Down Rounds & Recapitalizations, Startup Failure Patterns and Founder Persevere vs. Pivot vs. Shutdown - E311

· VC and Angels,Start-up,Southeast Asia


“You have to think about, in the absence of investors, what would I do? Do I actually have a business that works? I don't think it's this binary state of Hey, I got to go all out on growth and I don't care about the other stuff, because you start a business to make money. You don't start a business to raise money. And at some point, you got to make money and you have to have a theory on how you're going to make money. Ideally, that theory should turn into reality sooner rather than later. And so, we need to have a theory on how we're going to make money and we need to have proof relatively, otherwise, you've proven that you can spend money.” - Shiyan Koh

“Thinking about your customer segment is really important because you often see people who think everyone can use their product. That's true, not everyone is a good customer. You have to know who your best customers are and you fire the bad ones because the cost of serving them is not worth it for you. It's related to your free product, which is, that just because somebody uses your product for free, doesn't make them a good customer. Without proper planning, you may end up catering to a vast range of segments, making it challenging to assimilate diverse feedback. It will be hard for you to incorporate feedback not only because they all want different things, but also because you did not initially identify your customer base.” - Shiyan Koh

“Taking a step back is if you're in a position where you have to consider recap or a down round, that means that your runway is probably relatively short. Your economic metrics are not what you forecasted two years ago, so there's a breakage between reality versus your expectations. That's a very important set of conversations you need to have internally, because when you go out there fundraising, and for sure the new investors are going to walk in and ask what you’re going to do differently. If you don't have that depth of conversation, then an investor wouldn’t have the confidence to come in.” - Jeremy Au

Shiyan Koh, Managing Partner of Hustle Fund and Jeremy Au discuss three main topics:

1. Down Rounds, Recaps, & the Psychological Implications: Jeremy and Shiyan talk about the complex dynamics startups face when fundraising expectations aren't met. Shiyan shares that startups consider accepting down rounds, which might come as an ego blow, or considering recap, rewriting the cap table to accommodate new investors and ensure the incentive for existing stakeholders. Jeremy explains that it’s pivotal for management teams to exhibit their adaptability and lessons learned, both at a company and personal level, while making actionable changes, such as cost-cutting or strategic shifts, that validate their readiness for the next phase.

2. Failure Patterns in Southeast Asia: They explore common failure patterns that often result in down rounds and recapitalizations, such as market saturation, lack of product differentiation, and rapid, uncontrolled expansion. Shiyan notes that many startups in Southeast Asia share these failure patterns due to a mix of hyper-competition, immature ecosystems, and differences in consumer behavior across countries in the region. Jeremy adds that external economic factors and regulatory changes, especially in diverse markets like Southeast Asia, can also lead to such scenarios. They advise founders to keep a close watch on market trends and be agile in their strategies.

3. The Role of the Founder and Investors on the Board: They stress the pivotal roles that both founders and investors play during challenging times and highlight the necessity for founders to maintain open lines of communication with their investors, sharing both good and bad news. Investors should also offer guidance and support. They share that effective boards can facilitate difficult but necessary conversations about layoffs and pivoting and that the founder's role also shifts from being a visionary to being a crisis manager, which is crucial for the survival of the startup.

They also discuss the significance of customer segmentation for maximum business impact, mental resilience, and emotional intelligence for founders during tumultuous times, strategies to generate revenue such as lending and SaaS models, and the importance of concentrating on a single product or offering before expanding.

Supported by Ringkas

Ringkas is a digital mortgage platform aiming to solve the access to financing problem for home seekers in Indonesia and Southeast Asia. Ringkas currently collaborates with all major Banks in Indonesia and the largest Property Developers across more than 15 cities. Ringkas vision is to democratize home ownership and create more than 100 million homeowners. Don't just dream about owning a home. Make it a reality. Explore more at

(01:51) Jeremy Au:


(01:55) Shiyan Koh:

Good morning, Jeremy. You're wearing red on the auspicious occasion of our newly-elected president.

(02:03) Jeremy Au:

Just woke up feeling in a mood for red. No, all of it, auspicious, prosperity who knows? But I like the color of it for once in a while.

