The market has reached a consensus that the failure rate among startups is extremely high; in many cases, 90 percent is quoted as the default failure probability. Such statistics, while painting a gloom and doom outlook on the prospects of startups, reflect only part of the story. The truth is startups that have true product-market fit can be primed for success through proper cultivation of market access.
Small and medium enterprises (SMEs) account for 99 percent of firms in countries under The Organization for Economic Cooperation and Development (OECD). Such SMEs are usually battle-tested, resilient and have a keen sense of where the market opportunities are. At FVC, it is a priority to engage with SMEs to acquire valuable insights into market opportunities and tap such companies for market access on behalf of our portfolio companies.
Early-stage startups lack market access in their initial days of inception, while SMEs lack the talents and technology to tap into market opportunities they identify and can access with ease. Bringing the startups and the SMEs together could not be a better fit. Their interactions, from our experience, when moderated by a third party, such as an investment provider, could yield meaningful and lucrative collaborations that empower the SMEs to partake in market opportunities while helping the startups realize their value through the actualization of market access.
Creating a Robust Feedback Loop
In almost all cases, FVC consults with a wide network of SMEs in Southeast Asia to glean insights on market opportunities available to startups we are looking to invest. SMEs provide us with robust feedback that we loop back to the startups and help to further refine product-market fit for potential investees, creating post-investment market access plans with the investees. This allows us to be intimately involved in the success of our portfolio companies as enablers for their success vis-à-vis active participation in facilitating market access.
Facilitating Investments and Potential Exits
The bigger and better-funded SMEs among those consulted are often potential acquirers and/or investors in our portfolio companies. It has been important since day one to create the potential synergistic relationships between such SMEs and our portfolio companies to ensure a smooth transition to potential lucrative exits for us over an accelerated time frame. It is not by design that we seek fast exits, but due to the nature of our work, we are usually able to obtain strong indications of exit potential within the first 2-3 years post-investment.
"These SMEs could be tapped for a strong, potent driving force of growth that could accelerate innovation pursuits and help startups get through the dreaded ‘Valley of Death"
The Missing Link in the Innovation Ecosystem
In our pursuits for innovation and the next big thing among startups, we often overlooked the established SMEs in our own backyards that have the potential to constantly reinvent themselves and adapt to market changes. These SMEs could be tapped for a strong, potent driving force of growth that could accelerate innovation pursuits and help startups get through the dreaded ‘Valley of Death.’ While not necessarily the most innovative or most resourced corporations around, SMEs are nimble and adaptable. SMEs have developed a keen market sense to go with the flow of changes to survive. However, due to a lack of technology and access to talents (they could not compete with MNCs on pay and could not compete with startups on growth prospects), their adapting to changes does not necessarily yield the best outcome. With the potent technology that many startups have, SMEs could be great initial partners to kick-start revenue generation through market access. Lucrative collaborations may result that could catapult both startups and SMEs to higher growth trajectories.
Not Always a Walk in the Park
While synergizing SMEs' efforts to harness the growth potential of startups may sound promising, there are inherent conflicts of interest that need managing. For example, startups may outgrow the initial foray to access markets where successful collaboration leading to revenue sharing could limit the growth of startups. When such a situation occurs, it is important for SMEs and startups to reassess their collaboration models for a more sustainable symbiotic relationship. Sometimes, this may be to M&A; sometimes, it may be a division of market segments and perhaps at other times, it is the ending of collaborative relationships that have outlived their usefulness. Regardless, the initial collaborations should have made everyone better off than not.
The Importance of Enablers
Venture capital firms (VCs) could play the role of enablers. Both the relationship with SMEs and startups could originate from them, and they are best placed to be an intermediary to seek out win-win solutions for the collaborators. Of course, it means a lot of efforts need to be put in place. However, the potential payoffs make it worthwhile for the VCs to put in the efforts; after all, management fees could be better justified through tangible value-adding work done in an attempt to improve overall fund performances.
