the hiring front, and lacked that discipline. As a result, the company would then be forced to lay off those employees. So the entire process is something companies will need to go through and learn together. It is a very painful and brutal, but necessary.
If you were a company operating for two years, do you think it is a good time to accelerate when everyone else is slowing down? Or would it be better to remain cautious?
I think with two years of runway, it would be vital to evaluate the unit economics and sustainability of the business. For example, certain aspects of your business may generate profit while others are rapidly burning cash.
The board and business leaders need to consider if they had built a moat and how defensible their moat is; and whether they can deepen the moat. That way, if your competitors embark on a price war, it would be more challenging for the customers to churn you out. The moat that you build could also translate into considerations for raising additional funds at a better valuation.
To approach this from a different angle, we often underestimate how bad it gets when things take a negative turn. So if you are trying to build a model, it is essential to run it through various levels of stress tests and see if you have what it takes to survive each scenario.
To CHEN CHOW: Any advice on how you remained upbeat and optimistic throughout the ups and downs your company has experienced? And how transparent were you with the employees?
We tried to be as transparent as possible to avoid causing panic. For example, during the pandemic, we explained that salaries would have to be reduced when the revenue drops to 60%, but also how it would be back to normal once the revenue recovers to, say, 80%.
Each week, we also show the team how much closer we are to reaching the next tier in revenue, at which we will be able to restore a certain percentage of the employees’ salary. So when it comes to decision-making in times of adversity, it needs to be logical and backed by data, but there has to be a level of empathy.
To CARMEN: What are the triggers that allow VCs to deploy their cash to startups? Lower valuations or stabilization of the market?
For Vertex, we are constantly looking for great companies to back. Unfortunately, given what is happening in the public markets, the growth funds are taking a pause. But this is the best time to look for opportunities especially if they have conducted enough research and due diligence.
Last year, Vertex sat out some of the opportunities because of how incomprehensible some of the valuations were compared to their respective revenues. This year, we noted that companies are taking way longer time to fund raise as investors seemed to be way more cautious. For us, we have been very busy meeting with founders and seeking opportunities to invest in disruptive technologies, as well as business models that can impact more people.
A big thank you again to all speakers for such an insightful discussion, and many thanks to our Heli-Pad readers of course. I encourage anyone who has further questions about this discussion to reach out to us by email at firstname.lastname@example.org.
– End of Roundtable Discussion –
Keep up with the latest FinTech and private market news, business tips, and thought leadership from industry leaders, mentors, and professionals.
Join our mailing list to receive information on upcoming Helicap platform updates and webinars.
If you're excited about the potential of private markets and fintech, we've got a job for you.