(02:14) Shiyan Koh:

I saw Adriel yesterday and I said, can you please get Jeremy to wear different colors?

(02:21) Jeremy Au:

This is like joining the lobby of my wife. My wife is busy starting to say, Hey, have you tried these colors? Like maybe, or like blue. Oh well, one wardrobe upgrade at a time, I guess. So yeah, I think what we

wanted to discuss, was that I think we've been noticing that there's been many founders who have been, going through a set of decisions, primarily they've been out raising down rounds or flat rounds. Definitely, you and I have been meeting them either from the perspective of advising them what to do and how to structure it or the other way around, which is whether we should join for that round. So we want to discuss that. But of course, I think it also more broadly talks about what to do once you're in that kind of runway and strategic situation. So I think let's talk about that, Shiyan. Why have you been seeing the market in terms of founders going out for flat rounds or down rounds?

(03:18) Shiyan Koh:

Yeah, I think we've talked extensively about the slowdown in funding for folks, and I think one net result of that is, for folks who had raised, either really ahead of progress or where their business is. What they're facing is a lack of demand to do a financing round at the same terms or better, flat would be the same terms. Better would be an upround. And so they have to grapple with the situation, which is okay, do I accept a down round or do I make more cuts? What's my plan B? I originally, I was going to raise an up round. This is what I told my investor 18 months ago.

It's Hey, we're going to raise this round, we're going to do this thing, and then we're going back out again. And what happens is there isn't demand for the deal at the price that you would hoped, and so I think in the simpler case, it's okay, I just have to accept a lower valuation.

There's going to be more dilution. There may be anti-dilution provisions from prior rounds kicking in. That can feel like an ego blow because you've been telling the story of Hey, we're going up into the right and here it is, where you're like, I need to keep it together. And so I need to accept this. I think in more extreme situations beyond doing a down round, people are also thinking about recaps. And so a recap is when you're essentially, recap is short for recapitalization. You're sort of rewriting the cap table.

(04:43) Jeremy Au:


(04:44) Shiyan Koh:

And that's because a new investor comes in and says, Hey, I think there's something there. It's not at the price you wanted. But in addition, I can't write a new check in with this pre structure ahead of me. There's already so much preference ahead of me on the cap table that even if I were willing to come in with money at that lower price, I don't have good downside protection because all these people are going to get paid before me. And so we need to clean that up and we need to recap the business. And that is a more gnarly situation because it involves getting the prior investors to agree to essentially give up some of their rights.


(05:33) Shiyan Koh: But the math on it is simple, which is Hey, if this business doesn't get funded, everyone's, doesn't matter what preference you have, it goes to zero. And if the existing investors aren't willing to put up the money and a new investor is, then it's within the rights of the new investor to be like, well, those guys aren't putting up more money to save the business. So it sounds like mentally they've written it down to zero. So, we need to clean up the cap table in order to move forward.

And in both those scenarios, both in the down round and the recap the other consideration is does management have enough equity to continue to be incentive to move forward? Because in a down round and taking more dilution, you might end up in a situation where the management team and the employees are so diluted that they don't feel like they have enough upside.

(06:25) Jeremy Au:


(06:26) Shiyan Koh:

And so part of the down round considerations is also to think about what equity is being granted to the team to continue, and same thing in a recap.

(06:35) Jeremy Au:

Yeah, I think for a new investor coming in, what you want to compensate for example, is primarily the management team, right? That's going to take the team moving forward as well as, the new investors coming in. And then obviously at the bottom of that would be in the terms of , prioritization would be the old investors, right? Especially follow investors or minority investors and to some extent, prior employees that have previously left the company ESOPs and so forth.


(07:01) Jeremy Au:

So I think there's a little bit of a dynamic where new investors are prioritizing what the company looks like as a going concern moving forward, right from today onward and forgetting about past contributions and so, so forth. All that is kind of like, In that situation, I think what it boils down to a little bit is just

Hey, we're starting from a new chapter or even from a new page, a new book because previously what has happened is that there was a certain story, a certain perspective, a certain growth trajectory that had been planned on several years ago, and now, that story has changed significantly and it's no longer in a good enough position to keep having that story. So there's a new

story being written. I think this is a very difficult, I don't want to say inflection point because it implies like a growth by another growth curve, but it's definitely a very important transition point because I think, like you said, I think the conflict between who has been responsible for the last chapter versus clearing the decks in this moment to be able to be in a position to do the next chapter and survive in the next chapter is actually very difficult period. Both. I think you kind of implied by it, negotiation-wise, psychologically, lots of different stakeholders, legally, even logistically, a lot of dynamics can happen while the company is in a very fragile state.

