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.