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Are tech companies getting ahead of themselves?

Written by Teddy Oetomo Published on   5 mins read

There is a need for today’s technology companies to embark on a path to sustainability, to remain efficient, and cover their costs.

The year was 2008, and I was on a domestic flight in the United States. The passenger sitting next to me tried to strike up a conversation by asking what I did for a living. I could not bring myself to tell him that I worked in a global investment bank. I ended up telling him that I was an academic, my choice of occupation prior to joining investment banks.

For years prior to the 2008 global financial crisis, investment bankers pumped the subprime market. When the market collapsed, millions of middle-class homeowners lost their homes. It has been more than a decade since that day; I am left to wonder if history will repeat itself, albeit in a different form.

Today, the subprime crisis has been well studied and documented. Believing that property prices would continue to surge, many people took on additional mortgages. These higher-risk mortgages were repackaged and labeled as AAA-rated instruments. Reasonable diversification to some extent can reduce risks, but combining a bunch of high risks assets and arguing that benefits of diversification will result in an AAA-rated instrument is literally stretching it too far.

While it may be clear today, the high demand for such products at the time, combined with positive sentiment, clouded investors’ judgements. A similar cycle with similar reasoning and trends also took place during the commodity super-cycle. At its peak, all commodities were priced at insanely high levels. Investors and speculators argued that the increase in the world population, combined with improved purchasing power, would continue to drive the demand for commodities. A surge in prices led to technological improvements that made it possible for companies to mine shale gas, capping the prices of natural resources. The downturn in the economic cycle and higher consciousness towards the need for cleaner energy further escalated the decline in commodity prices, particularly natural resource prices.

The two mentioned above are merely examples of many cycles that have taken place throughout world history. While they come in many forms, ranging from tulips to mortgages, there remain common traits in each cycle. In every cycle, there is euphoria over a particular asset class. During this euphoria, believers argue in favor of why price and valuations will continue to increase via various justifications that are eventually proven to be irrational.

We hope that such cycles of bubble and burst will never repeat. However, it is impossible not to express some concern over the trend and valuation of technology companies today. Investors are currently pouring dough into technology companies in emerging markets, largely enticed by the high growth generated. Many believe that the sizeable untapped market opportunity indicates that the potential for such a high growth environment may continue to persist.

In the aftermath of the global financial crisis, growth was a rare commodity. Technology companies that started to record remarkable growth suddenly became beacons of hope. Investors hoping to mirror the success generated in developed markets sought comparable companies in emerging markets. As more investors caught wind of such investment opportunities, herding behavior started to form. This placed more and more demanding valuations on these companies. Like with past trends, justifications were formed to rationalize the demanding valuations, that the high growth trend is expected to continue for years to come.

Entrepreneurs have been quick to recognize investors’ appetite for growth. Companies have been set on strategies that favor growth over other metrics. The focus on growth has been so extreme that they may sacrifice many other metrics to make way for higher and higher growth, potentially hindering the fundamental strength of the company. We have recently seen how companies grew rapidly and significantly enhanced their market share, yet, their losses ballooned in line with their size.

Management is often forced to push the boundaries in order to further satisfy investors’ insatiable thirst for growth. In their attempt to book more growth, management has expanded into new lines of businesses, often in areas that they have little competency and competitive advantage. While not directly comparable, this measure may be akin to packaging tons of lower quality mortgages and labelling it as AAA. With the new business lines, management claims even larger untapped market potential, positing yet another opportunity for growth.

As companies continue their land grab journey, they affect the lives of the wide population. This is not merely from the perspective of users of the services provided, but more importantly, those who are providing the services. In ride-hailing companies, they are the drivers. In marketplaces, they are the sellers. These are people who have based their livelihood on the continuity of these technology companies, who are still running in losses and have yet to be financially sustainable.

Indonesia’s former minister of finance Chatib Basri recently raised this concern. Indeed, this concern may not be an exaggeration, after all. With the last down cycle having taken place over a decade ago, there are reasons to be cautious.

Global trade wars have eroded growth in some of the world’s most dominant economies. Indonesia is expected to be relatively insulated given its relatively lower reliance on global trade. However, a global economic downturn will expectedly increase investors’ risk aversion. This, in turn, may pose greater challenges for companies when raising funding. For those that are running at losses, their ability to raise enough funding in time will be imperative, as it may threaten their business continuity.

In the odd chance that any of these companies cannot raise the funding needed, it may result in a discontinuation of some or all of their businesses. It may hit tens of millions of individuals who rely on these companies for their incomes. More than ever, there is a need for these companies to embark on a path to sustainability. It is not necessarily about targeting an exuberant amount of profit, but just to remain efficient and generate enough revenues to cover their costs. We all hope that we may avoid such a downturn, but the reality remains that the economy follows cycles. With most of our younger entrepreneurs today have never experienced an economic recession, let alone crisis, we may be entering unchartered territory.

I hope the history of bubble and bust does not repeat, thus affecting the technology industry. I do not look forward to concealing what I do for living from fellow passengers on future flights.

To read similar stories, please hop on to Oasis, the brainchild of KrASIA. 

Teddy Oetomo is the chief strategy officer of Indonesian e-commerce firm Bukalapak. 

Disclaimer: This article was written by a community contributor. All content is written by and reflects the personal perspective of the interviewee herself. If you’d like to contribute, you can apply here.


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