One can argue that stress and anxiety are par for the course in entrepreneurship. Yet founders are buckling under unprecedented pressure to achieve growth — some of which is self-inflicted, others imposed by stakeholders, primarily VCs.
“The growth that happened during Covid in the past two, three years? Unsustainable,” Tan declares. While he doesn’t name names, the Sequoia alum observes that many funds have been making some 120 investments a year in recent times.
“In the last five years, people didn’t give a hoot about good governance,” he says. “They didn’t pay attention to having a sustainable business model, they didn’t pay attention to culture and mindset.”
Those low interest rates that enabled the cheap capital, inflated valuations, and growth-at-any-costs mentality to flourish are now gone. “It’s back to reality now, obviously. A lot of VC investments floundered because they met the founder for one hour, then wrote him a check.”
So what is a sustainable model? Tan goes back to the basics of making profit on every order. “Over the past 10 years, a lot of companies lost track of that. If you’re producing a product, but paying people to use it, that’s not sustainable. If you show me a profit and loss statement, I’ll tell you whether your business model is sustainable in 30 seconds.”
Perhaps this is why Insignia made just eight investments in 2022, despite having a chest of US$516 million (S$695 million) amassed from sovereign wealth funds, foundations, university endowments, and family offices to splash on early-stage regional tech plays. “We were very disciplined, to the extent that some of our team members asked: how come we’re so slow? But we have been amply rewarded because we’re able to monitor founders across many lines, rather than dots.”
Dots, the managing partner explains, represent each time the VC meets a start-up founder. Two dots form a line, and so on.
Why does this matter? For Tan, a sustainable model requires more than making money. It also needs good governance (as in audited financials) and a founder who “does what they say”, such as meeting self-set funding or development targets. Every meeting is an opportunity to check if they’ve achieved their objectives. “Always judge their actions, not just their words,” Tan adds. “If they have consistently exceeded goals, that’s a good sign.”
Co-developing business models with its start-ups
That’s easier said than done in the start-up world, where plans, projections, and even the very foundations of young, malleable businesses morph as they traverse the road. And so investors have a role in making sure the ideas they back are built on solid fundamentals.
“Many times, we invest in a company with business model A and then they change to business model B six months later when they figure out it didn’t work,” says Tan, eyes crinkling behind orange glasses. “They meander around until they find the right model.”
Insignia co-develops business models with its start-ups, and wants to “be there” when they face challenges, rather than simply admonish them for failing to meet targets. “It’s unfortunate that we see this happening in the industry,” Tan says. “We treat founders as business partners. We want to be that first call in the middle of the night when they have a problem.”
Hence, the garden walks. “We now have to be quite hands-on,” he admits. Of late, conversations with founders around tweaking the business model to boost resilience have been many — and not just around finances, but environmental sustainability, too.
It’s back to reality now. A lot of VC investments floundered because they met the founder for
one hour, then wrote him a check.