(08:16) Shiyan Koh:

Exactly right. Exactly right. I guess I've, one uplifting story. The very first company I worked for when I was in college, it was 2001. So it was after the first Dotcom bubble burst. That business went through three bridge financings and I think five years later was public on NASDAQ. So they made it through the sheer force of will of the founders to grit through a bunch of stuff. They made it through. We always talk about this, which is that morale runs out before the money does. And so actually the more important thing is, do you have the energy? Do you have the passion to see it through? Or is this sort of okay, this is a sign, it's not working, I'm out. Because it's rough. It's really rough.


(09:04) Jeremy Au:

I mean, it may not be working out right. Maybe if it's in a product market fit or maybe your business model worked during the pandemic and it doesn't work after the pandemic, for example. At least it doesn't work the same way that you thought it did. Or it wasn't a no-brainer. And I think that's the big part about it is, if you get to that point, obviously morals going low because things are not going well, but then the question becomes, did you learn from that? And I think that's really important because, if you are not in a position personally to have had a space, to be self-aware and learn what had gone wrong, versus what you had hoped for, but also what you need to do differently to change, then you're not going to have high morale, personally.

But two, also, your whole team is not going to be learning or changing the behavior needed to succeed for the next stage.

And thirdly, you're not able to bring in the investors who are coming in, who are going to say Hey, we totally understand that, our job is to underwrite the cost experiments. So what did we learn? Do you know? Do we trust you enough to be the leadership team moving forward? So I think that's very important.

(10:01) Shiyan Koh:

That's a really good point, which is do you still have credibility with your investors?

(10:05) Jeremy Au:


(10:06) Shiyan Koh:

And also, I think there's a very human thing, which is, that sometimes people are just tired.

(10:11) Jeremy Au:


(10:12) Shiyan Koh:

Maybe the investors are at the end of their fund life and they're Hey, we've been in this thing for five years. I don't know, like this recap thing. Am I going to be around to reap the benefits of it? So I think there are those very sort of human considerations as well.

(10:26) Jeremy Au:

Yeah, and I think it's super important, because obviously, taking a step back is if you're in a position where you have to consider recap or a down round, that means that you're probably, your runway is probably relatively short, probably six months to a year. Your economic metrics are not Where, well what you forecasted two years ago. So there's a breakage between reality versus your expectations, and I think that's a very important set of conversations you got to have internally, because if you don't have that yourself, you don't have that executive team, then you go out there fundraising, and then for sure the new investors are going to walk in and say, Hey, what are we going to do differently this time around?

And I think if you don't have that depth of conversation, then an investor doesn't have that confidence to come in. And I think that's the, that's what I've been advising a lot of founders. Mess it down with them as just okay, what do we learn here and what would we do differently? Because if we can't say this in a very nice and professional way, then you know, why would that new person want to work with you? Why would I want to work with you? Why would you want to work yourself?


(11:26) Shiyan Koh:

Maybe, yeah. So what are some examples of a good answer to that question?

(11:32) Jeremy Au:

Yeah, I think there's the outside-in and inside-out anomaly. So outside in normally, the answer would be like, well, the market changed and it's not working. There'll be the outside in. So it's like external factors. And an inside thing would be like, I screwed up, and therefore, A, B, C. And I think the good answer normally does both because the truth is it's both. Normally what happens is that you had a certain set of expectations, and I think chronologically is the best way to do it.


(11:56) Jeremy Au:

To answer the question would be like, two years ago, this is what we believed in, And we raised this large round because we believe we're going to underwrite, for example. We're going to expand to a new country, let's just say, and expand to a new product category and we're going to improve retention of our current users. I mean this, I'm just giving a theoretical. Those are three things we need to do in the next two years. And over the course of this two years, because of the pandemic and the markets and so forth. We only achieve one of those things, which is, let's just say retention. But, a new country's not working out. It's super expensive and we weren't able to launch a new product category as it's underperforming. These are all facts in that sense, and then I think the conversation that has go down to and as we went through that, there was a set set of learnings that we had, and on reflection, I think what I should have learned, or now I've learned is that, maybe I could sequence these experiments faster.

