Tech bubble bursting exposes unsustainable business models

THE rising tide of venture capital in the past few years lifted all boats in the startup world – including those with questionable unit economics. Hoping to get a slice of the hottest startups, some investors seem to have let the ball drop on due diligence and checks on business fundamentals.

Now that the tide has turned, unsustainable companies and unquestioning investors are facing the heat. This phenomenon is playing out spectacularly in the crypto and Web3 space. The rally in cryptocurrencies last year fuelled immense exuberance, and venture funds alone poured a record US$30 billion into the industry, according to PitchBook data. Companies that benefited range from crypto exchanges and lenders, to blockchain games and even non-fungible tokens with no clear utility.

However, a string of collapses this year suggests that investors did not adequately scrutinise how these companies are governed. At crypto exchange FTX, none of the investors – which includes institutions like Sequoia and Temasek – took board seats. Questions are now being asked on how FTX could have been valued at US$32 billion without even the basic checks and balances in place. Other segments of the tech world are also under strain, such as the on-demand economy. From the get-go, questions loomed over how sustainable it was to be burning cash in pursuit of the thin margins that on-demand delivery offers. Concerns about the legal status and social safety pitfalls of gig work were also raised. However, the excitement of the market was louder. Hungry for returns in a low-interest rate environment, capital flooded many of these businesses and took them to sky-high valuations.

The market is now undergoing a painful correction. Grab, which listed via a blank cheque merger at a US$40 billion valuation, is now worth US$12.1 billion as of Tuesday (Nov 15). Indonesia’s GoTo, which is down 46.6 per cent this year, is reportedly set to lay off over 1,000 staff. Sea is said to have laid off 7,000 workers in six months, and its share price is down nearly 72.1 per cent this year.

The fintech sector is also under strain. There is the question of whether certain fintech models that thrived under ultra-low interest rates can survive the hawkish environment, such as buy now, pay later (BNPL) providers, which now face a much higher cost of capital. Regulators are also beginning to look at rules for the space to prevent excessive consumer debt. Sentiment is weak; BNPL provider Zip’s share price has fallen 83.8 per cent year-to-date to A$0.70 on Tuesday.

There will be plenty of pain, not just for the companies and their investors, but also for laid-off employees, retail investors and customers who struggle to recover their funds from collapsed businesses. The ability of regulators and policymakers to mitigate the fallout will be tested in this climate.

That said, the current stress test for the tech ecosystem is a positive for the long term – bad companies are weeded out and the ones that survive stand a chance of growing into the next Big Tech giant. There are also valuable lessons to be drawn. Raising funds and hitting billion-dollar valuations cannot be an end in itself. No matter how cheap capital gets, having sound business fundamentals and good corporate governance is simply a non-negotiable.