About Startups That Burn Money and Are Called "Real Businesses"

The startup scene in Indonesia is getting intense these last few years. Various types of digital companies have emerged with various business models, along with venture capital that appears, both from abroad and locally.

The businesses and activities that revolve around these startups are also growing. There are media that specifically cover startups, software development companies specifically for startups, as well as coworking space businesses whose clients are startup companies.

Do you still clearly remember the excitement when Tokopedia received $100 million in funding in 2014? Just now MatahariMall got that much, but now no very excited :)

Well, lately — Yes Gojek who just got 550 million dollars, then FoodPanda stopped operating because it was allegedly running out of money. Day by day there is more and more news about startup A getting several million dollars in funding, and startup B which suddenly has to close for various reasons; running out of funds, or planning to pivot to another business.

And a few days ago; I was intrigued to read a facebook status that somehow appeared on my timeline; something like this:

"More and more startup businesses are proven to be like gambling, it's better for real businesses"

— automatically makes me think hard; errrrr…

Then I remembered again about a friend who commented on startups by comparing his own business; "Yes, if I'm a real business like this, the calculations are different, I have to make a real profit..."

Hmm. It seems that there are quite a lot of misconceptions in society — which think that a startup business is the opposite of a real or real business. That is, the startup business is not a real business, aka a fake business or fake.

When viewed from the origin, startup can be interpreted as "just starting". This means, yes, all businesses that have just started (although this is relative, but quite a lot of people agree that before 3 years can be a benchmark).

Now I want to try to explain about the comparison between a startup and a "real business". To make things easier, let's imagine a comparison analogy between an e-commerce site or a virtual mall, with a “real” mall, and the fictional characters Amir and Umar — from a company valuation perspective.

Amir's story

Amir is the son of a conglomerate. His father has a successful property business and is used to building housing, offices and shopping centers. Every Friday, Mr. Amir always invites Amir to go golfing. Here's their conversation:

Father: “Amir, it's time for you to follow in your footsteps in the property business. Try you buy one of the lands from our family company at a price and you build something on it. Later, you will give me the capital."

So Amir builds a mall.

Ideation & Building Stage

Because his father is rich, Amir was able to allocate Rp 125 billion to build the mall. The first thing Amir did was buy land to build the Mall. It takes 10,000 m2 (1 hectare) plot of land located in a strategic area. The actual market price per m2 is Rp 4 million/m2 — but because Amir bought the land from his father's company, he got a cheap price, only Rp 2.5 million/m2.

With 2.5 million/m2, only Rp. 25M is enough to buy the required land. At this point, Amir still has Rp 100M left in the bank, and the company's valuation has immediately increased to Rp 140M (100M cash + 40M land asset value).

With 100M remaining, Amir started building the Mall he had planned. Various channels for the allocation of funds were disbursed — from building consultants, contractors, to the management and marketing team he hired. It took approximately 1 year for the Mall to be built, with a total cost of IDR 75M. During construction, Amir's marketing team has also been operating, they have started offering to business owners — restaurant owners, owners of fashion brands, optics, coffee shops, and department stores. Oh yeah, don't miss the cinema. Some brands and business categories such as department stores, cinemas and very strong and ubiquitous brands are referred to as Anchor tenants.

Product/Market Fit & Growth Hack

One year later, when it was ready to operate, there were not many tenants, but there were already several anchor tentants. They want to go into Amir Mall and open outlets, because they are offered very cheap prices — even completely free. Why? Because with them entering, the Mall has started operating and can attract visitors. For the Mall business, anchor tenants are like MVP (Minimum Viable Products).

A week before opening day, advertisements were placed in all the media so that the entire town knew about Amir Mall. It's the talk of the town. Everyone is interested in coming to visit the new Mall. Business owners who have previously been offered space, whether they have been rented or not — by the marketing team are invited back as VIP guests.

