Turning challenges into business opportunities, and prospering by persisting
This article is a continuation from Saturday’s collection of predictions about the China tech ecosystem, here is more about what Harry Wang has to say about China’s 2019 startup ecosystem.
The flying pig theory will fly you nowhere
The flying pig theory — brought to life by Xiaomi’s Founder Lei Jun — hypothesizes that any company, regardless of whether it’s stable or not, can taste success as long as they have money and luck.
Linear Ventures finds this theory distasteful.
Previously, when the market still had an ample amount of capital, random founders could raise funds from random business tycoons. However, those tycoons have since become pickier and those public companies have run out of extra money.
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Therefore, if founders continue to practise the flying pigs theory and count on their investor’s spoonfed money, many startups won’t be able to sustain themselves past 2019.
So, what is the viable alternative?
1. Strategise your financial plan
Don’t put all your eggs into one fundraising bucket. While taking your cash flow and revenue into consideration, figure out how you can survive through the next 18 months without any further funding.
If you really need to raise funds, you should prepare for a 6-month fundraising cycle (at the very least).
2. Only focus on a few businesses
Get rid off all unnecessary side projects and allocate your resources, efforts and manpower to the few core products that can continuously generate revenue.
B2B companies need to maintain their gross margin at a minimum of 80 per cent, or they won’t be able to survive through the cold economic winter.
You should only work on a new product line after guaranteeing a steady stream of revenue. If not, don’t bother about it.
3. Create a lean team
There are usually two groups of employees that receive extra scrutiny when their company is undergoing retrenchment — the highest paid 20 per cent and the underperforming 20 per cent. And, if someone happens to fit both categories, they will be fired first.
Don’t be afraid to make such harsh decisions when restructuring a better team. It will be hard, but it’s a necessity. Just don’t forget to compensate those who are going to lose their jobs!
One good thing about this economic winter is that more people are starting to criticise the flying pig theory. They have become more rational, and have taken time to reflect on the honest and unsexy market analysis and prediction.
It is heartening to see more and more startups beginning to revisit their company strategies. We can look forward to entrepreneurs coming up with better solutions to their problems after this storm.
2019 may not be the best year, but it will be the year for the best
2019 will not be an easy year. When the hot money in China’s startup ecosystem starts to cool down, we can expect the failure rate to climb up to 90 per cent or higher.
Thus, with lesser startups and a higher fail-rate, only the best players can survive through the filtration of each fundraising stage.
Surprisingly, we usually don’t encourage people to embark on an entrepreneurial journey. At most, we would recommend joining a startup company with visions and prospects instead of founding one.
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However, if you are determined on getting your foot into the world of startups, there’s no stopping you. But do bear in mind — for VCs, we only look at those startups who can grow fast within three to six years. Any shorter and it could be counted as a private equity investment; any longer and it would be a research project and not an ROI-driven investment.
Conclusion
2019’s overall economic development will not be pleasant. But, we should always remain optimistic as it is times like this that will define us, our intentions, and our companies.
Still, being optimistic doesn’t mean ignoring the recession. It means acknowledging it and yet preparing to deal with it because you refuse to give up in the face of challenge.
So hang in there and reap 2020’s spring harvest. Problems indicate opportunity and opportunity means business. Fight hard and prosper by persistence.
Here, I would like to remind everyone that ‘what doesn’t kill you only makes you stronger’. Good luck!
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Linear Ventures is looking out for passionate and undaunted startup founders. If you can identify with that, do send them your pitch deck and gain valuable industry expertise and capital.
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