"Growth vs Profit": Investor Thesis Trends in 2021

The stumbling block of WeWork's IPO plan in 2019, seemed to open the eyes of venture capital companies that the metric growth (growth) which has been the focus of startups and venture capital companies, is no longer the only mainstay. Activities "burning money" for innovation and new users, if not accompanied by a strong business strategy, can lead to failure.

In early 2021, when the pandemic was still a major problem, many startups did pivot business model and gain acceptance in order to maintain operations.

We spoke with a number of investors to understand how their investment thesis was going this year.

The pandemic is a moment of proof

According to BAce Capital Managing Partner Benny Chen, the pandemic is an opportunity to open our eyes even wider to push the company to be better. This condition is an important moment to be more vigilant and focus more on the business model.

The same thing was expressed by Investment Manager Genesia Ventures, Elsha E. Kwee. According to him, companies that are successful in raising funds during the pandemic are in a better position to focus on growth. The "key" is to have 18-24 months runway.

"I don't think there has been a fundamental change in the general attitude towards growth and profitability."

The Genesia Ventures portfolio, Elsha claims, ended the year with much better numbers than at the beginning of 2020.

Meanwhile, according to Kelvin Yim of Alpha Momentum Indonesia, the growth and profitability of startups in 2021 is very dependent on startup business ideas and strategies in the midst of a pandemic.

"If those products and services have any relevance during this pandemic, then this is a good opportunity to capture market share and drive some profits. If not, then a strategy must be implemented to see how startups can drive sales and growth during the pandemic," said Kelvin.

It is undeniable that the pandemic has reduced and even postponed the activities of venture capital companies to provide investment to startups.

According to the Managing Director WIND David Soukhasing, this condition forces founders who can't reach their fundraising goals to create new revenue streams or better control their spending.

"I think 2021 is still unclear what the prospects will be. Managing growth will continue to be the focus of startup founders. In the end, the decision will be in the hands of investors and the wishes of the founders themselves. [..] If the logic changes and you see the company being judged With EBITDA or net profit, investors will encourage controlled growth and profitability," said David.

Balancing growth and profitability

According to Benny, although most of the focus of startups in the initial funding stage is on growth, it is possible that profitability can also be achieved with the right strategy. Benny added, there is no standardization for this, if the startup has a relevant business model, it's best to try both processes, of course, after the founders understand correctly how to get profit and achieve ideal growth.

Meanwhile, according to Kelvin, it is better for startups that are still in the initial funding stage to always think about growth. Growth can be measured by various indications. The general indicator will likely be around the number of customers and if the startup is in its early stages it should ideally have a strategic plan to see how customer growth is done.

“Profitability tends to be in a phase where startups can identify annual break-even point to operating expenses. Some startups may have trouble identifying where revenue can be found, but it's always better to get into the business with profitability in mind. In the early stages for a 3 or 5 year plan, startups must include breakeven and profitability, so that startups can strategize how to achieve these goals from the start," said Kelvin.

As a venture capital company that focuses on early-stage startups, Genesia Ventures sees most early-stage startups will spend most of their time and resources looking for product market fit and once they find it, growth becomes an important focus, as it shows potential investors that the solution the startup is providing is something the market wants.

"Overall, I think growth is more appreciated in the early stages, although at the same time it is important to show investors that there is at least a path to profitability by achieving a healthy economic unit. As the company grows, the focus will then start to shift towards profitability. founders need to find a balance between growth and profitability," said Elsha.

According to Kelvin, if a startup is in the early stages but demanding ticket sizes large in the beginning, then perhaps growth vs. profitability should be prepared to attract investment.

Without growth, a startup is unlikely to reach the profit stage, given that they will spend operating funds very quickly. Depending on the stage at which the startup is located, growth indicators are usually important in the early stages. When a startup has been operating for some time, profitability is the next milestone.

"If I had to choose, I believe that a growth perspective mindset forces founders to rely on funding. That means it's not only customers and markets that decide the company's trust, but investors who make decisions about who to stake on," said David.

Meanwhile, according to Elsha, investors will also look at other metrics, such as recurring revenue and user engagement. Revenue is a good indicator of whether the company provides solutions to problems that are significant enough for users to pay for, whereas repeatability and engagement indicate ongoing utility.

"But again, having a good economic unit and showing a path to profitability is important, especially as the company progresses towards fundraising for the growth stage," Elsha said.