On the opening day, crowds of visitors, and VIP guests, aka prospective tenants, mostly immediately signed a contract to rent space at Amir Mall. The launch was a huge success!

A week after the Mall opened, Amir invited management to a meeting and invited a consultant to calculate the valuation of his current business. It turned out that the space that was rented out at the Mall had been filled by 80% in the first week; 20% for anchor tenants, and 60% for new tenants who have just registered.

Monetization

In the first year, Amir only took a rent of Rp 8 million /m2 per year (not including service charge, electricity, etc.) — while the space offered was 10,000 m2 (there are 4 floors with each floor covering an area of ​​2,500m2). This means that in the first year, Amir Mall's net rental income was recorded at Rp 48 billion.

The consultant then calculated in detail all the assets owned by Amir Mall now. The value of the building land has actually gone up drastically because once Amir Mall was built, the surrounding land went up in price. Now the land value has reached Rp 6 million / m. This means that Amir's land is worth Rp. 60 billion. Then the value of the building is estimated at Rp 60M as well. It's a loss, because the construction reached Rp 75 billion, but the estimated value will not be the same as the real value.

Valuation

For the Mall business valuation itself, it turns out that the consultant suggested a simple method = total net revenue x 5 years, because it is predicted that in 5 years this business will run smoothly. Employee salaries and other expenses are calculated at IDR 1 billion per month, or IDR 12 billion per year. Because the existing benchmark is gross revenue of IDR 48M / year, the total per year calculated net profit is IDR 36M.

Up to this point, Amir Mall's business valuation is: Building Land (10,000m2) = Rp 120M Cash in the Bank = Rp 25M Business valuation (5 years x Rp 36M) = Rp 180M Total = Rp 325M.

Wow, fantastic! In 2 years, Amir's (father) capital of Rp 125M has grown by 2.6 times! Amir that day came home proud. That night he had a schedule to have dinner with his father, and that's where he told his father that he had successfully built his business.

The Father listened carefully, patting Amir on the shoulder; "That's great son, keep it up.." ..but Amir felt that your response was really flat..

Umar's story

The afternoon before Amir came home, the father actually hung out at one of the anchor tenants, a coffeeshop with a green logo at Amir Mall. He wanted to see how his son worked. Mr. Amir sat alone while watching the crowds passing by. Because this coffeeshop is nearby pintu entered, he could also see across the street; a construction of a high rise building that seems to have just begun.

Umar, just landed from Singapore — he came to attend an old friend's wedding, but because it wasn't check-in time yet, he stopped at the Mall. He entered the first coffeeshop closest to pintu come in and find a seat.

"May I sit here, sir? Incidentally all the tables are full and it looks like you are alone .."

Mr. Amir was a little surprised, then looked up while looking at the owner of the voice and replied: "Oh, please .."

"It's amazing, sir, the development of this city. This mall is still new, right? Too many, huh?" while Umar pulled a chair and threw his body.

"Yeah, just opened a week ago." replied Mr. Amir, while observing the appearance of this young man. He seemed to be the same age as his son, but looked more casual. T-shirts, jeans and sneakers; not like his son Amir, who has a neat shirt everywhere.

"Oh, if it's on the other side, the Mall too, right? Looks like it's just been built and I saw a sign with a name earlier — it looks like it's going to be a shopping center too." Umar said.

"It seems so. And at the end of the road there will also be a new Mall. It looks like this street will be filled with shopping malls in the future.” replied Mr. Amir.

"Wow, if it's all along the Mall road, then the competition is really tight, right, sir? If I'm not mistaken, the population growth of this city is only 5% per year. The cake doesn't increase if you want to eat more, right?" Umar said.

"Hehehe sorry sir, I don't know what it's like. Introducing Sir, my name is Umar. Coincidentally, I used to be small in this town too.” Umar continued, feeling presumptuous.