There's some preliminary data that came in and we wanted to keep going. In retrospect, I think I doubled down too hard, for example, with the leadership team. And now that I've sat down and thought about it, this is what I'm going to do differently moving forward. If I'm going to expand, I'm going to focus on retention first. So this is a ways to kinda explain What you do differently. But I think you can also add that next layer of flavor, which is what did I learn personally? And on reflection, I think my mistake I had was A, B, or C, and this is how I'm going to change that moving forward.

And I think the last thing to add is just like any key actions you need to take that demonstrate that you actually learn those lessons are really important. So for example, a classic error would be over hiring. I mean, that's how you spend most money. Well, I think it's one thing to say after I race this bridge round, then I'm going to do layoffs, but I think if you already have six months of cash left, I think you should already be conducting some of those layoffs. And just, bite the bullet and they say, I've already conducted this layoffs. We are already reaching to that certain state, and this capital is coming in as the fund future growth, rather than dependent on actually having to do that layoff in the future because the fund raise takes times to close, et cetera. So I think there's a demonstration that you are actually integrated lesson and you're willing to take action and willing to do, pull the trigger right on closing something down or wrapping it up, or, conserving cash.

So I think those are the aspects of what a better answer would look like. What do you think ,Shiyan?


(14:07) Shiyan Koh:

Yeah, I think it's a really human thing. It's just like you're basically saying Hey, it didn't work out the way I'd forecasted, but trust me, it's going to work out better this time and here's why. And so I think it's just sort of navigating the dynamics of that conversation and being clear about it. And I think also, founders who've had strong communications with their investors in the past will do better in this process than those who haven't because they'll just have a higher level of trust to draw from, like a savings bank of trust. And this is why I'm always trying to encourage founders to communicate more, because trust is built up over time and so, you can't only call your investors up when things suddenly are going badly and they haven't heard from you in six months.

(15:00) Jeremy Au:

I think you're spot on, which is what is being said is almost exactly like what you said. I think it's very clear. How it's said is really important because it is, because at the end of the day, Does the leadership team believe in the founders as the executive team does? Do the investors believe in the founders as executive team? And that comes from how you communicate in many ways than what you say. This kind of like the classic was it spousal communication thing, right? It's not what you say, it's how you say it. It's really important, but I think it goes for so much human communication. It displays who you are as a person.

(15:32) Shiyan Koh:

I mean, it's like talking to kids. They're complaining about how it's not fair or somebody won't share a toy or whatever, and you're like, okay, what are you trying to accomplish? How do you think you coming to tattle to me helps you accomplish your goal? How do you think it's making this other people, person feel like? Is this effective? Go think of a different solution.

But yes, I feel like empathy is a big one, just to put yourself in the other person's shoes,

(15:55) Jeremy Au:


(15:56) Shiyan Koh:

To try to be like, Hey, does this actually clear the bar?

(16:00) Jeremy Au:

Yeah, that's the tough part. And I think for a lot of founders, it's quite scary because you're out raising this down round or recaps, so, so forth. And there's all fragility in the business, obviously in the fundraise because like you see maybe not happen. It's 20% chance it doesn't happen to 40 to 50 to 60% chance it doesn't happen. So it feels a little bit like a hail Mary to keep going in the fundraising round, but you're also working on Operations and so, so forth. And you hope the numbers keep going up or you have to do stuff and do the layoffs or whatever it is, for myself at least. I love to hear your point of view. For myself I think one big example that you have to do is if you have to do layoffs, just do them. It can't be dependent on the fundraise. It can't be based on a fundraise. I make a decision whether to have a layoff or not. And the reason why that happens is because it feels better. I mean, because maybe if you do, the financing does come true, then maybe the layoff doesn't need to happen. And then you want to keep the people, you want to do growth, but I think you're in a situation where you're really knowing that you're doing a down round or recap or even a flat round with some risk of failure.

