Accounting for 20% of global earthquakes with magnitude 6.0 and above, Japan’s history has been shaped by seismic events. The Ansei Edo earthquakes in the late 1800s weakened the bakufu military of the shogunate, leading to the rise of Imperial Japan at the turn of the century. More recently, the Fukushima nuclear power plant collapse in 2011 shifted public perception globally when it came to nuclear energy.
Even Japan’s most famous investment firm — Softbank — was not spared from its own earthquake, and the aftershocks rippled investor sentiments globally. Much has been said about the WeWork/Softbank fallout, from its singularity as an event (ie “it doesn’t change anything) to its role in the larger narrative of a “reckoning” befalling companies at the cusp of an IPO. Regardless, it’s clear that this seismic event has been building up pressure for a long time, and the IPO pullout was the one with the magnitude to pull the rug from underneath the big players and private investors.
Primarily WeWork’s downfall brought other Softbank investments like Oyo and Grab under more intense scrutiny. The pressure mounts for unicorns to prove profitability in their models as they expand further into later stage rounds.
In the property sector, major players have been taking cover from the fallout. PropertyGuru coincidentally missed what would have been an arguably pivotal, $256M exit for the region, and Oyo diversified its board in a bid to step out of Softbank’s mushroom cloud.
The once palpable excitement amongst technology companies to take-off in the public markets in three to five years is now overrun by the sobering reality that internal stability and sustainable profitability are key to a successful IPO. Technology companies that have grown accustomed to scale and expansion at all costs cannot make this transition overnight.
Companies that have raised several megarounds in anticipation of a public exit are staying private longer, presumably in an effort to reconfigure their growth trajectory. This is a trend that has been observed long before WeWork with companies exceeding $10B on private fundraising, and it is one that the past year’s IPO flops have only intensified.
The crowding at the IPO gates is thinning out, especially with capital flows shifting due to trade wars and economic uncertainties. Even then, fast growth remains the rule for venture-backed companies, only this time it can’t be done the same way, given what WeWork and Softbank have brought to light.
Even though Japan is inextricably tied to earthquakes, this doesn’t stop them from building skyscrapers. The country boasts the second tallest building in the world, the Tokyo Skytree. As the high-rises of Tokyo, Osaka, and Yokohama are built, a process called seismic isolation allows these skyscrapers to dance with the earthquakes. Shock absorbers and motion dampers are built in throughout their entire height.
In the same way, fast-growing technology companies need to undergo their own “seismic isolation” that encompasses the entire company. This approach extends from installing organizational checks and balances to tapping into multiple high-margin revenue streams.
With the biases uncovered by the WeWork case and overall uncertainty in the global markets, investors are flocking to safety in dancing skyscrapers — companies that are still able to grow fast while withstanding market uncertainties and adapting to the limits of their own business models.
Architects of these dancing skyscrapers have an industry-sensitive perspective. It’s difficult to build on land you haven’t studied well.
That the co-sharing model has an immensely high cash burn due to capital procurement should be clear from day one. This means a venture-backed, sustainable growth trajectory for co-sharing can’t the same as that for an asset-light, volume-driven e-commerce or entertainment platform. The co-sharing model has to establish value-add to their clients beyond leasing space and generate cashflow through these adjacencies, from tenant support services to community engagements.
Having an industry-sensitive perspective also means being nimble enough to adjust strategy and tap into opportunities amidst changing market conditions. Given the unsustainable economics of the WeWork model shaking up investor sentiment, an IPO may not be the best exit, and instead an M&A with a more established property developer.
Investor appetite can be expected to focus on this founder-market fit, as it will define how the investor-founder relationship will work out. How involved should the investor be? And on the other hand, what value does the founder really need each stakeholder on the cap table?
The “ownership” aspect of the deal was vastly underestimated in the case of WeWork and Softbank. While it’s easy to diagnose the issue as a lack of true investor-founder collaboration, the challenge will still remain for founders to choose the best deals, which doesn’t always mean the most cash or highest valuation. The challenge for investors is to find founders who can live up to the heights of their story or at the very least have clarity on how to get there.
Dancing skyscrapers of the future
The earthquakes will continue to happen, and skyscrapers will still be built. Sentiments may have shifted but appetites remain strong as increasing amounts of capital search for smarter investments. In East Asia, capital from the north continues to flow south as bulked up investors from China, Korea, and Japan seek dancing skyscrapers in Southeast Asia for high return liquidity opportunities.
To that end, it’s not just about following the money, but the evolution of models as the waves of innovation take on new forms beyond Silicon Valley, Hangzhou, and Bangalore. Seismic isolation is not limited to rubber shock absorbers, and engineers are becoming creative working with what they have, designing polyhedral meshes to support age-old temples.
In Southeast Asia, the geography and diversity of the region have given rise to vertical-focused ecosystems and growth in terms of depth instead of breadth. The dancing skyscrapers of the future will no longer be monolithic structures thriving solely on the vanity of their height. Instead, the immense heights they attain will be precisely because of their ability to balance aggressive speed and measured expansion.
Perhaps it is these emerging buildings of the future that will exceed any post-WeWork expectations, and this time it won’t be the result of a flop in the public markets.