Almost all US Internet companies failed in China in the last 10 years. Yahoo entered China by acquiring 3721.com (some argued it was a keyword based search engine that dominated the space before
I’d say the same for Indonesia too. Except maybe not as extreme.
Riot-y times no?
With so many to cover, I’m picking at the newest dude in the hood. IMHO, multiply did not close because of not being profitable, but because there’s not enough historical growth PLUS it has sustained negative cashflow for a while.
First, investors want growth. If there’s not enough growth, they’d better put their money with some fund managers who can grow their money at 30-150% annually, so that’s your benchmark. They want hyper growth company that can beat their fund managers. If they can’t get it from you, they’re going conventional. They’re not ruthless, that’s just how the world works.
But remember, however beautiful a hockey-stick growth is, if historical and projected cashflow is bad, you’re eventually going down. We can break down cashflow problem into 3 interrelated critical factors:
What follows is the story of how they interrelate.
Cashflow = LTV - CAC > 0
If you’re in ecommerce, you better know your LTV and CAC like you know the location of your birthmark. Any sustainable business operates on 1 condition: cashflow > 0. It is not different with startups.
What is LTV?
LTV is Lifetime Value. Basically, this is a metric that calculates how much income a customer generates for you as long as they become your customer. This is mostly affected by your gross margin and your product retention rate.
This is what killed ecomom when they focused on the top line and went daily deals frenzy. Low gross margin (if positive, at all) and low retention rate (daily deals users are not the most loyal of all. That is, the collective LTV from these customers does not justify the CAC.
So if an ecommerce consistently gives discount, that should be a red flag for any investor or journalists alike. #kode
What is CAC?
CAC is Customer Acquisition Cost. Basically, this is a metric that calculates how much do you spend per customer. The simplest way to calculate:
CAC = marketing spend / # of users
This metric is mostly affected by how good your online marketing team is and the marketing gimmicks that they run. Any marketing expenditure will accumulate into CAC.
Positive means money going into your business, negative means money going out of your business. And this is where many ecommerce startups in Indonesia fails. Let’s break it down:
Cashflow = LTV - CAC = f(retention rate, gross margin) - g(marketing spend, customers obtained)
Using the above metrics, I’ll rate a few startups from what I see, assuming the following overly simplified mathematics:
The rating value will be relative and out of 5. This is not meant to be objective and bias does take into account:
Berrybenka: retention rate (1.5), gross margin (2), spend (2), customers (1.5) = 2.25
Belowcepek: 1.5, 1, 0, 1 = 1.5
Maskoolin: 1, 1.5, 0.5, 1 = 1
Zalora: 1.5, 1.5, 5, 1.5 = (1.5 x 1.5) - (5/2.5) = 2.25 - 3.33 = -1.08 (!)
It’s overly simplified but I’m pretty confident it aptly reflects their current condition. And just to be blatantly obvious, yes I am saying that I believe Zalora is most likely at negative cashflow for every transaction they make.
Now you can easily rate any ecommerce startups with these 4 questions. Investors to-be, dig deep and do your homework. Ecommerce startup owners, look at yourself in the mirror and stop fooling yourselves.
At the moment, my most favorite ecommerce startup is tiket.com. I’m not saying they’ll end up with the highest net worth or they’ll have the most extravagant exit, but they’re likely the most sustainable ecommerce startup currently. I like building sustainable companies, so I’m inherently biased :)
Another of a rising star for me is burufly.com. Their team is solid and their product roadmap seems great. Their first priority is validating their business model but once that’s taken care of, they should take off. (Disclaimer: I was a part-time consultant for burufly.)
It’s a very simple concept: a novel establishment sets an internal threshold that we will be pre-disposed to when similar happenstance re-occur.
Suppose you are doing consulting and your first ecommerce client is willing to pay you $5000 for 5 hours of consultation. Would you do consulting for another for $2500 for 5 hours? Most likely not, because now you have established the belief that your consulting rate is $1000/hour. Why would you want to do it for half less?
Take this concept to e-commerce: if an ecommerce startup has regularly given discounts to their existing customers, what do you think will happen to their retention rate once they reduce/remove discounts?