If you can take the opportunity to cut fat or cut even deeper than that, then you have to take it because that way, it gives you more runway. And if it gives you more runway, you have more leverage with your investors, you can find alternative and options. You don't get stuck with the investor. You don't have any other alternative to o, but also I think it demonstrates to investors that, you're making a decision based on the business reality rather than based on your ability to fundraise.

So that's how I think about it often especially when I meet founders who are very bloated headcount and they haven't yet pulled the trigger in layoffs yet. How about you, Shiyan? What do you think?

(17:31) Shiyan Koh:

I had assumed that by the time we were talking about a recap, you had already done the layoff,

(17:38) Jeremy Au:

Not necessarily.

(17:39) Shiyan Koh:

Are saying that's not true?

(17:40) Jeremy Au:

I mean, they do very tiny ones, maybe to some extent. It's 5, 10, but some of the numbers are literally, it's just the burn is still effectively very high actually. Yeah, it is a shame. One time, I guess

one reason I noticed, by the way, why they often seem to be doing this, I don't think it's because of A, B, C, but I think one reason, at least a theme I'm seeing is the concept of gross margin, CM 1, CM 2, CM 3, and then EBITDA. And so I think sometimes founders are, they feel like the fundraiser is very dependent on growth of CM 1, for example, or CM 2. So they're very focused, that growth of that top line, et cetera, because they feel like there's a reason for why they fundraise. But the EBITDA, the CM 3, whatever we want to call it, is tough, and so that makes it difficult. because I totally understand it because the fundraise feels like it's based on these numbers, but then it's also killing your cash, so I think there's that interesting dynamic.


(18:32) Shiyan Koh:

Yeah, I guess maybe I'm old-fashioned, but I think you have to think about, in the absence of investors, what would I do?

(18:46) Jeremy Au:


(18:46) Shiyan Koh:

Do I actually have a business that works?

(18:49) Jeremy Au:


(18:51) Shiyan Koh: And I don't think it's this binary state of Hey, I got to go all out on growth and I don't care about the other stuff because you start a business to make money. You don't start a business to raise money. And so at some point, you got to make money and you have to have a theory on how you're going to make money. And ideally, that theory should turn into reality sooner rather than later. And so, I think that's a really hard one for me, which is we need to have a theory on how we're going to make money and we need to have proof relatively, have to otherwise, what have you proven, you've proven that you can spend money.

(19:26) Jeremy Au:

Yeah. That is true. And one thing I think about is not just the responsibility of the founder. I think we've had this conversation as if it's the founder who is primarily responsible and I think obviously the founder is in charge. I just think that the board, the investors also play a very strong role, because say fiduciary duty can say they have a duty of care. But I think, a lot of trust has been happening at a board level to have that conversation. Is this working? How do we make this work better? How have you've been part of these conversations at the board level? How do these conversations go? How do you think they can go better?


(20:02) Shiyan Koh:

We don't tend to sit on boards and so, it tends to be like, these kinds of things happen after we've put in our checks, right? And so we get pulled into these Hey, we're going to recap the business. Are you going to participate or not? Sorry, you're going to get 1% of what you used to own.

I mean, I think it's all the things that we talked about, which is one, does the new investor or whoever's leading the recap believe there's something of value to save, and what is that? Two has the founder built the confidence with this investor that their plan, their go forward plan is not going to make the same mistakes as the old plan? That they've corrected for whatever errors they've made in the past.

And three, if you work backwards to the next round, the deal's going to get done at a place where there's enough upside for everyone based on where we think the numbers are going to land up to where the next round gets raised.

So I think it's that. I think then there's just like chasing people for signatures and kinda getting people on board and explaining what's going on and setting up a structure that feels like nobody likes a recap. But everyone can understand why it needs to get done.

(21:15) Jeremy Au:


(21:16) Shiyan Koh:

You're hoping to get more than zero. Yeah.

(21:18) Jeremy Au:

I think I attended a seminar by David He one of our regular listeners. He's probably out running and jogging right now listening to this podcast, so shout out to you. But he did host a really good webinar for the SVCA, the Singapore Venture Capital Association, about down rounds and the legal side.


