Contributions from: Kavya Vayyasi, Summer Analyst
From our latest edition of CTG Insights, a subscriber-only publication that explores key innovation themes, my colleague, Josh Gilbert, wrote an excellent article that cuts through the hype of off-grid solar investing, and raised an early warning about over-saturation of venture investments in this space. The article sparked my curiosity to explore a similar trend we are seeing in the Asia Pacific region, where significant amounts of venture capital are being invested. But are they being deployed too fast? Let’s take a closer look at a few recent developments.
Excessive capital to drive rapid growth
By excessive capital, I’m referring to mega-deals that run upwards of $100 million and beyond. Over the past year, mega-deals coming from Asia Pacific are starting to appear as the norm in the mobility space, in areas such as bike sharing (Mobike, Ofo), ride sharing and on-demand taxi apps (Didi Chuxing, Ola, Go-Jek), and electric vehicles (Xiaopeng Motors, NIO, Singulato). It’s certainly a welcoming sign that the venture capital ecosystem is thriving in the Far East; nevertheless, it’s also concerning as most of these companies have yet to achieve profitability. Perhaps this is caused by the Uber and Airbnb phenomenon, whereby companies aim to scale quickly to increase their valuations (Uber and Airbnb currently hold the top two most valued U.S. start-ups crowns, respectively).
We are also seeing the downfall of excessive capital and the quest to rapid growth. Particularly in Asia, there are a few companies that have already fallen into the “growth at all costs” trap and made several devastating mistakes. For example, Wukong Bikes, a China-based bike sharing company, recently declared bankruptcy after losing 90% of its bikes due to the simple fact that the company neglected to install GPS systems on them. Although we can’t draw a direct correlation that this is caused by rapid growth, the company could have prevented this if it had discovered the fundamental flaw early on before deploying more than 1,000 bikes to the streets.
Minimal competitive differentiation
Another factor compounding the excessive capital issue is the fact that many of the companies do not have any fundamental product and/or business model differentiations. We can use Uber’s defeat by China’s Didi Chuxing as an example, showing that Uber’s lack of differentiation could not overcome Didi’s home court advantage. Another example to illustrate this point is India’s foodtech start-up, Dazo, which closed its doors after only a year in operation as the company and the board could not afford the never-ending cash burn to acquire customers without major product differentiation.
I’m certainly not making the argument that too much capital, too soon are the sole reasons for start-ups to fail. Other factors, such as regulatory hurdles and geographical conditions, often contribute to a company’s development. Moreover, Asia Pacific has a different set of characteristics from the West, and therefore a bullish approach may be the right investment strategy for many. Countries such as China and India are huge potential markets, and having a first-mover advantage will certainly help companies take a slice of the pie.