Southeast Asia startups should stop aiming for unicorn status blindly

In the mythical world of technology startups, unicorns are being born.

The venture capital industry defines unicorns as technology startups that have reached the $1 billion valuation milestone. But such milestones are rare to achieve and aspiring tech entrepreneurs and their financial backers who dream of a $1 billion exit have better odds at crossing paths with mythical creatures – unicorns, for example.

Unicorns are being born at alarming rates in places like Silicon Valley, while technology entrepreneurs in Southeast Asia are aspiring to do the same. But rather than innovate new business models, Southeast Asian startups are increasingly copying the business models of established unicorns. Such startups can be thought of as ‘baby unicorns’.

Baby unicorns

How do you identify a ‘baby unicorn’ from the pack of startups across Southeast Asia?  Baby unicorns typically pitch themselves as “the [insert unicorn name] of Southeast Asia.”  For example, in Indonesia alone, Sociocaster wants to be Hootsuite of Indonesia, Rumah Diaspora wants to be the Airbnb of Indonesia, and Go-Jek wants to be the Uber for motorcycles of Indonesia.

While there is nothing inherently bad about being a baby unicorn, what is troubling is that while there grows a proliferation of baby unicorns in Southeast Asia, fully-grown unicorns are dying off.

Gilt Groupe, for example, was valued at $1 billion in May 2011, but rapid expansion into new services diluted the company’s core service of flash sales for deep-discount fashion. The company continues its struggle to turn a profit and IPO is long-delayed from original plans, and recent fundraising suggest a down-round where the valuation of Gilt Groupe has dropped below $1 billion and a potential sale to rivals at ¼ the valuation.

So it becomes concerning that Southeast Asian startups are copying Gilt Groupe’s struggling business model. Brandsfavor (Vietnam) and Reebonz (Singapore) are examples of startups offering flash sales of luxury goods.

Following the path of unicorns is a perilous journey for Southeast Asian startups and the ailments that eventually kill unicorns and baby unicorns are multi-faceted. From my experience in the management consultant, venture capital, and private equity industry, the ailments are typically a combination of high valuations, high burn rates, and lack of ability to commercialize.

Seeking high-valuations too early

Southeast Asian startups which attract high valuations early on are under pressure to hit key growth metrics which justify those high-valuations. Miss those key metrics and startups’ valuations will flatten out in subsequent funding rounds, possibly resulting in a down-round, or worse, killing the company altogether.

High cash burn rates

In efforts to raise the valuation of the company as quickly as possible, startups are forcing high cash burn rates to hit key growth metrics.  If metrics are missed and subsequent funding rounds are delayed, these startups will be unable to sustain themselves. Add to the equation the less developed venture capital scene in Southeast Asia and baby unicorns with high burn rates are exponentially risky.

Lack of ability to commercialize

Too many startups in Southeast Asia weave user-acquisition into their narrative for success. But it’s not user acquisition that leads to success per se, but generating revenue from a start-up’s user base.  startups often forget this. Not to mention Southeast Asian baby unicorns are operating in markets whereby revenue per users is significantly smaller than markets like U.S. making commercialization of a user base more difficult.

Ending thoughts

Startups and new ventures are inherently risky. But what startup founders often forget is that investors are able to diversify their risk across multiple investments. Founders don’t have the luxury of diversification and therefore should build their startups more sustainably.

Startups in Southeast Asia then, regardless of their business model, will need to start grounding themselves in business reality. To be successful, startups need to manage their valuation, control their burn rates, and build their company around solid commercialization plans. Without such, startups in Southeast Asia are just dreaming in the clouds with unicorns. And the fall to Earth is painful once reality hits.