(21:36) Jeremy Au:

And I think one big reminder after the entire webinar was like, it's really important to have a good lawyer. That's a really

important thing to do. And he reminded me how much there's a big difference between a lawyer who knows how to do this versus a lawyer who theoretically knows how to do this, but has never done this before. Because it's not just a function of the legalese, but also a function of, like you said, the commercial sense about how to talk to the other stakeholders, which is like saying, Hey, let's save what we can save moving forward better. Something rather than a lot of nothing, but saying that in a very nice way, that doesn't trigger, the other person's corporate council and entire team is super duper key, so I think definitely reaching out to lawyers who've done it before is really important because of the stakes involved.

Of course they're going to be expensive right on top of, the capital. So, that's one of the tricky parts that I think as a founder you always kinda deal with, right? It's, "I'm running outta cash, but I have to hire this super expensive lawyer to help with this recap in down round."


(22:33) Shiyan Koh:

Yeah. I guess that brings us to an interesting question, which is like, When should you throw in the towel? When do you know it's time to stop?

(22:44) Jeremy Au:

I think you mentioned two already. It's like when your morale runs out, then call spade a spade. I think there's one. Second thing you mentioned is when a business doesn't work, and maybe you worked for a while and you stopped working, or it works for certain circumstances, but it actually doesn't work. Or maybe new information has come out. You thought it would work, but it doesn't work. I think the second type is interesting.

There's two types of businesses. There's a commercial side kind of business, and the second is more like the R&D-centric one. The R&D-centric one is pretty simple. It's like you go in, you're underwriting some deep tech, and you're trying to build this material on key example, supposedly does this. There's no commercial reality for 1, 2, 3 years. You're just doing research. It turns out, the science or the material or the innovation doesn't work out right then I think that's the most clear sign of a business not working out. And I think we see that all the time for drugs for example. Drug companies in Boston and in America. You just don't pass the trial.

(23:41) Shiyan Koh:

Yeah, but that's very different.

(23:42) Jeremy Au:

That's easy, right? That's an easy one. I'm giving you an easy one.

(23:44) Shiyan Koh:

Very different. Well, but it's not even easy. At that point, when you're in phase three trials, you've raised hundreds of millions of dollars already.

(23:52) Jeremy Au:

Yeah. And it doesn't pass.


(23:54) Shiyan Koh:

Yeah. And that happens routinely. So those are big swings. But that's not what's happening in Southeast Asia, right? Most people are not like shipping new biologics or whatever.

(24:04) Jeremy Au:

I'm giving the easy case of my to stop, right?

(24:08) Shiyan Koh:

Yeah. But I think the businesses we deal with in this region are much more tech-enabled services, much more commercial rather than, research-oriented. And so I think then the question is okay, how do you know you should stop?

(24:22) Jeremy Au:

I think if you're doing a

(24:23) Shiyan Koh:

Is there a place you stop before Cheerly running out of money?

(24:27) Jeremy Au:

Yeah. I think when you're doing a tech-enabled service, actually there's less product market fit risk in the sense that there isn't risk in the fact that you're doing a tech-enabled service. The service itself or the product itself is something that people already buy so it's not necessarily a question of consumers not wanting to buy that service, But I think the common problem is that the economics don't work for delivering the service that you want to do it. Technology just ended up being way smaller, a percentage of what you needed to do, for example.

And so there was no margin improvement. There's no productivity improvement, no orchestration of market power slash influence possible. And so you end up in a situation where, you're just building effectively the same product as somebody else, at a slightly better margin profile, but not enough to justify VC returns or funding, and then that's the conversation that everyone's having at that point of time. So it shows up, for example, as your lifetime value is not three times that of customer acquisition costs, right? So you put in $1 in the customer and you don't get $3 outright because, for example, I think one big issue and one big Frustration I've had frankly, and I sit down and actually do the math together to help them understand, it is a lot of people in Southeast Asia calculate lifetime value based on gross margin, for example. It's like I take a customer and so, so forth and gross margin does is not really an issue if you're, for example, a B2B SaaS company, right?