For some startups, this has become a dug-hole-too-deep-now-i’m-fucked situation which stems from:
Twisted business strategy
Have you ever wondered how can some startups keep giving discounts left and right and most importantly, why do they do it? These startups have to subsidize the burden in order to get attract first-time buyer and repeat buyer to their site. The strategy behind this commonly used tactic is to make their customers belief that the startup can give them the biggest bang for their buck; the startup gives them whatever they want (feature, fashion items, whatever) at the (close to) lowest price in industry.
This idea is the origin of a concept Mark Suster calls “deflationary economics”. However, this idea does not and should not entail having negative cashflow. What startups all over the world recklessly do is embedding deflationary economics onto their startup without regard to their cashflow plus establishing psychological anchoring on top of it.
They have too small margin, they give extra discounts that makes their cashflow implode and by doing that, they’re implicitly telling their customers that “we’re cheap, come buy some more”. Now do you see how some Indonesian ecommerce startups have essentially shot themselves in the foot, tumbled over into a river and got carried into a falls?
These days ecommerce have low barrier of entry, but it does not necessarily mean it’s easy to execute profitably, let alone remain profitable while having rapid growth. Here are 3 small lessons that I think every startup, not just ecommerce, needs live and breath by:
Pick 1: growth or profitability. But know the limit and do balance things out. If you pick growth, make sure you don’t set traps for yourself along the road. Also make sure that you know, with a great degree of certainty, when are you going to start being profitable. You can’t simply state that ecommerce startup generally takes a long time to show its value. I call that being ignorant & irresponsible because you can prove your startup’s value 6 months into operation. Know your payback period and segment it into cohorts.
Becareful with your marketing gimmicks. At first, they may create a rosy perception that your business is doing really well, your metrics are over the top, you get that hockey stick growth you’ve always dreamt of. But in the long run, they can put you into a hole so deep you can never get out of because now you have installed a habit and a predisposition so hard to erase from your customers expectation.
Lastly, learn from online gaming. I have quite a bit of experience in this industry and I have to say that this is probably the best online business in Indonesia. Inventory in bits means gross margin is approaching infinity, built in viral mechanism means CAC is approaching 0, and built-in retention rate, what more can you ask for? No wonder VCs flock to these guys. Figure out if you can figuratively (pun intended) integrate aspects in online gaming that make it such a lucrative business into yours.
learn from the deaths of your industry fellows. The news may not say so, but 99% of the time there are good, rock-solid reasons behind it. If you don’t, you will be the next to fall.
Caveat: You may ask: “how did you get the number in your cashflow calculation rating?” The short answer is: I infer. The longer asnwer is just as short: I have had experience in many different startups involving LTV and CAC, so I can confidently infer.
I haven’t got the money, but it feels FUCKING FANTASTIC nevertheless!
Praise the Lord
Several days ago, I met with a founder of a new startup. We met because the founder needed help on online marketing*. The startup is still ramping up users count through a contest.
* I apologize for the shameless self-promoting :)
The idea is pretty chill and it definitely has potential to be big. It promises a value to users to get the stuffs that they want for cheaper (not a daily deal). And it also has latent potential to spot the latest trend.
Yes, I am about to raise a concern
So like usual, I dug around: I asked a few probing questions. The founder was very enthused with the startup so the beans just spilt left and right. Heh.
But it was a very positive session. I could feel a rush of emotions flowing and an exuberant excitement from the founder. I could tell the founder is putting everything into this baby. Just look at the following commitments the founder stated:
I am going to build this cool feature that can do this and that
I am going to provide this curation tool for the user
I am going to have all features done by next year
Now, I can relate to that. I used to feel all the excitement of building this cool feature and that awesome tool for the users. How the heck can I possibly fail when I give this much value to the users? No way, Jose. There’s just no way.
And fail I did.
The problem is I had a perception bias. I created this thing and I can see the value in it. I have problems that this thing can solve, so why not others too right?
Nope. I learned the hard way that my problem is my problem and their problem is their problem. They and I may have a common problem, but I should not have assumed. Imposing my problem unto others’ was not a wise move. David Hume would have laughed at me and said “I told you so”.