"My name is Kamirun mas, usually called Mr. Amir. Incidentally I also have a child the same age as you, his name is Amir too. It's just that if I'm called Amir — the Indonesian spelling, for my son, the vowels A & I are pronounced like the movie series from my old days — The A-Team.”

They then shook hands.

Mr. Amir then continued; “Oh, indeed — the competition is getting tougher, but the target market of these shopping malls isn't just city dwellers you know. The busier this street is, the more it will attract people from other cities as well. Well, because the more crowded, the land prices also go up. This means that apart from business profit, there is also a significant capital gain every year due to property value growth.”

Then he explained at length about the business model of making a shopping center, and how when a business loses, property assets continue to increase in value and overall the business will not lose. Mr. Amir also excitedly told how Ciputra and other business tycoons engaged in property, and entered as the richest people in Indonesia.

Although he didn't directly say what his business was, Umar could understand that Mr. Amir's business was also property because he knew inside and out about the business. Since Mr. Amir was also able to mention in detail about this Mall, Umar also guessed that the mall they were in now also belonged to him, or at least to his family members.

"Wow, it's going to be like Orchard Rd, isn't it, sir? it's all malls." said Umar.

"Well, that's right, have you been there?" asked Mr. Amir.

"Quite often, sir, at least once a month. Coincidentally just landed from there, there are consecutive meetings for several days in Singapore this week.”

"Wow, you're great too. Work or business?” asked Mr. Amir curiously.

"I happen to be in business too, sir, it's only been around 3 years. If people say, it's still a startup," Umar replied.

"What kind of business, sir? How come the meetings in Singapore? Export Import?" Mr. Amir is getting curious.

"Not sir. I currently manage a digital marketplace. Maybe it's similar to a mall, but there's no physical form at all. Everything is digital, and only transactions can only be done on the internet. There are people who sell goods there, then there are those who are interested in buying them. Well, my business brings these two parties together. For example, someone wants to sell a rare book by Enid Blyton that is signed by the author directly — even though he doesn't own a bookstore; then this person sells on my marketplace, and is met by fans who want to buy.”

Ideation & Building Stage

Now it's Umar's turn to talk at length about the marketplace he manages. It started with the death of Umar's father 3 years ago who did not leave a lot of money, but one room was full of the deceased's collection of books.

“I still remember the contents of my father's inheritance letter, sir. I even have a digital copy of this,” said Umar, showing the screen of his tablet, after a few clicks to open a file.

Umar, my only child. Forgive your father for not being able to leave an inheritance in the form of valuable assets or land, because I believe you can get property or buy land yourself with the results of your sweat and watery brain. But what I left behind was far more valuable; science and virtue. Windows to the corners of the world. Hallways leading to the back of the brains of scholars. To you, I left my personal library. Inside there are hundreds, maybe thousands of selected books, many of which are even signed by the author. Use this inheritance of mine in your own way, so that you can rule your world.

“After the funeral, the next 3 days I spent starting sorting through my Dad's book collection. I still don't know what to do with this whole book. Yes indeed, this is a source of knowledge and a window to the world. but after I checked, almost all of the books are on sale on Amazon, and if it's the old books, there are digital copies on the internet and can be downloaded for free. I'm dizzy, sir, confused about what to do." Umar continued.

"Then what do you do with all the inheritance of his books, mas?" Mr. Amir asked as he gazed — he himself hadn't thought about the legacy he wanted to leave behind. Imagine the faces of his family; his son, Amir, then the people who would really miss him if he wasn't around, and then don't forget the faces of the losers who would inwardly rejoice when he died.

"I sell sir .." Umar answered briefly with a flat intonation. “My considerations; the first — I don't have the ability to manage libraries. I was rarely at home, and my father's private library was the room I was in the least. And although my hobby is reading, I also love to travel so carrying heavy books in my backpack doesn't seem like a great option.” said Umar, pointing to his backpack.

“The next consideration, because all the contents of the books in my father's library, I can now get them on my device. I can read it anytime. So my father's collection of books is actually of no use if I use it myself." Umar explained.