But if you're doing tech-enabled services, lending, so, so forth, then you should be really be looking at the contribution margin, and not CM 1, not CM 2, but really what actually covers your fixed costs. And so I think that kind of, you call it, I think at some levels, accounting error from a definitional perspective, but also I think it was quite popular over the past few years to report this way, has caused a lot of businesses to lose track about whether they actually are unit economics profitable. And if you're not unit economics profitable but you think you are, then you raise a lot of money to bit scale it. And then you scale. You're losing money on an individual consumer and then you scale up to a million consumers and then you end up losing a lot of money on a million people. And then suddenly you're stuck in a situation where you're like trying to keep growth going and you're trying to fix it in economics once you realize it. And I think that's a pattern that I've seen several times now which is quite painful.

(26:45) Shiyan Koh:

Yep. I mean, business should be a money making box. You put money on the top of the box and more money should come out of the bottom of the box.

(26:55) Jeremy Au:

Is this a children's book now? The money making box? The money making box. Like a children's book. Lemonade


(27:01) Shiyan Koh:

I mean, yeah, business is not like physics. We're not trying to cure cancer. It's," can I sell somebody something for more than it costs me to make it and acquire them, and do it repeatedly?" We don't need to be precious about it. I feel like sometimes, I talk to technical people, they're like, oh, business, it's so confusing. And I was like, you're an engineer, you're like way smarter than business people. It's not that complicated. We just make it complicated.


(27:31) Jeremy Au:

Yeah. Actually, this is a fair point. How do you think people make it complicated?

(27:42) Shiyan Koh:

How do we make it complicated?

(27:43) Jeremy Au:

Like for themselves? For the board, for the leadership team?

(27:49) Shiyan Koh:

I mean, I think it's just every startup, every company, there's so many things going on, so you can really get caught up in the activity of oh, well we have this new product. Oh, we have this new channel we're testing. But at the end of the day, it's just okay, who's my customer? Why did they buy my product? How much did it cost me to acquire that person? And if I have, if I'm acquiring a hundred people in that channel, can I acquire a thousand people in that channel? Can I acquire 10,000 people in that channel? But people don't focus. They just run off and start launching other channels or like new products, and they get distracted.

And then you feel like you're really busy doing a lot of things, but at the end of the day, you just have one thing to do. I'm making a thing. I'm selling a thing. Hopefully they're paying me more for that thing and they like it. They tell their friends about it and they want to buy more of it. That's simply what we're doing and so I think it's hard because there are so many things that go into running a business. And also because in the beginning you're still figuring out what the product looks like. You're still figuring out how the channels work. So there is a lot of exploratory work, but at some point, it's like the people who are like, I'm going to launch in five countries, and you're like, you haven't even figured out one country. Why are you launching in five countries? You've created more surface area of complexity for yourself when you just needed to do the one thing properly.

So I think that's how we create complexity for ourselves. And so a business update should be very easily captured in one page.

(29:16) Jeremy Au:


(29:18) Shiyan Koh:

If you really dig to the core of your business and yet sometimes people can spend five pages and you're like, I still don't know. Is this business doing well or badly? Where are the numbers? What's going on? There's no, simple, clear, conversation.

(29:32) Jeremy Au:

Yeah. Yeah. Super true.

(29:35) Shiyan Koh:

I don't know. Okay. I'm off my soapbox.

(29:38) Jeremy Au:

Well, it's a fair point. I think one area of complexity, there's a failure pattern in Southeast Asia is if I give you this product for free for a certain period of time, then get lots of new users, and then I go use that to sell a product that actually makes money, and I think that has sometimes worked, but oftentimes it has not worked for many folks, and then you raise a lot of money because you have a lot of users, for example, monthly active users, weekly active users, but then, they actually never end up building the monetization adequately, or early enough versus so forth. So I think that's one version of complexity, that you feel like the whole product works, but actually you haven't demonstrated your ability to monetize.

(30:20) Shiyan Koh:

Yeah, I think related to that is that people don't spend enough time thinking out who their customer is.

(30:25) Jeremy Au:



(30:26) Shiyan Koh:

I was listening to the Acquired podcast on Costco, and I mean, I love Costco. What Singaporean doesn't love Costco? What’s interesting as a factoid was that the average income of a Costco customer is $120,000 a year, as compared to the average income of a Walmart or Sam's Club customer, which is like $80,000 a year. And I mean crazy stat average revenue per employee at Costco is like $750,000.

