Investing In Zero Early Revenue Start-Ups Is Just Like Investing In A Shopping Mall
VCs Need To Make This Mindset Shift
**This piece first appeared on johnsonkhoo.com. You can find more related stories and articles on his 10 year journey to build ASEAN’s first world-changing start-up that would help everyone in this world find true love and build lasting romantic relationships here.
Many VCs in this region are afraid to invest in tech start-ups or apps that do not have any revenue for the first few years of its life.
That is understandable, because most investors and VCs here came from conventional businesses like manufacturing, banking, property and more.
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Google Had Zero Early Revenue
However, what they need to understand is that plenty of the world’s most valuable companies today like Google or Facebook started as an app or website without generating any significant revenue for the first few years of its life.
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Many Start-Ups That Generate Supernormal Profits Had Zero Early Revenue — VCs Need To Realise That
If they were to categorically miss out on all start-ups that don’t generate any significant revenue for the first few years of their lives, then they would most definitely have missed out on the opportunity to invest in the next Google or Facebook and make billions in the process by investing in these start-ups early.
A Shopping Mall Has Zero Early Revenue When It Is Getting Built Too
The truth is, investing in an app or website like Google and Facebook when it has zero revenue is the same as investing in a shopping mall.
If you were to build a shopping mall today, you would have to invest plenty of money into building the shopping mall and wait while not generating any revenue for the first few years before the shopping mall is completed too.
Google Had High CAPEX During Their First Few Years
Similarly for a tech start-up like Google, they had to invest plenty of money into hiring engineers and building out their algorithm and indexing the web until they have solved the problem of organising the world’s information and finish building a much better search engine that everyone in the world would eventually use before they can start generating any meaningful revenue.
In that sense, Google had high CAPEX during their first few years too when they were building out their platform.
A Shopping Mall Has High CAPEX During Its First Few Years Too
That’s just like a shopping mall, where you would have to first spend a lot of money and build that physical building that is going to become your shopping mall!
Investing In Google & Investing In A Shopping Mall Are Similar Concepts
That’s why, investing in a tech start-up like Google and investing in a physical shopping mall are actually very similar concepts.The difference is that investors here are familiar with how shopping malls work and are not familiar with how apps and websites become global behemoths like Google and Facebook.
Apps Can Fail — But Shopping Malls Can Fail Too
Some investors are afraid that apps can fail, but the truth is, many shopping malls fail too.
Build It And They Will Come — Not True For Both Apps & Shopping Malls
The notion that if you build it, they will come, is not true for both apps and shopping malls. Just look at the number of empty or struggling malls in KL and many residential neighbourhoods around the country.
Just like apps, malls can fail too.
Investors Are More Comfortable Because Malls Are Physical & Have Land
Investors are more comfortable with malls because they have a physical presence and land. At least it is something that you can feel, touch and walk into.
White Elephant Ghost Malls Are Huge Money Pits Too — Sometimes Worse
However, that is just a false sense of security.
If you have invested in a failed shopping mall that became a white elephant, they can be huge money pits too, sometimes worse. Just the cost to maintain the property, the electricity bills, taxes and other things can slowly drain more and more cash while the shopping mall sits empty and start to crumble.
If it is an app, you can just pull it off the app store and cut the servers completely.
You can’t really do that with a mall, you will still have to incur costs to maintain it even if it fails, and it isn’t really very liquid as well. No one might want to buy your failed mall and you can be stuck with a money draining property for a long time, which can be worse that just closing down an app.
When An App Or Mall Does Well — It Can Do Really Well
On the flip side, when an app or a mall does well, it can do really well.
If an app does well, it can become the next Google or Facebook and start making billions in profit every quarter each year. If a mall does well, it can become a Mid Valley.
Don’t Be Afraid Of A Zero Revenue Start-Up
Having understood that, investors should not be afraid of a zero revenue start-up.
It Is Just Like Investing In A Shopping Mall Like Mid Valley
It is just like investing in a shopping mall like Mid Valley.
They both would not make any revenue when they were still being built but can generate tons of it every quarter once they are successful.
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All Investors Need Is A Slight Shift In Mindset To Reap Significant Rewards
Investors just need to get over that mental hurdle and fear of investing in something that isn’t a physical asset like a mall to participate in the significant rewards and return on investment that can result from investing in a successful tech start-up that has zero early revenue, just like a successful shopping mall.
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