Be Lazee shares 3 lessons from its failure to raise funds
By Karamjit Singh October 15, 2016
- Funding “winter’ brings renewed focus on fundamentals, profit
- Know who the LPs of your VC are before you take the money
IT was all so different for Suthenesh Sugumaran, Puvanendren Maniam and Adlin Yusman, cofounders of digital concierge startup, Be Lazee Group Sdn Bhd in June 2015. They had just raised US$500,000 in the quickest seed round by a Malaysian startup then – one month.
Not only that, their investor, savvy Japanese VC, Koichi Saito of KK Fund Pte Ltd hailed the trio as among the most savvy and knowledgeable entrepreneurs he had met. “They can execute fast,” Koichi said then, specifically referring to their Groupon backgrounds as being key to their ability to execute. And that was what was needed to win in the then hot digital concierge/on demand space.
But even savvy investors can get it wrong as Koichi has found out and today, Be Lazee is just a shadow of the company it was from early Aug when it had operations in five countries and had a 40-person team on the payroll with a monthly run rate of US$160,000 a month at its peak.
Today it consists of three people who are focused on executing its B2B pivot by delivering a chat bot via, chat as a service, to a financial institution in Indonesia. This is one of four potential enterprise customers they are engaging with. The immediate future of the company will depend getting the Indonesian customer to sign off on the contract with the proof of concept at the final stage.
But the interest within the ecosystem is on what went wrong. Or in this case, what didn’t go according to plan in their model where success is initially premised on offering subsidies to consumers, as this was a pure B2C play, and getting them hooked to your brand for their needs. Profitability? That would come later. Traction and brand building first.
“At the end of the day, to have a sustainable business, to be profitable in at least what we are doing, you need at least 3 years,” says Adlin who remains a shareholder but has stepped down as CEO and taken on a consulting role with a telco in Malaysia. “But then winter came abruptly,” he says, describing the funding mood.
And with that, their conversations with VCs also changed and this started happening from March. They went from “show me your growth, your top line, your GMV to what are your profit margins, when are you going to be profitable,” says Adlin.
Winter chills in late 2015
They actually began to feel the chills of that winter in late 2015, when they were unable to raise their Series A and eventually raised a smaller amount in Jan 2016 than their seed round seven months earlier but generously described the round as a “pre-Series A” round.
In trying to raise some serious money, they came up against the “comparable question” ie who else has the same model. Mentioning Magic and GoButler from the US brought up the fact that both had to pivot and while Operator did announce a US$15 million Series B in late Sept, it came too late for Be Lazee.
“Investors were concerned because there was no comparable when we were trying to raise funds. At the back of their minds, they knew this was a capital intensive model and that someone down the line needed to put in between US$10 million to US$15 million,” says Adlin.
The lack of funding success of their comparables in the US hurt them as did the fact that investors did not see a clear exit path.
From their funding experience Adlin reiterates a known fact about the Southeast Asian startup ecosystem and shares three lessons.
“Our SEA ecosystem is very much a follow-me ecosystem with not just startups but VCs taking their cue from what’s happening in the US.”
There is nothing wrong with that in itself as the success of a number of “me too” startups has shown, especially within the stable of companies Patrick Grove of Catcha Group has bet on. But the big difference lies in the risk appetite with US VCs a lot more willing to take risks while in SEA, Adlin notes the risk appetite is low. But he also pinpoints a reason for this.
“The VCs here are also constrained by the risk appetite of their LPs (Limited Partners) and if there is one lesson we have learned here that other startups need to be aware of is to ask the VCs they are engaging with about their LPs because some LPs will only allow the VCs they have funded to make follow-on investments on condition that a new lead investor powers the next round,” says Adlin.
This has hurt Be Lazee as Adlin reveals that their existing investors were actually willing to put in another US$400,000 but on condition Be Lazee could bring in a new lead investor to put in more than that. They almost got the funding too, claims Adlin. "We had an Indonesian investor that wanted to invest but the investor couldn't close the round he was trying to raise first."
“That aside, as founders, we didn't know to ask this question about their LPs but I think it’s an important one to ask for anyone out there looking to raise funding so that they know what their existing investors can and cannot do.”
Both Suthenesh and Adlin are quick to praise their existing investors for the strong support they have shown Be Lazee. “They tried everything they could to help us,” says Adlin.
The second lesson was around raising money for their Indonesian expansion without having a presence in the country yet. They had chosen to expand from their home base of Malaysia to Singapore, Brunei, Vietnam and Philippines.
“If you don’t have an Indonesian presence don’t raise money there. You need to have at least a small presence in the country,” he says adding that it was very difficult for them to convince investors “I want your money to build Indonesia.” It was for this reason too that they mainly approached Indonesian investors.
“In hindsight we should have started with Malaysia and Indonesia first rather than the other SEA countries,” he reflects. And beware the Singapore bite. For while they only had four full time people in Singapore, the monthly cost for Singapore matched their Malaysian cost base – which had over 30 headcount!
Profit and fundamentals matter
Finally, the most important lesson learnt. Profit matters. “For those raising money, fundamentals are important no matter what they [VCs] say about focusing on growth over profits first.”
Forget that, he advises. “Because, when winter comes, they only ask for one thing. What’s your bottom line.” Already, Adlin is hearing from other startups raising money about this renewed investor focus on profitability in the short to medium term.
“So worry about your bottom line from the get go as you don’t know who your next VC will be and they may want to see solid fundamentals.”
As for Suthenesh, who now leads Be Lazee with a product executive and Sunny Khiani (pix right), who came in as CTO in July to help complete the development of what he describes as a “a bot builder”, the focus is on rebuilding the business, one customer win at a time, focusing on the four interested companies they are engaged with now.
“Getting this first Indonesian financial institution to sign off the PO, will help keep us going for the next two years, and we then go after other customers,” he says confident that their bot builder will excite corporate customers, many of whom are all looking to automate their first level customer service with software to replace headcount.
“With our bot builder, customers who have their own help desk can build their own self-service bot with the features they want. And of course, we can also do it for those who prefer to let us handle this,” says Sunny who is running his own IT consultancy focused on enterprise software.
“He is a childhood friend who happens to have the skills set we need to help us transition to our B2B SaaS (software as a service) model,” says Adlin who shies away from directly answering the question of what it will take for him to return full time to Be Lazee.
“Our focus in on retaining shareholder value and to ensure we do that, we want to run a profitable business for a full year and after that ask ourselves if we want to raise money or pay dividends,” he says noting that margins for the B2B model are over 40% while they would struggle to even hit 5% in the B2C model.