The cases of big companies gone bust
It may be counterintuitive, but one of the biggest advantages of the Southeast Asian startup scene is the reality that the ecosystem is years behind global leaders like China and Silicon Valley.
While it would be nice to have a vibrant behemoth of an ecosystem like that of China’s, what’s good about being an emerging ecosystem is that entrepreneurs, investors, and community stakeholders in Southeast Asia can study the mistakes and steer the regional startup scene away from pitfalls.
One such pitfall is how to adapt to an infusion of excess capital, because it does not necessarily correlate with better business decisions, according to a joint study from Golden Gate Ventures and INSEAD.
According to the study, the excess capital began to hit China around 2009, when Silicon Valley investors began to look East as a way to diversify their portfolios.
Investors sought Chinese companies for three reasons:
- First, the best universities in China began hosting competitions that opened up the door for angel investing.
- Second, companies were in need of this investment (the study reveals an anecdote in which the Managing Director of Trilogy VC, Stephen Bell, says he inked a deal for every term sheet he offered).
- Third, VCs could find deals at a lower price than their American counterparts.
For people paying attention, this seems to be happening in Southeast Asia — with Chinese investors playing the role of 2009 Silicon Valley VCs.
“The things you see in China and the US have not happened [in Southeast Asia] yet, but the idea was to send a little warning,” said Michael Lints, a Venture Partner at Golden Gate Ventures, in a conversation with e27.
“[Southeast Asia] is seeing more Funds that have raised money recently and they need to deploy that capital in the next four or five years and companies will raise from them. [So this is] to make sure we are not falling into any traps,” he said.
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According to Lints, one of the major lessons from the nine use-cases the team analysed was that operational experience played an important role in determining the successes or failures of these companies. Some raised tens, and even hundreds, of millions of dollars but fundamental operational errors lead to an eventual closure or buy-out.
“I think that that its one of the takeaways [Chinese investors] brought to SEA: not just spending money but being more diligent in spending decisions.”
Let’s take a look at two of the studies.
Gaopeng.com
Gaopeng was a group-buying company that offered users special deals through a daily email full of discounts. Not only was Gaopeng similar to Groupon, but it was actually financed by the American company in a 50/50 share-split with Tencent.
After an investment of US$40 million, Tencent, Groupon and the management team became principal shareholders in the company.
What ultimately doomed Gaopeng.com was a lack of cultural understanding. It set up the team in such a way that it became nearly impossible to fully grasp the nuances of Chinese culture.
In a company built in China, only two of its senior management were Chinese (and one was from Hong Kong, which operates in an entirely different business culture). Furthermore, even in remote parts of China, the people running operations were foreigners.
One example of how this leads to poor decision-making is how it approached its mass email system. Despite warnings from local employees that Chinese people rarely read mass daily emails, Groupon insisted on the model — essentially turning the company’s main feature into its biggest bug.
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Furthermore, this unwillingness to draw on local talent meant the company was dogged with a high employee turnover rate.
The final blow came in the form of two scandals. The first was in 2011 when staff were caught cheating on the lucky draw (lottery), which resulted in the Vice President getting fired and the CEO making a public apology. Less than a year later, it was discovered that luxury watches sold on Gaopeng.com were fakes.
With its reputation in the dump, and a management team that did not fully understand Chinese culture, the fate of Gaopeng.com was sealed.
Key takeaway: Place locals in key management positions, so the business can adapt to cultural nuances and better understand their customer base. This is particularly relevant in fragmented Southeast Asia, where companies are often forced to reach beyond their home markets.
Letao
Letao was established in 2008 as an e-commerce platform selling footwear. Similar to Tmall, the company partnered with local merchants to act as an online marketplace for shoes.
In total, it raised US$85 million in publicly disclosed funding and an undisclosed Series E from Ceyuan Ventures. The company was bought by Guangdong Guanpeng Shoe Industry Franchise Ltd. for US$72 million in 2014. The company still operates.
In 2009, however, it was the darling of e-commerce in China. Letao had almost no competition and its daily order number tripled from 1,000 to 3,000 from Q1 to Q4 that year.
Letao was growing fast, and investors wrote big cheques. Unfortunately, the company did not use the money wisely — spending a lot on over-the-top offices and expensive advertising.
Poor money-management was compounded when the management team then made a strategy mistake.
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Their business, which involved physical warehouses to improve delivery time, had thin margins and could not turn a profit. In 2011, Letao decided the solution was to create its own brand of footwear to boost profit.
But, they underestimated the amount of time and money it would take to create brand awareness — which led to overproduction and massive losses.
The decision sucked money and killed Let status as the “premiere online shoe marketplace” — weakening itself ahead of the rise of e-commerce in China. When Alibaba and JD.com finally emerged, e-commerce exploded in China, but Letao’s status as a market-leader was a distant memory.
As the losses piled up, the owners sold the company in 2014.
Key Takeaway: The company spent its investment-funding poorly and failed to capitalise on its status as a market-leader in a specific niche. What eventually did Letao in was a high-risk gamble that did not pay off, exacerbating the downward spiral the company was experiencing.
In Southeast Asia, the case study is an example of a company that found success in a 2008 Chinese e-commerce environment that is similar to this region’s current status. As the Southeast Asia e-commerce industry emerges, the Letao example can be a guiding light to point-out potential pitfalls that the region’s players should avoid.
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