I’ve been wanting to write this post for over 10 months. I was part of a hot startup team in Hong Kong, been through the ups and downs, and people kept telling me our only chance to succeed, i.e. raise more fund to run the product and hire real talents, is to go to Silicon Valley. Very elitist thinking but true. Who doesn’t want to be accepted by Harvard, make a grand dropout stunt, and being called some cool names because we’ve a $1B-valuation startup in our pocket? I was so buying the Valley dream. While seriously considering the feasibility of moving to the Bay area, enrolling into programs like YC, TechStars, 500 Startups, etc., I got pregnant.
Call me weak, blame my lack of ambition and determination, or maybe I’m just not made for the “big thing”, but staying in Hong Kong, at least for the next 5 years, is my only and wishful option.
Then that got me thinking, is following the Silicon Valley formula the only way to build a tech company?
By the Valley formula, I am referring to those teams, getting their business up and running by raising a seed round, based on a mere concept or prototype. They carefully and strategically select their angels or seed round investors because they know an early round by Sequoia is going to help a long way in future rounds than money from their billionaire uncle. They also need to confidently craft out their exit plan and strategies – IPO or acquisition by Google, something to get their investors convinced and hyped that their money will be exponentially grown 10 to 10,000 times in 5 years.
As perplexing as it may sound, user traction is way more important than the actual revenue or profit margin. There may be a business model in place but are these startups required to implement the business model for a glamorous P&L in order to exit? Have you ever wondered why there are so many free apps out there? Put it this way, will you kill the goose that laid the golden eggs? A lot of exits happen because the buyer company wants an acqui-hire, or a patented technology that‘s cheaper to buy than in-house R&D, or user data that fits their strategic need, or a move to boost up their stock price, or even simply to eliminate a potential threat.
Not until in later rounds, when the money pooled in is getting high, will the startups be answering to the pressure to make profits. You will find many serial entrepreneurs in Silicon Valley and what it means is they build a product and a team, looking for a 2-year exit window, generates a 3X return for their investors, pocket in some money and move on to develop another product. This career path will make financial sense only when you know there are investors lining up outside waiting to write you checks.
There of course is a complex economy behind, but let me generalize and over-simplify the above in numbers:
If you have a prototype and you’re looking to sell 20% of your company for US$1M to kick start, meaning your company is already worth US$5M with only your brain and your partner’s hands. A round usually is enough to burn for 18 months and let’s say you don’t raise further rounds, you should still aim at an exit at $10M for your investors, meaning you need to double the growth of your company in less than 2 years. It’s not so much about how you become $10M-worthy, that’s arbitrary; it’s more about who in 2 years will see you worth $10M and why.
The problem is, according to Gust.com, only less than 5% of startups could meet this minimum return for their investors. Click To Tweet
We don’t have luxury to be this type of startups.
Even with such high mortality rate, Silicon Valley can still sustain this model of startup economy because:
- The 90/10 rule works out ok;
- There are enough exit outlets around;
- There are enough investors around, and particularly celebrity VCs that the big banks trust;
- There are enough users around
Recently there are lots of debate here regarding the hopeless and gloomy outlook for local startups, crispy summary here. I would say all these dramas are quite unnecessary because we never had, and probably never will have, an ecosystem to support so many VC-funded startups.
If our young generation has the delusion that they only need one prototype and some generous angels are going to toss them $1M to build their next Whatsapp, I could only have the local media to blame.
Too bad we don’t have a local version of CB Insights. But if we are to glorify and brag about all the glossy successful rounds of A, be it about a local team or a team already moved base to the West, at least we should have the decency to tell the truth about the pathetically low chance of exit. Because any experienced founder will tell you seed round is only like an admission to Harvard Law School, it earns you some likes and congrats, but you need to exit to call it a real success.
Don’t get me wrong. I have nothing against the Valley model and I surely will go around to solicit money if I want to build the next Facebook or Amazon, I will need capital, a lot indeed.
But what if I just want to build a company, riding on technology to disrupt old business methodology and aiming at earning US$15,000 a month for each member in the team? Do you even call it a startup? I don’t care. I just need to figure out if this business goal can be achieved if I am based out in Hong Kong. And I think it’s doable.
My point is, I believe we can build commercially successful startups here, not by following the Valley rule but by building a product that people are willing to pay now, and by taking good care of our top line and profit margin. Granted no investors would want us day one because:
- The product doesn’t entail a traction fantasy for them to fill in their KPIs;
- The growth isn’t fast enough for them to exponentially increase the company’s valuation for successive rounds
But without traction, however good the product and the team are, investors won’t want us anyway, reasoning that if our team is in Hong Kong, buy-out won’t be an option, bla bla bla. Wait until you’ve got solid traction and revenue coming in, investors will surely know where to find you.
For those who choose to play by the Valley rule, statistically, the mortality rate would be even higher. The reason is simple, because it is hard be better players than the Valley native.
At the end of the day, it’s all about business. And as Management 101 would tell you, the goal for any commercial body is to make money, albeit different approaches. So please be responsible founders, try your best not to lose your investors’ money. Even if you can’t grow your user base further, at least you can focus on selling a good product.
I figure I care more about how to make a product sell and how to make a business profitable than participating in the discussion of startup economy in Hong Kong. I’ve met a few courageous and bright young teams, who built their products without any backing, attaining breakeven and even profits within 2 years, enjoying a big fat check they so well deserve.
These are Hong Kong startups that we should be proud of and about whom I hope the local media can feature more. They may lack the lustrous CVs we expect a startup founder to possess but they’re admirable entrepreneurs that represent the genuine Hong Kong spirit.
My passion may not be building the next Twitter but I certainly am aspired to build the next Mailchimp (please refer to this Quora note to learn Mailchimp’s earning estimation).
That is why I like to work with startups and sometimes even their investors to explore product growth strategy, operation models that facilitate deals closing, strategies and frameworks for a business to self-sustain. Because when you have attained the quality traction, whether you want to raise more fund to expand or keep splitting money among you three, that will be a happy problem I wish for everyone.