It’s time for VCs to compete with Big tech eco-systems

by George Chichua

Time is running out for VCs portfolio start-ups to unlock the most obvious value-added they possess — powerful portfolio synergies!

As another year goes by, stories of the tech start-ups fueled by the QE remain on everyone’s mind. What changed though is that the excitement quickly turned to disappointment. Business news headlines instead of VC-backed start-ups’ success stories brought into the spotlight the failures of unicorns with razor-thin margins — WeWork, Uber, Lyft, Slack… the list goes on and on.

And this is only the tip of the VC iceberg. , Those few lucky unicorns (besides WeWork of course) who managed to get out of the private stables into the public market racetrack are now stuck in an overvalued state, unable to progress further into profitability, strong users growth, and continue raising money to burn.

Major down-rounds for unicorns going Public

A great example is SoftBank’s 100 billion dollar Vision fund, which had promised to invest in companies that would usher in a new era of innovation. Vision Fund created a portfolio of investments in delivery startups including Zume, rideshare startups such as Grab, Uber, Didi, co-working startup WeWork to name a few.

Each of the unicorn companies dominated significant market shares in their categories and regions, with Softbank touting them as new global leaders. Interestingly, Vision Fund’s many investees moved into each other’s verticals. For example, Uber, Zume, and Doordash all operated into the same area of food delivery.

Some of the large ticket investments by SoftBank’s Vision Fund

It all ended up in scaling back Zume’s operations which recently announced job cuts and rollback of the food delivery operations. The famous WeWork has narrowly avoided bankruptcy with their office sharing business model, and Uber’s ride-share business is still unable to turn a profit. All the above startups have been affected by very high burn rates caused by price wars and low profitability. They had to leave markets in Southeast Asia and China where they were competing with other Vision Fund’s portfolio companies which had managed to create their ecosystems such as Tokopedia, Eleme, and Didi.

Softbank accumulating losses from underperforming Vision fund investments

Things couldn’t have been more different for Big Tech companies such as Amazon, Alibaba, Tencent, Google, and Facebook which managed to expand into every possible vertical and achieved tremendous growth and strong profitability.

In many cases, the above Big Tech companies’ investment arms invested in or acquired the tech industry winners thus strengthening their core products. Amazon, Alibaba, Tencent, Google, and Facebook’s omnipotent platforms pushed out independent start-ups, adopting their successful models in the process and turning themselves into a one-in-all super-app with an endless array of features and functions.

What seems to be a decisive factor in the evidence waning the startups’ alpha on the one hand and the success of the Big tech on the other?

Largest Tech companies are growing in VC investment portfolio

The Big tech combines their investee companies into a single ecosystem, making them work together, as a single unit, which inevitably leads to lessening or even taking down competition. Big tech companies can develop and market products in large networks using powerful technology platforms.

All the above allows Big Tech to have the upper hand over the fragmented independent venture funds-backed start-ups. Amazon, for example, leverages its AWS operations by copying Tableau, MuleSoft, and Cloudflare’s SaaS (among others) products that run on AWS infrastructure and then launches under its exclusive brand.

Amazon also has been using its Prime membership to boost operations of Whole Foods, and outcompeted Pill Pack in the medical delivery business with better Amazon supply chains for their medicine and finally acquiring it in 2018. Facebook increases its dominance in new industries such as payment, online shopping, and advertising, using the audience base of the Facebook social network.

The independent VC funds’ backed startups already lost the battle with Big-Tech in China. As I‘m studying and working in Shanghai, the successful use of the eco-systems by Alibaba and Tencent, such as allowing access to their services for partners and co-offering of products, is particularly evident to me. With their massively popular apps such as Wechat, Alipay, and Taobao, Alibaba and Tencent dominate all areas of digital innovation in China.

Having investments in almost every large scale unicorn, the Chinese Big tech companies are connecting them onto their platform so that they can dominate in payment, delivery, ride-share, bike apps, social media, e-commerce, cloud, digital health, ticket sales, sports, insurance, financial products, shipping, automated shopping, and other industries.

Tencent’s portfolio investment Meutiuan Dianping’s super app ecosystem

In the meantime start-ups which are not connected to the Chinese Big tech companies platform offerings, automatically lose to the Alibaba/Tencent backed ecosystems. The above-described dominance exerted by the Chinese Big tech leads to the market distortion: Alibaba and Tencent can rip all the benefits, while new start-ups are forced to join their platform. Because of their dominance the Chinese Big tech now has priority access to virtually all attractive VC deals in the country while the Venture Capital Funds settling for crumbs.

And this ecosystem approach is already going global

Alibaba’s diverse start-up portfolio

Conclusions:

The Big tech companies are emerging as the winners, sweeping the business of small start-up competition away. The Venture Capital Funds have little power to help the start-ups to withstand the trend. Even the VC funds’ financial capabilities are dwarfed by the size of the Big tech companies coffers.

If only Softbank had combined its well-diversified portfolio of investee companies into ecosystems so that their apps could bring each other’s audience together, share supply chains, access new locations, create cross-marketing of their platforms- the companies of SoftBank Vision fund might have had a chance to compete with the big tech.

SoftBank’s Vision Fund combined into the ecosystems might have had a chance to compete with Tencent and Meituan-Dianping in China, where many of SoftBank’s investments would flourish if placed together (Uber wouldn’t have to sell its business in China, partnering with Eleme, Full truck alliance — the Chinese platform unicorn, or the secondary car marketplace -Guazi ).

If Zume had never gone into the niche of food delivery, and simply offered the packaging services for Uber eats, along with their logistics supply-chain, it would not burn millions of dollars by moving into a crowded market. But instead would tie with the network of Uber Eats to support their operations and expand into the huge audience of Uber.

However, it should be pointed out that Softbank is only one example of how a VC could benefit from using an ecosystem approach to withstand the competition from the Big tech. Smaller VC funds, unlike SoftBank, do not have investments in startups that move beyond their direct verticals with subsidiaries, and they shouldn’t. Instead, the VC funds should pay more attention to possible synergies coming from combining single investee companies into the ecosystems.

Vision fund vs standard VC structure

The future may also shine a light of hope for the VC funds, with the pressure on the Big Tech giants to break up mounting, while the VC funds pool of capital shows no signs of draining. However, the VC funds will need to pay closer attention to using their networks of companies to stay on top of the changing structure of the Tech industry.

They should encourage their existing investee companies to partner with each other to create ecosystems, and refocus their deal flow on finding companies that will support the VC funds’ existing investments and contribute with further synergies.

The VC funds who are ready to adopt the above strategy can start now by signing up for Ecosystem as a Service Coopsight Software that allows Venture funds to identify startups in the existing portfolios as well as in their deal flow which are best suited for the targeted ecosystem.

Sign-up at: https://www.coopsight.com/features-1

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George Chichua Coopsight CEO and co-founder

Coopsight Open Platform matches Startups with essential ecosystem partners.