"Where did you sell it, sir?" Mr. Amir asked, half curious half embarrassed — he imagined that one day the inheritance he gave to his family was not taken care of, but simply sold.

“At first I advertised in the newspaper, but it didn't sell. I tried to offer it to bookstores, in fact I was laughed at because they were also desperately selling books. Then I tried to offer it to online forums, it was pretty good, sir — it sold well because there were also many book collectors who were interested. At that time, I had sold dozens of collections with a value of millions of rupiah. Until I finally got the case, I sent the book, the money didn't reach me.” Umar said.

"How come? Shouldn't you just wait for the money to be sent before the goods are sent, right?"

"No sir. People also don't want that method, that's why there is a business called a joint account or rekber. kind of escrow that's the term bank. It's just that it turns out that the account is problematic, the buyer has transferred it to the account, I've sent the book, uh, the money wasn't transferred to me." Umar explained

"Why is that? Didn't you report it to the police?"

"It's okay. The case is already crowded, sir, just try to search on Google about the case, sir. Already caught, and want to pay in installments to compensate. But that's right, it's complicated to take care of it, so I gave up using rekber and selling on the forum again."

"So, where did you sell it?" Mr. Amir is starting to feel uncomfortable. He began to understand the contents of Mr. Umar's will — that he entrusted his inheritance to be used in Umar's own way. So there is no obligation for Umar to continue to keep those valuable books.

Product/Market Fit & Growth Hack

“I finally tried to make my own site, sir, specifically for selling collector's edition books. His name is BukuLapuk.com. All my books take photos and I give a short review, I also give the author's profile and direct link to the author. Well, every writer I contact, mention or tag on their social media. Because I made the descriptions about them unique and funny, and the books being sold are no longer published, so on average the authors will share them in their own accounts. So many people come to visit, and end up buying books on my site.” continued Umar's story.

"Wait a minute, did you say the business was a marketplace? Why are you selling books? What's the difference with an online bookstore like Garukmedia?" cut Mr Amir.

“Yes, sir, it was an old bookstore and I sold it myself. But there I also manage a special forum for fans of antique books. Well, after a long time it turned out that a forum for buying and selling antiques was formed between fellow members. Finally, I facilitated it to make it easier for people to sell antiques, and also make it easier for people to see what they were selling, and I also took care of the payment, sir. So, BukuLapuk.com is the first marketplace for rare books and antiques,” Umar explained.

"If I sell books, I understand, sir. But if it's a marketplace, where do you get the profit from? Do you charge a commission on every item sold?” Mr. Amir curiously asked.

Scale

"No sir. For the last 3 years everything is free. We facilitate buying and selling transactions without paying anything. The important thing is that the number of members is increasing, and an ecosystem is formed. If the commission was charged from the start, who would want to sell goods at my place, sir? In this way, after 3 years of existence, we have recorded that there have been more than 1 million sellers, sir,” Umar explained.

"Well, how can that be? There must be a lot of costs involved too — especially with 1 million+ members, I'm sure it takes a lot of human resources to manage it, right?” asked Mr. Amir.

“Actually, the first few months, I spent relatively little money, sir, it covered the cost of selling my father's books. Until then the total number of sellers reached more than a thousand, I began to be overwhelmed by the complaints of naughty buyers, or fussy sellers. Who sells it, where is the goods sent, complain to me. I was dizzy, sir.."

“And you don't charge any commission? Why don't sellers charge a monthly fee? Then how's the profit?"

"Well, sir. Indeed, when compared to conventional businesses such as the Mall that you are talking about, for example — there are some differences, but actually there are also many common threads. If you told me earlier that building a mall requires a large investment at the beginning, to buy land and buildings with good architecture, what is the purpose for that, sir?"

