Chen Ou, CEO of Jumei.com, disagreed with the opinion that “a winter for entrepreneurs is coming” and expressed confidence in entrepreneurship at a forum held by venture capital fund Zhen Fund last Thursday, reported Sina Tech.
Chen Ou, 31 years old, was once featured in Forbes magazine as a promising CEO. He founded Jumei.com, an e-commerce platform known for selling cosmetics and makeup. Jumei.com debuted on the Nasdaq last May at USD 22 per share. Xu Xiaoping, one of Jumei’s angel investors said profits have increased 800 percent in 4 years.
Following the downturn of the Chinese stock market in August, investors have become more wary of investing in once popular Internet businesses. Some critics have warned of a so-called “winter for entrepreneurs“ approaching because many startups have since crumbled with the break in the capital chain.
Chen Ou, however, holds a different opinion. “Is winter coming? No, I think instead, spring has arrived.”
Chen said at the ZhenFund forum that high valuations and bulky finance were, in fact, getting entrepreneurs into trouble.
Top risks Chen warned about:
I. High valuations are always accompanied by protective provisions.
Protective provisions might not hinder a company when it is able to maintain financial stability, but will likely harm a company if it faces the prospect of a great decrease in valuation or possible acquisition. Protective provisions will then come into effect and ensure investor interests are protected first, at the expense of a company’s interests.
Under these circumstances, a company may be pushed into an even more difficult situation, which entrepreneurs should be very cautious of.
II. High valuations threaten the stability of the team.
Startups always give a certain percentage of company equity to core employees as a reward and also as a way to maintain team stability. Equity issued before an IPO is always more valuable.
Equity after IPO, even if the company receives a high valuation, may not bring employees much profit, making this method ineffective for maintaining team stability
III. High valuations may push the whole sector into irrational competition.
A high valuation can also serve as a message to investors that rival companies may have the same potential in the capital market. This may increase the froth in the market and turn product-based competition into capital-based competition.
China’s Internet market has already seen a lot of cases like this over the past few years with prominent examples including: Didi Dache vs. Kuaidi Dache and Ele.me vs. Meituan. When companies depend hugely upon investment to develop their businesses against rivals, capital withdrawal can prove deadly.
Tencent Tech reports that of the 846 Chinese startups that received an A-series funding in 2014 only 225 made it to a B-series. Barely any of them succeeded in completing a C-series. The market bubble vanished when the capital pulled out.
However, in Chen’s eyes, a winter for the capital market can be a vibrant spring for entrepreneurs.
Opportunities Chen suggested:
I. Companies can focus on things that are beneficial to their development when there’s no pressure from investors.
“You have to sacrifice your profit, your development and many other things just to satisfy some short-sighted investors. Sometimes you have to do things that can make your valuation look good first,” Chen said.
II. High valuations may attract the wrong teammates.
When the entire market is at an irrationally high position, startups will have to spend more to hire the right people — sometimes they may hire people who’re opportunists.
“In a rough situation, it’s more likely for you to find the kind of teammates who’ll likely stay with you through predicaments,” Chen said. “It takes at least three to five years for any team to truly mix together.”
III. In the midst of a “winter for capital,” malicious competition will pause.
Chen pointed out malicious promotion and the hunt for talent from other companies are all forms of malicious competition. Jumei.com was waging a PR war against VIP.com, another cosmetics e-commerce portal, in April this year. Talent recruitment is also a big concern for Chen Ou.
“As the CEO of the company, if you can’t focus on how to develop the company, how to make a profit, but instead have to focus on how to poach talent from other companies, I think your company is in trouble.”
Chen Ou also said when investors become more rational, companies can then be more reasonable and focus more on products instead of valuations.
Some analysts shared similar opinions. A report by Sina Tech commented, when the market cools down, investors will be more cautious of a company’s business model and financial status. This will rid unqualified players from the competition much faster.
There’s a saying spread among Chinese entrepreneurs, “only when the tide is on the ebb, can people truly know who is swimming in the nude.” For those not properly prepared, a winter for capital might prove too harsh for them to survive until the spring for entrepreneurs.
(Top photo from Baidu image)