Value, like problem, is relative
The founder was about to go on an emotionally exhaustive journey without knowing for certain whether the ship that is being built is going to last. That is crazy! The founder’s intellectual capital was research of consumer behavior, research of similar startup in another country and research on potential market.
Those are good researches. Definitely, not the slightest doubt. The only problem is if you do not back it up by validating your idea in the real world. Research is largely about what has been, what the history suggests. But that does not entail that the sun is going to rise tomorrow for the founder.
If you have a startup, please start by formulating your value hypothesis: what is the problem that you are going to solve & how are you going to solve that problem. And then build a minimum viable product specifically to validate that hypothesis. No additional features. And test it on the market. Measure the feedback. Learn and iterate.
No features shall be built without knowing exactly the value it delivers and it has gone through validation period. Stop wasting your time accumulating wastes.
P.S. I can’t disclose the startup.
This is a very long story, so grab a bite :)
During my employment, there were many exciting works that I did. There were also many relationships that were formed. More importantly, I got to learn so many precious lessons. These are the kind of lessons that alter the course of my life.
Lessons upon lessons
The challenge presented by daily deal business model definitely allowed me to practice my online marketing skills. From social media to web analytics. The heavy traffic (I forgot how many times the server crashed during several deal launches) meant that I could test many theories that I could not have previously done before and be confident with the result.
But the most precious lesson (one of them anyway) was on entrepreneurship.
I was lucky, so very lucky
I still remember the day I first saw Adrian. I was in the office room and he came in with one of the co-founders (Andy). They were talking and laughing. Soon after, Andy, introduced Adrian to the whole room. After we shook hand, he quickly sat down to my left and asked me some questions about facebook ads. It was clear he is a complete newbie in online marketing, but those questions revealed to me how smart he is.
1 month later, he formally joined DealKeren and soon enough, I could see the real Adrian. He turned out to be an amazing guy: not just smart, but he has a big heart too.
Those were still the early days of 2010 so we were still a very small team. I got to work directly and report to Adrian. We discussed many things together and he could really keep an open mind and appreciate fresh ideas. I am still immensely grateful that Adrian could appreciate my young-and-sometimes-naive light bulbs. Others called these bulbs foolish. He called them creativity.
Knowing his big heart, I took it as an opportunity to propose ideas
And propose away, I did.
I got to start many independent projects beside my daily tasks at DealKeren. It felt like I was making sub-startups within DealKeren. It was like getting funded for my idea and I was set loose to be fully responsible for my ideas. How could I not fall in love with a company like that?
Here I was, getting funded for the exact same cause that got me in trouble in my previous work places. Previously, people would have said “no” after 30 seconds hearing my proposal. In DealKeren, I got the kickstart. Major awesomeness.
It’s important to note that the ideas I threw around was purely intended to benefit DealKeren. I thought if I could create this product or make this project successful, DealKeren would be more well-known and hence, more cash flowing in.
During my stay, I created 3 sub-startups within DealKeren:
All of them ended up dead. Satriya died due to diminishing time and funding. Cool or Dull died due to re-allocation of resources. And Shopping Paradise died gracefully after it proved that my value hypothesis was wrong.
Purpose: to facilitate DealKeren’s market penetration using gamification layer. If it were to take off, we could also have control on share of voice of daily deal provider on social network. That is, we would have and could provide incentives for people to spend more time talking about DealKeren instead of other daily deal. More SOV = higher chance to create relationship.
Satriya was going to be a gamification overlay on top of popular social networks (I started with twitter and foursquare). Think of it as a reversed SCVNGR/Bouncity.
On bouncity, you need to check in first before doing challenges. Satriya only required you to sign in with your twitter ID and all of your tweets/activities on foursquare would be given points (which can be used for “leveling up” and other social perks). There were certain activities that would generate more points than other; e.g. mentioning @dealkeren
It eventually died. For this project, I got to hire a friend as a part-time developer to work on Satriya and I got the design from a designer in DealKeren. I wanted it done fast, so I contracted @tyohan as a front end developer using my own money. He ended up just doing 2 interfaces before the Satriya was abandoned.
I planned this to be an underground project. I thought I would keep it silent from Ensogo and once it’s up, running and got traction, I would present it to them. That was foolish.
