The stock price of Indonesia’s decacorn PT GoTo Gojek Tokopedia Tbk (Go To) is seen increasing on the monitor of Indonesia Stock Exchange (BEI) on April 12. Many startup companies across the world have been unable to perform, forcing them to lay off their employees en masse. - Antara/Handout/GoTo
JAKARTA (The Jakarta Post/Asia News Network): Recently, there has been a brouhaha regarding massive lay-offs among digital start-ups in the region and across the world.
TechinAsia reported that as of June no less than 3,000 employees working in the technology start-up sector have been laid off in China.
In South-East Asia, around 1,500 employees have lost their jobs -- mostly in Indonesia; while in India, the figure stands at around 1,000. This has become a concern for many policymakers because technology has been touted as a sector that can provide employment in Asia, especially during the Covid-19 pandemic that has hit hardest the world’s economy.
In the wake of the mass layoffs, many skeptics have argued that the start-up bubble finally comes in.
What happened? Why are the darlings of the start-up world suddenly troubled with financial problems?
Beside the recent global economic turmoil and slowdown that affect many different sectors, the crux of the problem perhaps lies in the long-standing debates in the entrepreneurship academic and practitioner circles on whether start-ups need to engage in “growth-first” or “profit-first” strategy.
Many big-technology entrepreneurs, backed by strong funding, believe in the growth-first path. This perspective is behind the aggressive expansion of recent technology start-ups. Many of these ventures introduce new technologies and therefore, rapid rollout to the market is necessary.
On the other hand, non-technology entrepreneurs often believe that securing profit first is the rule of thumb in business. Business should be prudent. Gaining profit means you know the rules of the game in, not just disrupt, the respective market.
What is interesting is that recent research has found that focusing solely on aggressive growth may bring unbearable costs to the sustainability of start-ups.
In contrast, Per Davidsson and his colleagues in 2009 found that ventures focusing on low growth and high profit would yield higher growth rate in the following period. This study is validated recently in a newly published paper with more data, and it means that the original conclusions are robust.
Start-ups embracing the growth-first strategy may be preoccupied with expansion in a short period of time and therefore lack the ability to secure necessary resources to stay competitive in the market.
A recent report blamed the overly aggressive recruitment by expansive start-ups during the pandemic for the recent lay-offs in the region.
This recent phenomenon and the research seem to agree. So, what are the lessons learned for technology entrepreneurs and governments in the Asean region in general and Indonesia in particular?
First, the gold standard in developing a sustainable venture is ensuring competitive advantage, and this can be first reflected in the profit that a venture generates. Therefore, new start-ups should carefully design a profit strategy before expanding. This has been a norm in many start-up circles.
However, since the introduction of digital technology to the market often needs ventures to be aggressive -- to ensure buy-in from participants -- start-ups need to find a delicate balance between profit and growth.
Yet, we still do not know much in this area due to scant research in the technology start-up context. More research is needed, and the government may provide funding for this particular research agenda. Second, in the last decades, entrepreneurship has become very popular in the region.
A BBC study in 2010 highlighted that Indonesia, along with several Asean countries, is the most favourable place to set up businesses.
In fact, Indonesia is now home to some of the region’s unicorns and decacorns. Since then, entrepreneurs with feasible start-up ideas are flourishing, yet only a small fraction have managed to become high-growth ventures.
Establishing an ecosystem to support the growth of these embryo ventures is therefore imperative. The enabling ecosystem consisting of education institutions, funders and governments should foster incubation and commercialisation efforts for these start-ups.
An array of policy frameworks, capacity building, incentives, as well as regional cooperation is necessary to help transform ideas from entrepreneurs to become high-growth digital ventures.
It is time to move on to the next step of the venture-creation ladder ecosystem. This should be the priority for the Asean governments to support digital ventures in the next few years.
*** The writer is deputy campus director, Malang Campus, Binus University. The views expressed are personal.