(30:59) Jeremy Au:

Oh, insane.

(31:00) Shiyan Koh:

So the productivity is insane. But the idea is that they've sorted, everything in their strategy is aimed at a very specific customer type, which is a wealthy customer who likes deals. That's like thing. It's not just a customer who likes deals. It's a wealthy customer who likes deals, and that customer's worth way more than just someone who likes deals. But you, it could feel the same. You're like, oh, well, who doesn't want 96 toilet rolls with each toilet roll being much cheaper?


(31:29) Shiyan Koh:

So thinking about what your customer segment is really important because I think you often see people who are like, everyone can use my product. And you're like, that's true, but is everyone a good customer? And how do you know who your best customers are? Are there enough of them? And can you fire the bad customers because the cost of serving them is actually just not worth it for you? And I think it's related to your free thing, which is just because somebody uses your thing for free doesn't make them a good customer. So thinking deeply about who actually is a good customer is something that often happens because then you didn't plan it, and so you end up serving all these like random segments.

They all give you feedback on your product, and it's actually really hard for you to incorporate because they all want different things, but it's because you'd started out not actually thinking about who your customer was.

(32:20) Jeremy Au:

Yeah. I think there's definitely a very true dynamic, which is that the gap between, let's say your segment is, a small medium enterprise, but your free product may actually appeal to a much larger segment of that dynamic rather than the small percentage. Actually is willing to pay for your SaaS product that you tend to launch in one to two years. That's super fair. Actually, you mentioned it, I should write that down. I think that's a hundred percent right. I think it hits the knee on the head. I think a lot of errors have really been a huge dynamic on that.

Also when you have obviously Asia, many economies, GDP per capita is low, and so when you have a low GDP per capita, let's say, for that segment, the willingness to pay is a huge differentiator and huge divide actually. It reminds me of this time, when we did due diligence on a company and, there was this basically saying we have a free product, we're going to upgrade so, so forth.

And eventually, we just end up in a situation where we just end up talking to all of them and saying Hey, would you upgrade for a paid thing? And all of them were like, no. And I think that's a really tricky situation to be in all of a sudden. Obviously, as an investor, you should be doing that kind of level of reference checks and due diligence on the customers to be able to believe whether they can monetize that second thing, whatever it is. But I think as an executive or founder, you have to stay in touch with the customers as well because you know a lot, everybody wants to tell you good news. You know what I mean? Everybody wants to tell you that for sure, you'll monetize. But you know, I think nothing beats going to the frontline itself and seeing whether they actually want to buy.

(33:49) Shiyan Koh:


(33:51) Jeremy Au:

I think a version of that is lending, actually.

(33:52) Shiyan Koh:

What do you mean?


(33:53) Jeremy Au:


(34:47) Jeremy Au: The last thing I think that if you're a customer and you're getting lending from a startup, you're not actually, you don't feel like you're paying something because, it's just part of the upside. It's I borrow $5,000 and then I'm not necessarily paying you for anything. So I think that doesn't demonstrate a willingness to pay for something down the road.

(35:05) Shiyan Koh:

It's not a good predictor.

(35:07) Jeremy Au:

It's not a good predictor that they'll eventually buy SaaS from you. And so if most of the money you make down the road, is supposedly based on SaaS, but the target profile of someone you lend to and borrow money from is not the same as somebody who buys SaaS.

(35:18) Shiyan Koh:


(35:19) Jeremy Au:

On that note, Shiyan, any last words of advice? Parting words or thoughts?

(35:26) Shiyan Koh:

Just keep your head up. Keep fighting. It sucks now. It'll get better.

(35:32) Jeremy Au:

Yeah. On that note, I think I'll summarize the three big takeaways. First of all, I think we discussed very much about down rounds, recaps, what needs to be done, and some of the psychology behind it.

Secondly, we discuss failure patterns, what causes this kind of situation, and also the common issues that we see across Southeast Asia.

Thirdly, we talk about the role of the founder and investors on the board to make sure that the company continues to survive and thrive in the future despite the inflection point that folks are at right now.

On that note, see you Shiyan next time. Peace.