If there’s a single compulsory pre-requisite of a successful startup, it would be to have all parties involved looking in the same direction. To have the same vision. Everyone should be as transparent as possible to everyone else. If I could not trust or could not make myself entrusted by the others, this startup has a very weak foundation.
Another related lesson is that communication to all parties involved is very important. Interpersonal relationship is critical to success. There’s no way I could do this alone; I need help from others. And if that so, then I should manage a very good relationship by excellent communication.
Business is easy, people are hard.
2. Cool or Dull
Purpose: to be used in DealKeren’s online and offline campaign. I have never seen something like this ever used in an event, so I thought this would be a really cool addition to our events.
Imagine if you were in a concert. There’s a giant screen filled with pictures of people who are in the same concert. And the screen keeps getting new submissions of pictures. Wouldn’t it be awesome?
Think of it as an intersection between real time hotornot.com and pinterest layout. The pictures are submitted through twitter and displayed near real time on the homepage of coolordull.com. People who visit the site could rate the pictures submitted. It’s a for fun kind of thing.
Since this is a very simple project, it saw the light. Briefly. It was used several times for dealkeren campaigns. We used it during Jakarta Fair in 2011.
Although some people found it confusing to use, it gained some tractions and it was a pure delight to see real people using it. Some pictures even got more than 10 votes! :D There are days I see the traffic and time spent on site jumped although we spent nothing for advertisement.
It’s a shame the project stopped being developed due to diminishing time. The latest status was implemented a tutorial to use the site and creating a mobile friendly version. Other works pressed in for my developer friend. He was also still taking his master finishing his thesis so he couldn’t come in full time. The days he came in were the days he’d be working on something specifically for DealKeren.
So it finally got abandoned.
I would have to say that this is the most successful project out of the 3 in termof completeness. It validated my value hypothesis. It didn’t solve any real problem, but it served as a good hype platform.
The only thing that was not yet proven was: could it ever turn to be like hotornot.com. That is, the growth hypothesis was still not confirmed.
With this project, I learned that having sufficient resource is critical, especially to do things you can’t do yourself.
3. Shopping Paradise
Purpose: another attempt to penetrate market using social game. Social game is huge for Indonesian. So I thought if we could make a great game that people would love to play, the game would serve as another touch points, to DealKeren, in the market.
This was the largest project of all three budget wise. I worked with Agate on this one. They had been a great team. I really thank Shieny, Andrew, Nelson, Tama, and Barziyan. Without them, there would be no Shopping Paradise. They (especially Nelson and Tama) put their heart and soul into the game. Thank you guys.
It was a social game on facebook where you can shop in the town for discount items. The better you get at picking out discount items, the more you can build your city. The more developed the city becomes, the better the items get.
There were quests to do that require you to shop around. Citizens would ask you to shop certain items for them. By doing quest, you’d get a certain reward. There were also quests that require you to ask your friend for help. You could also help your ingame friends to shop.
Want to get a cute costume you can’t buy from the shop? Or maybe you want to zoom your way through the game? Sure, buy a deal on DealKeren and use the code to redeem the costume. So the game did not only serve as an introductory touchpoint, but also an incentive for people to spend on our deals. Or so I thought (more on this later).
This was immensely fun project, but also the most emotionally draining. This was the first time I had to see the billing for my project. And it was not small. That was not including upgrade fee.
I couldn’t help to feel a heavy burden. I started calculating the profit I must create through the game to pay off the bills. To put it mildly, I was burdened. Thoughts like “what if this game flops?” raced through my head. I couldn’t help it! I was faced with a huge billing for something that may not even take off. And it was my idea! I was asking a company I loved to pay for a hope; for something that may turn out to attract nobody!
Fortunately, the game did get played. And we even got pretty good response. The comments on the game fanpage were quite good. We were quite well received. I could definitely see some early evangelists that had fire in their belly to excel at this game. Some were really enthusiastic. Some others were so into the cute costume, the ingame characters and the vehicles. I definitely worried too much and I should’ve had more faith on Agate team and on myself.
