Building for Profitability in the Shadow of Tech’s Great Reckoning

Nick Martin
Apr 26, 2023

This article was first published in Tech In Asia.

From the collapse of startup stalwart Silicon Valley Bank to mounting job cuts at profitable unicorns in Southeast Asia, the tech sector continues to undergo a great reckoning as its scaling approach comes increasingly under fire. While unhealthy growth practices may have contributed to the financial instability sending shockwaves throughout the industry, that same energy could be harnessed to drive a more long-term growth trajectory that prioritises profitability. 

The startup financing boom legacy

The startup funding boom era, characterised by low-interest rates and expansionary monetary policy, created the conditions for the “growth at all costs” model. Large pools of investment pursued disruptive technologies that were rewriting business models: from ride-hailing to money transfers. 

Venture-backed businesses did not need to prioritise profitability as money was free, so demand could be manufactured if it did not exist. This led to aggressive customer acquisition, extensive product development, and grand market expansions. Significant loss-making investments in infrastructure, personnel, and marketing made it difficult to achieve profitability at any stage, and most founders were able to be complacent on unit economics.

All that changed in 2022. Investors globally lost $33 trillion in equity markets. The Nasdaq, with its high concentration of Big Tech stocks, fell by a third. In Southeast Asia, Grab shares dropped to $3.22 from $7.13; nearly a 55% fall in share value.

Similarly, in the private market, both startup valuations and the number of deals began to drop. Leading VC financing legal firm Cooley was involved in 428 VC deals worth US $23.3 billion  in Q4 of 2021. One year later, Q4 of 2022, 269 startups raised a total of $6.1 billion in venture. A drop in deal flow may not be the death knell that many think it is: in fact, it could mark a new era of efficient startup operations that prioritise profitable and sustainable growth.

High growth versus sustainable growth

To adapt to these new market conditions, founders are cutting spending amidst fears that recent investment raised on favourable terms could be the final round raised. With funding flowing less freely, a loss-making growth strategy is no longer sustainable: a course correction has begun with a tight timeline.

The clearest example of shifting from growth to unit economics is Twitter. After buying all the company’s outstanding shares at US $54.20 each ($44 billion total), Twitter traded as low as $31.30 before being taken private amidst Elon Musk’s claims that it was losing US $4 million daily. 

Since Musk took over, Twitter employee numbers have shrunk by 70%. While the nature of cuts has been roundly criticised, it has demonstrated that a technology business can still operate while restructuring. This emboldened the sector, with 160,000 layoffs reported on in 2022, while close to another 160,000 people having been let go in the first three months of 2023.

With the current crunch representing the third major downturn of the Internet era (following the dot-com bubble burst and the 2008 Global Financial Crisis), a lot of founders have not yet experienced a downturn. Beyond cutting headcount and reducing burn rate, there are other methods to help founders take control of their business and strengthen their outlook.

The path to profitability

Cutting costs helps reduce overhead, but there are other strategic ways to pursue profit. Not all will work for every business, but these strategies may offer some means to keep hold of high-skilled tech talent for once the market builds up.

Improve lifetime value of a customer (LTV) and reduce customer acquisition costs (CAC)

With companies able to focus on unprofitable growth, users acquisition became a key performance indicator. Some businesses profited from acquiring customers through discounts that drove word-of-mouth referrals; like subscription services. Most Software-as-a-Service businesses, however, do not drive profits by offering free or discounted access. Good business practice suggests spending $1 -20 to acquire a customer (CAC) if you can predict life time sales (LTV)of $100 from them. Businesses that were spending $100 to earn $10-20 LTV are now facing a reckoning. Lowering CAC by relying less on expensive paid ads or leveraging customer referral programs is now being forced on existing companies and a requirement for emerging companies. Extending LTV is now a vital KPI with companies increasing the number of sales of existing customers, optimising gross margin whilst maintaining a great customer experience. 

Focus on areas you provide highest customer value with best margins

Marketing spend aside, scaling back to the core business line is another way to take control. Google leads the pack at ruthlessly ending products that are not working - try searching ‘killed by google,’ More recently, Traveloka discontinued all diversification businesses to return to its core of travel. In each of these, the companies realigned to the core offering that makes their business unique. Earlier-stage companies should assess which of their business ideas is closest to product-market fit, which will reveal more opportunities to reduce costs. In a tight job market, nearshore teams can supplement Singapore-based personnel during work spikes, at a lower cost. This ensures a streamlined team does not lose out on scaling opportunities. 

Preserve research & development or investments in other pursuits

It may seem counterproductive to invest in experimental ideas while streamlining, but this could be key to long-term success.  Encouraging employees to experiment around the core principles of the business and acknowledging that failure is part of the process can drive innovation. Product testing and prototyping saves time and money, and helps get new ideas to market faster. This is a particularly interesting time to  test Generative AI with purpose. While leaders have called for a temporary pause on training systems exceeding GPT-4 and larger companies have quickly curtailed its use, citing quality, security, and legal risks, such systems allow employees to summarise notes, propose outlines, test code or try other time-saving techniques. By encouraging employees to adopt an agile and experimental mindset, they could uncover some incredible cost savings.

Reasons to be optimistic

In times of uncertainty, looking ahead can be challenging. As businesses face drops in revenue and funding, it is important to remember that times will change. Plus - reflections on the reality of your business are most accurate when your back is against the wall. Tough times call for decisive action. That said, there are still plenty of reasons to keep an eye on a more optimistic horizon. 

For one, Southeast Asia is continuing on its digital transformation journey: the region’s digital economy continues to grow by more than 20% annually. Investors remain confident in the long-term prospects for the region, giving us an enviable context to build back stronger. 

The tech cuts are far from over - markets are going to continue to adjust to this new reality over the next 9 - 12 months. Old business models of cut-rate expansion will fall by the wayside, creating a more intentional and slower but sustained pace of growth. We can expect to see hiring trends change, as in-house teams shrink but are instead supported by a constellation of specialists on a fractional, part-time or project basis. 

As we reprioritise our energy, resources and focus we should see this moment as a great opportunity to build new ways of building businesses that rely less on fast sprints, and instead take a marathon approach to meaningful growth.

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