Being a growth investor, I am always interested in the tech startup scene. However it is recently that I start to notice a worrying trend about the world of startups.
Here are my insights:
- Students, schools, and practically everyone now are “inspired” to build a startup, for the sake of building one. There are no valid reasons to build it, nor the correct team members, business model, problem-solution factor. People now build startups purely because its “cool” to be an “entepreneur”.
- Youngsters are being led to the dream of running startups due to the capitalist nature of education.
- Older corporations thinking that the way to hire millennials into their workforce is to adapt the “startup culture”, making their offices cool, swanky, and throw in high pay and benefits.
- Every single company now wants to add in a technology element, thinking that their business will explode 100 fold simply because they are able to build an app for “char kuey tiao”, or a website for confinement services.
- The lure of billion dollar “millennials” and “lucky people” who run the Facebooks, Amazons, Netflix and Googles of the world makes people think that the money is there.
- Investors not wanting to mix out, flood the tech space with venture capital thinking that they can flip easy returns of 100 baggers and above within short periods of time.
- Startup founders claiming themselves as “Entepreneurs” always “want to make the world a better place” and “want to create value for society”. But nothing is mentioned (usually) about how to bring in cash flow (aka. how to bring rice to their table), how to build up their sell their product, how to gain customers, how to manage their finance, how to run their operations. Nothing is concrete, just a fascination and idea; a Dream.
- Employees claiming that work sucks, and want a “work-life-integration” world where they are “passionate” about what they work in, and all that sort. And usually they jump into fields that they have no idea what to do with, AKA (non-core competency).
All of the above and more, has led to an impressive boom of the technology world. And this has given rise to extreme over-valuations of technology-related companies, which then lures other companies to “adopt” technology by adding some component of tech into their business, be it an “irrelevant and useless” mobile app, website, or software.
But think it through;
- Are these startups really useful at creating value?
- How many startups really succeed?
- Why do some startups succeed and others don’t?
- What are the key elements we look for in potentially successful startups?
- What are the founder traits and circle of competence?
- Do the team members gel well?
- What’s the industry lacking that needs their product?
- What is the business model that allows them to generate value to society and at the same time create cash for themselves, their investors, and their employees?
With the thought process as above, the structure of 3R principle comes back into play. Taking into consideration, value investing can also be applied to private equity and private businesses, as well as public companies. In fact, private business and public companies are one and the same; BUSINESS ENTITIES. And what is the real purpose of businesses? To generate money.
VCs and PE firms should apply the techniques of value investing into their investment strategy, through scuttlebutt and the strategies employed by mega investors like Peter Lynch, Warren Buffett and the likes, and the risks of investing in startups will significantly reduce.
Startup founders should also learn the art of value investing to understand the facts on how and why companies are valued, and therefore able to realistically apply business concepts into their companies, instead of relying on selling “dreams”.
Because we are living in a “dream world” now due to exceptionally low interest rates and extreme quantitative easing measures, the market is flooded with easy and cheap cash which hot money needs to find a place to burrow into, and the tech space is currently one of it. Which therefore means that as an investor, one should err towards caution at such risky times, to avoid substantial financial loss, when the world is currently relying on the “greater fool” theory.
To sum it up, I would like to quote a paragraph on Howard Marks article recently called: Yet Again.
Two friends meet in the street, and Jim tells Sue he has some great sardines for sale. The fish are pedigreed and pure-bred, with full papers and high IQs. They were individually de-boned by hand and packed in the purest virgin olive oil. And the label was painted by a world-renowned artist.
Sue says, “That sounds great. I could use a tin. How much are they?” and Jim tells her they’re $10,000. Sue responds, “That’s crazy, who would eat $10,000 sardines?” “Oh,” says Jim, “these aren’t eating sardines; these are trading sardines.”