But soon enough the reality set in: we weren’t growing fast enough. On my projection, we would pay off the initial outlay in 6 months. It was a bad projection though. I definitely bloated the number to boost my confidence. It was my way to make peace with my mind. I was desperate to make the game successful because it was my idea. I couldn’t help to feel strong responsibility to make a pay off.
With the growth at that time, we would probably reach BEP in like forever. And I was desperate to show real progress to the team. So I started spending on facebook ads. It helped! We reached more than 8000 total player before the development stopped.
Unfortunately, things got to end. It was a tough (and not to mention, embarrassing) decision to call it quits because Shopping Paradise was definitely not a path to sustainability. It was a very demoralizing experience for me.
The lesson - on values
Remember that I wanted to use the ingame items to probe people who wouldn’t buy our deals to start spending? The premise was this: assuming the game is good and people play the game with their friends, if we offer virtual items in exchange of a deal voucher, they’d do it. They could show off the item to their friends and they also got a bargain from DealKeren. Why the heck would they not do it? 2 birds in 1 stone! I am genius!
Not so fast.
If you have ever used DealKeren, you know that the payment process could be a pain in the ass at times. You need to order from the web, then go to ATM/online payment website, then you need confirm your payment, and wait for the payment to be approved. This hassle turned out to be much bigger of a turn-off than some virtual ingame item. Simply, the perception of value from the ingame item could not overcome the cost (tangible and utility) of getting the item.
We could see the proof of this when we check how many people redeem the vouchers, who are they and what deal do they redeem. Most of them are existing members redeeming popular deals. So it’s very likely that those who redeemed would have bought the deal anyway with or without the ingame item. We were basically giving away the ingame item for free.
If I could repeat the experience, I would have validate both value hypothesis and growth hypothesis of the game by building a Minimum Viable Product. It’s going to be a very early prototype of the game. Test the following premise:
The lesson - on growth
The game was expected to grow virally, so I will also test the following premise:
I mentioned above that we reached more than 8k players before quitting (around 1.5-2 months after launch). Not fantastic but I’d say it’s a pretty good number for a 1 developer, 1 copywriter, 1 artist, 1 project manager, and 1 newbie game marketer (me) team. I’d argue that it’s even a number big enough for the game to sustain. So what went wrong?
The number looked big in aggregate, but when we looked deeper, we didn’t have that much daily player (500 tops, and most of them are new players). We had a very thin head and a very long and thin tail. That is, there were only small number of players who played regularly. There were only a small number of players who spend time (in a day) more than average to play the game. There were even smaller number of players who did both! Most of the players left after checking out the game. Or they gave it a try once, twice and never came back. We had a very high attrition rate on engagement.
So when startups boast big numbers, you need to be smart. Ask the right question; a deeper question that will reveal the true state of their enterprise. If the founder/CEO/whatever do not want to reveal the numbers, be very skeptical of the hyped press news surrounding the startup. Media craves big numbers, it makes them look good.
The lesson - on finance
I also learned about financial projection. I mean, real projection. It was not until 5 months later, after I left DealKeren that I got to learn how to do a real projection. But by the time I learned, I was prepared; I knew the value of doing projection and how important it is to do it right.
I have failed many times trying to build something: my past blog, my 3 projects in DealKeren. And I expect to encounter more of these in the future.
I must admit it sucks to fail. I felt really bad for letting everyone involved down. But I tried, I got up, I soaked the lesson, and I get better.
If there’s only 1 thing you got from this post, let it be this: failing is ok, but don’t dwell on it. Open up and soak the lesson. But most importantly, get up and try again.
If you have a startup, if you enjoy this post, if you learn something from it, please share this post to people you care.
P.S. Thank you so much for Adrian Suherman, CEO of LivingSocial Indonesia. Without him, this story would have never been written. He’s been a very good friend of mine during my stay and he still is. I still look up to him to this day. Thanks Pak.
I would also like to thank @oliviawillyost, @erwin_stwn, @tyohan, @agatestudio and Syafrullah Djaya (Etjie) for helping me on these projects. Without them, my idea would never had materialized and there would be no lesson to learn. Thank you for your assistance. I am forever indebted to all of you.
I wrote a challenge to @JKTFI yesterday. In it, I surfaced a problem I saw during startups’ presentation: not enough validation.