"Well, let people come, please. If there are many visitors, later he will look at the goods in this Mall, or come to a restaurant, or to a coffeeshop like ours. People shop, later the shop owner can make a profit, and we charge rent. It's clear that it's a business, where does the money come from - it's not like your business."

Monetization

“Obviously I don't plan to set up a non-profit foundation, sir, but with so many transactions happening now, BukuLapuk.com now benefits from people who want their products to stand out in front of potential buyers. In this way, the seller has a greater chance of selling his product. We call them premium users. They can choose the commission method to BukuLapuk.com — they want to pay for every keyword searched by potential buyers, or give a commission for every product sold.”

"Wow, can you do that? Now how much is the transaction each month, bro? Hmmm.. if there are 1 million sellers, on average they only sell 2x items per month, does that mean there are already 2 million transactions each month? If you think the price of antiques must be more than Rp. 2 thousand, for example, this is an average of Rp. 200, which means that the total transaction per month is Rp. 250,000 x 500,000 million; So 1 billion a month, bro?"

"I think that's right, sir. It's a little more, but the numbers don't miss a beat."

“Then how many sellers are premium users? Surely people prefer their goods to sell, so more people become premium users, right? More than half?"

"No sir. More sellers still feel sorry for having to give commissions or pay for each keyword. So, only 5% of them become premium users. But, because of this 5%, we can automatically sell more in demand, then approximately 20% of the transactions are from premium users who give us a commission.”

"So there are Rp 100M transactions that give commission, right? What percentage of the commission is that?” while Mr. Amir puts on his glasses and he starts to open the BukuLapuk.com site, just click on the "Seller FAQ" section.

Even though he is old, but in terms of technology, Mr. Amir never wants to be left behind. He was immediately able to find the terms and conditions for being a premium user on BukuLapuk.com — and a moment later, after his mouth stuttered reading a few paragraphs, he pounded the table!

"Crazy! 5% commission, means you can get 5M more per month, right? That means it's bigger than my son's Mall business, right!”

Some of the visitors at the next table were shocked and looked at them. Umar was also half surprised, especially Mr Amir — who had just realized that he was speaking too loudly.

"Eh sorry, sorry .." while his hands form a gesture of apology to the people around him.

“But really, Mas, I didn't think that a digital business or startup could make that much profit. No wonder why I read on sites like TengsinAsia, there are news of funding up to hundreds of millions of dollars — what is the money actually for and what do you do with it. Lha wong has gone his own way, making a profit, why does it have to be an investor? It's better to manage it yourself, Mas.." continued Mr. Amir

“The analogy is this, sir; Earlier, you told me about Capital Gain from the property business or shopping center. The increase in land value depends on how crowded the location is — or more accurately, an official appraisal agency that assesses a property will use references from land sales and purchase transactions near the location. If, for example, we buy land in a location with a price of Rp. 3 million/m2, but next year it turns out that the land next to it has an exact value of Rp. 6 million/m2, automatically the value of our land will also increase.”

"Yes, that's true, but what does that have to do with it?" Mr. Amir couldn't wait to cut.

“In startup; when there is funding, it means that there are shares being traded. The incoming funds are exchanged for a portion of the company's shares. Well, let's say for example that which was sold at the time seed funding is 10% shares and purchased at a price of 1 million dollars, which means the total value of the company or its valuation is 10 million dollars, right? Even though it was possible that the startup was initially built with only knee and brain capital.”

"Wow, is your company valued that much, sir?"

"No sir, this is just an example.." Umar was humble.

"Then what is the money for? Isn't the company already profitable?

"Not yet, sir, it was just made a profit. The first three years, like I said earlier, everything is free for all users.”

"What do you mean by making a profit? Yes, the intention is to make a profit, right? I don't understand why.."

Valuation

"Look, sir.. It's possible that since there are only thousands of members, we can already collect commissions or fees per month. But with that, the growth of its members must have slowed down. After all, it is possible that someone with the same idea can imitate and then create the exact same service even though it has a different name — and it's free. If that's the case, it means looking for a quick profit is the same as committing suicide, sir," explained Umar.

