“A startup is an SME (small and medium enterprise), but not all SMEs are startups. SMEs include traditional businesses that aren’t exactly scalable, repeatable, or not looking for an exit strategy,” said David Shelters, entrepreneur-in-residence at Mekong Strategic Partners.
He currently advises the investment and advisory firm’s portfolio of companies in the Smart Axiata Digital Innovation Fund (SADIF). The published author of books on startups also lectures business model innovation and strategy at the National University of Management in Phnom Penh.
This week, David shared his insights on “Understanding Startup and its Ecosystem” during Spark Hour’s one-hour podcast that is regularly run by Techo Startup Center. He said Cambodia’s strong startup ecosystem means opportunities abound to succeed. He emphasized that an exit strategy is key for both founders and investors.
In an interview with Kiripost this week, David said, “The founders should have an idea from the beginning of what their exit (who will acquire them) could be.”
The startup advisor added, “Although startups that exit rarely guess this right from the beginning, the important thing is they are working towards an exit that requires exponential growth necessary to achieve exponential returns.”
When asked by the podcast host to define a startup, David pointed to Steve Blank, who is credited with launching the Lean Startup movement. “A startup is an organization in search of a temporary organization, in search of a repeatable and scalable business model.”
Compared to traditional SMEs, a startup has excellent opportunities. That means it does follow the same path as a traditional business when it is launching.
An exit strategy is key
“The most important thing is the exit. If somebody has an exit strategy at the beginning, that means that, to me, that’s a startup. And because they know they haven’t exited, you have to have exponential growth to get exponential returns.”
David explained, “If an investor wants 10 percent, 15percent return on capital, why would they invest in a startup? It’s too risky. They get those returns investing in a publicly traded company with much less risk.”
The difference between startups and SMEs and avoiding debt.
“You can have traditional SMEs that don’t have an exit strategy that may have a scalable business model that might be financially sustainable. Hopefully, most of them are financially sustainable. But I really think the core is the exit,” he noted.
“So, for traditional SMEs, you’re looking at return on capital. [In] startups, you’re looking at return investment.”
He said this impacts how startups are structured, their business model and funding sources. “For traditional SMEs, it’s okay to take on debt. As long as your capital is low in relation to the margins, you’re getting in your cash flow and you can service a debt.
“For startups, especially at the early stages, you never want to take on debt because with debt, you are basically insolvent from day one, and also in debt. People understand that debt is senior to any equity class. So, it’s very hard to raise equity funds after you take on debt.”
Before entering the Cambodian startup community, David spent a decade working in the Thai startup scene. He noted that most of the startups in Cambodia are still in the pre-seed stage.
David said he learned the hard way about startup debt early, when he first arrived in Thailand.
“My friend did the backend of a startup, a big startup company. In America, I did the fundraising for them. I was successfully able to secure $10 million of funding for this startup in Singapore,” he recalls.
“I had just a great proprietary IP and the founders are actually very famous in America, very successful, very skilled, but their first investors were a group of debt. They took the debt and maybe half a million dollars and they were basically held hostage.”