All startups have obviously done some market research which clearly showed to the audience and I that there’s a good potential for whatever it is they’re trying to build. But that does not justify that they should make the product or service they’ve been spending 4 months of their life for.
The market is there and they’re all staring at their own respective market. But is the market staring back at them? If they think so, how so and how confident are they?
Thanks for the love. Glad to hv opportunity to contribute via
#jktfi. Look forward for the blogpost #2 before commenting ;)
And today is the maturity date. So what to do?
Set up a smoke test
I heard that one of the 2 special assignments given to the startups was a landing page smoke test in which the page receives traffic from Facebook ads and collects emails as a call to action.
That is fantastic! Whichever mentor suggested that assignment to the founders, s/he knew how important it is to have real world validation.
To those unfamiliar with the concept, the idea is this:
And I am suggesting a similar thing to do but with a tweak: if you want real validation, in most cases I would use adwords instead of facebook ads. I won’t go into details in this post (I’ll do it sometime in the future), but the reason is because: facebook ads is largely a push mechanism (people are presented with ads regardless of need) while adwords is a pull (people are presented with ads only when they look for it).
Adwords is the fastest way to test whether that first critical bites exist online. If there’s no one looking for the bait (those who will become your early adopters), you can throw as many baits as you want and no one is going to bite.
Another approach is to reach out to communities that have high likelihood in needing the solution provided by the startups and present the value in front of them. But identifying need ain’t so easy… without adwords.
I want to emphasize that what is important is not the advertising channel, but rather, reaching people who need what you offer. If your solution appeal to general audience, you can simply sample some random people and get away without adwords. I’m just particularly biased towards online channels :)
Example: for Stilomo, I would set up a campaign looking for search queries containing “diskon”, “deal”, “promo”, “dealkeren”/”livingsocial” (yes I am sober), “disdus”/”groupon”. Point them towards the landing page and off you go towards learning the real market!
Additional nice thing to note: unless your startup tries to disrupt a saturated market (such as e-commerce) and assuming you know what you’re doing, keywords for adwords in Indonesia is still very cheap, while CPC for Facebook Ads has drastically gone up compared to last year.
With all that said, what is really remarkable (and I’m happy to know about) was that Jakarta Founder Institute suggested it and the graduates have done it. I just think it’s a shame that the result of that test was not presented. Because IMHO, that is the last piece that any savvy investors are looking for.
If you can show investors that:
they’ll be begging you to take their money.
In my eyes, all that VC meetings mumbo jumbo with entrepreneur is boiled down to 1 point: “can you convince me to believe in what you offer to the world?” What else convinces better than a real world validation?
And of course,
this post ain’t complete with some shameless self-promotion (oh come on, you knew this was coming): need help with adwords and other online marketing efforts? I’m here for you baby.
P.S. I’m not saying all startups must build a landing page first. A smoke test does not necessarily mean a landing page. Landing page just happens to be one of the quickest subset of a Minimum Viable Product (MVP)
…, The best way to validate your market is to launch your startup so you can get real feedback directly from your users. As entrepreneurs, you have to take the risk that your product will fail but sometimes you don’t know if that would happen until you launch your product…
Thank you very much for the kind reply, Novis.
I would rather say it’s the typical way, instead of the best way. My concern for waiting until the launch is: what if startup’s value hypothesis is wrong? And no one ends up wanting what they offer?
When we identify a problem and offer a value, we assume it’s a real world problem and we offer something of real value. But that’s us; the market may not feel there’s a problem and hence, what we offer is not of real value to them.
Can we help them to validate whether what they think aligns with what the market thinks during incubation?
The graduates spent several months of blood, sweat and tears for something that, after a short period of time, may go straight to the dust bin. To me, that is a huge waste and it would be a very demoralizing experience for them. It’s the incubator’s responsibility to mitigate that risk as much as possible.
So can we test the value hypothesis faster, before the launch? Yes we can and my proposal is to set up the smoke test described above, which JKTFI graduates have done (which is great!). The test result should have been included in the presentation, because in my eyes, it’s the missing piece to convince the audience and I (or maybe it’s just me) that the startup is in a steady progress towards sustainable success.