“Well, the funding from Venture Capital is for marketing and operational costs to continue to increase the number of existing members and transactions, to the point where an ecosystem is formed where each member really needs BukuLapuk.com as a medium for selling and looking for their goods. If that's the case — then you can start making money from there." continued Umar.

“Then, at the time of the next funding, or so-called series A, B and so on, here the founder has started selling some of the shares in exchange for cash. Or, at least get a significant salary or bonus. There are no fixed rules for funding, but most of the time, each funding will increase the value of the company 10x or more — where the Founder loses 10-20% but the total value of the shares he holds increases many times," Umar explained again.

"Hmmm.. so it's actually similar to the Mall business, huh. If you build a mall, you need a big capital first to build the building so that people can come, as soon as it opens, it gets crowded right away — you get money right away. For digital startups; Start small first, big capital is needed when more people come, so it keeps getting busier. Equally, the value of the company increases when there are more visitors, buyers and sellers..." said Mr. Amir.

"Well, the difference is, sir, it can be said that a marketplace like BukuLapuk.com is mine, or my rival is TukuPidio.com — in the past this was just a forum where people bought and sold DVD movies, then it developed into a marketplace as well — the potential for growth is almost unlimited, or the term scalable," continued Umar.

"It means scalable What to do?"

"Ginny sir. For example, Amir Mall, when it's full space-his, continuehow? Or when it's a long holiday and the parking lot below is full, what can be done?”

"Yes, that's the capacity. There must be a limit. TRUS for example, already fullcapacityYes, the plan is to make another mall, please.." answered Mr. Amir.

"That's the name repeatable, but no scalable. If it's a digital marketplace, there's no limit, sir. I could have millions of sellers and buyers. Not limited by the size of the building or the width of the parking lot. So, ideally, a digital startup business should have 3 characteristics — the 2 that were before, namely scalable and repeatable, continue one more: profitable. "

"Hmm, I understand now. Wow, now the value of your company and shares in BukuLapuk is millions of dollars, right?" Mr. Amir nodded in admiration, while watching Umar who had glanced at his watch several times.

"Well sir, it's nice to meet you. I have to go now it seems. When will we meet again, sir.." Umar said goodbye to Mr. Amir.

"Well, I have to thank you. Can I have your phone number so when I can talk to you again?”

They then exchanged phone numbers, and Umar left. Mr. Amir then went home, because he had also promised to meet his son.

Epilogue

There are several stages that are actually taken together in Amir and Umar's story, namely Ideation, Building Stage, Product/Market Fit, Growth Hack, and Monetization. The difference is, in conventional businesses such as making malls, there is no Scale stage.

No business is without risk. And not everyone is cut out for business; good "business" really” or “startup business” (yes, the quotation marks are meant to insinuate people who create a dichotomy between the two). And there's never been an easy way to succeed in business. The reality is, only a small percentage of businesses are successful. Especially the digital startup business. The example of the success story above is yes because it is the part that is chosen for success. More failed.

Hats off, and thumbs up to all startup founders who have started running their businesses. For those who haven't and will just — really count all aspects; and don't really believe in motivators. Just take what makes sense and is logical — because not necessarily those who give motivational advice have experienced it.

Make a startup by solving a real problem.

The real entrepreneur is a problem solver, not a money hunter.

If you have found your problems big enough to be solved, then go, do it, build your startup with everything you got. With all your heart, tears and blood. It's gonna be worth it. Been there, done that.

- Disclosure: This guest entry was written by Andy Fajar Handika and has been republished through editing with permission from the author. The original source can be accessed HERE.

Andy is the CEO Kulin, an online catering message site. Kulina solves the problem of expensive everyday meals in big cities due to the high cost of renting space for restaurants, by offering affordable lunch catering subscriptions in Jakarta starting from IDR 20.000/portion.