Gobi Perspectives #9: CROSSING ANIMAL, BEATEN SABER

This article was originally taken from Kay-Mok Ku’s Techinasia article (HERE)

A crisis is a disruptive event. While it may be scary, it is also when fairy tales are born. Take our current situation. Trapped inside our homes, our need for social and physical activities have created some unexpected winners:

Enter Animal Crossing. It is a decades old Nintendo franchise, a type of animated “Second Life” social game that has taken the world by storm. On the surface, the game seems to be designed for kids with their cutesy animal characters. But it is adults who are going gaga over it, because at a deeper level, the game is a reflection of real world politics. Take Tom Nook, the crooked raccoon, who makes players do all the dirty work then claims all the credit… Sounds familiar?

Next there is Beat Saber, a virtual reality game recently acquired by Facebook. Here, ancient sword fighting meets modern dancing, guided by hurling cubes tagged with directional cues. If you have been burpee-ing to the tune of Gangnam Style, you don’t know what you are missing out, while exercising from home!

What does all these have to do with venture capital? Well, VCs care more about the micro than the macro, about the winners than the losers. In fact, some purist VCs would argue that the only startups worth investing are in intellectual property (IP)-based businesses such as software, gaming and biotech. This is because their business model is almost pure fixed cost and no variable cost. They are the perfect profit generators when scaled up since after breakeven, revenue drops straight to the bottom line as there is not much additional cost in serving each new customer, often resulting in gross margins of 90%.

So why aren’t all VCs investing solely in IP startups? Because the majority are unable of “crossing the chasm” and caught up “inside the tornado” to become must-have products. These ideas came from Geoffrey Moore, a Silicon Valley marketing guru who observed that mass market adoption, which cannot be guaranteed, is the ultimate determinant of a particular technology’s success. While most products are well received by a specific group of early adopters, very few can cross a chasm that leads to widespread usage. In the process, startups become engulfed in a tornado, during which Moore ironically advises companies to focus on selling rather than customer service, since the market share leader, not the best product, will become the winner.

While 2003 was well known as the year of the SARS epidemic, what is less remembered is that it was also the year of the worm pandemic in the computer world. The Blaster worm infected PCs worldwide and suddenly a few small startups operating in the patch management space, some of which were almost running out of cash, became the masks and ventilators of the IT world. Needless to say, some of them became highly successful, as patch management became an essential treatment protocol, before it was finally replaced by a vaccine called Windows Update.

In Southeast Asia, VCs have been operating more like digital transformation funds, investing to create new tech-enabled businesses, which could become dealflow for private equity funds or buyouts by roaming tech giants. With the shutdown shifting consumption from offline to home-based online channels, will we see more investment into IP-based startups and the emergence of new Crouching Tigers and Hidden Dragons?