Welcome to the world of Unicorns -- the venture capital-backed companies worth US$1 billion or more. It's no surprise that a mythical creature has come to symbolise the hype surrounding many technology-focused businesses that will never live up to their investors' expectations.
First sighted in Silicon Valley, these beasts are now creeping toward Asia, but as investors grow more demanding, most of the new unicorns are expected to be genuinely worth the money, industry experts believe.
As of November, there were 131 unicorns globally: 85 from the United States, 31 in Asia, and 13 in Europe. Although some have managed to turn ideas into profits, many eye-popping valuations are seen as preposterous.
The investors behind these chunky cheques are becoming more prudent and rational given that these newborn companies are finding it harder to get traction and turn their fantasies into real business.
"Most of them don't make any money," said Apichai Sakulsureeyadej, director of the IT solutions company MSL Software (Thailand) Co Ltd, referring to some high-valuation start-ups in Asia.
Mr Apichai, also the co-founder of the Thailand-based venture capital (VC) firm Iyara VC, added that most of these companies were the first in their fields, which gave them first-mover advantage to create an image, brand their products and dazzle investors, but most are still struggling for profits.
In China and India, for instance, the market size is huge and will naturally attract large cash piles, which drives valuations sky-high.
"It doesn't necessarily mean that they have captured the whole market or guarantee that they will remain competitive and a lot of imitators are spinning up along the way to create competition," he said on the sidelines of the Echelon Thailand conference held in Bangkok recently.
Chan Park, general manager for Southeast Asia of the pioneering ride-sharing application Uber, said genuinely successful unicorns shared some important characteristics including addressable market size, scalability with proven growth, and of course, backing from deep-pocketed VCs.
Speaking with Asia Focus recently on the sidelines of the Bloomberg Asean Business Summit, he said companies in China and India tend to get excited by the size of the market and dream of larger potential.
"Quicker internet penetration and the faster-than-ever mobile adoption rate in Asia have encouraged investors to become less mindful. Cheap capital has also lured investors with higher risk appetite," he added.
However, some of these start-ups may still lack what it takes to succeed in the long run.
"They do not have proper business models or do not earn a single dime of revenue and they get valued at billions of dollars. This may be symptomatic of overvaluation," he said.
Uber is now the world's number one unicorn, worth $51 billion (with a new fundraising round planned to lift the value to $62.5 billion) and present in more than 300 cities globally. However, because it is still private, its actual revenues and profits are not known. Venture capitalists usually make their money when a company is listed on the stork market, but it is not clear if or when Uber will take that ride.
The Beijing-based smartphone maker Xiaomi is second on the unicorn list with a valuation of $46 billion valuation, followed by the accommodation rental service Airbnb at $25 billion.
The Indian-based e-commerce giants Flipkart and Snapdeal, valued at $15 billion and $7 billion respectively, are believed to be losing money, according to the Mumbai-based investment expert Raj K Mitra. He suggested that Amazon, Flipkart and Snapdeal were losing about $150,000 to $450,000 a day.
"Behind the glitz of million-dollar fundraising and billion-dollar valuations lurk stories of eventual doom," he said.
"How do you call that a business, putting in money just to grow on valuation? How long can you play that game?" added Mr Apichai.
Justin Hall, principal at Golden Gate Ventures, an early-stage VC firm, added that many of the high valuations globally have been driven by late-stage and non-traditional investors. "Those valuations may not be a reasonable reflection of the true value of the company."
Victor Chua, investment director at Gobi Partners, an early-stage VC, added that in his view, there will be some corrections as investors in the past were overly excited to be part of the start-up sphere, throwing in money and driving up valuations.
"Everyone is eager to have the piece of the pie," he said, "This hype around start-ups will cool."
Investors in the past were less discriminating about what was a good business and what was not, observed Maximilian Bittner, CEO of Lazada Group, Southeast Asia's leading e-commerce unicorn. Now there is a correction, as investors become more focused.
"They are becoming much more discriminating, and not just thinking that all e-commerce businesses are good but thinking more like, e-commerce doing 'this' is good," he said, "They have become more careful in picking who the winners are."
Having said that, he sees no fundamental overvaluation occurring in the market. "Similar to share prices, prices go up and down, it's just the matter of economic sentiment," he said.
Now present in Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam, Lazada Group is valued at $1.25 billion, one of the two Southeast Asian-bred unicorns. The other is the Malaysian-based taxi-hailing application GrabTaxi, valued at $1.6 billion.
Steve Melhuish, CEO and co-founder of Southeast Asia's leading online property portal, PropertyGuru, observed that there has been a big shift in the start-up and investment scene in Asia in recent years, where US-based venture capitalists are starting to invest heavily in China, India and now Southeast Asia.
"Sometimes, I see businesses starting to exhibit what we saw in the dotcom bust days, when companies raised lots of financing, trying to build something but didn't really have clear business models," he said.
Mr Melhuish expressed concern about businesses that don't have a clear view on how they can monetise their ideas. Many are building something simply in the hope of attracting some attention and some revenue.
In his view, valuations are creeping up too fast. "You've got a business idea and suddenly it's worth millions of dollars. If you're a start-up, you need to show some kind of traction and prove your business model before you can justify that there is a big opportunity here."
He added that VCs were becoming more rational in their thinking. "A year ago, there was a big rush to invest at high valuations. Now, start-ups will find it harder to raise money and the valuations will not be as ridiculous."
Now present in Singapore, Malaysia, Indonesia and Thailand, PropertyGuru embraces the marketplace model, which connects buyers and sellers together without having a physical asset.
"We are probably three or four years away from becoming a unicorn," he said. "This will be a reasonable valuation, not a ridiculous valuation that some companies are getting."
REAL VALUE
Leading investors and successful start-up founders agreed that becoming a unicorn should not be the ultimate goal for start-ups. Rather, Asian companies should focus on creating real value that becomes essential to users' lives.
Eddie Thai, venture partner of the global venture capital seed fund and start-up accelerator 500 Start-ups, said unicorn success stories in the US stemmed from a large, connected, and comparatively wealthy population that is familiar with online behaviour and willing to make non-cash payments for digital value.
"Asia is more populous but its internet penetration and behaviour lags, and non-cash payment in many countries is still low," he said.
In addition, the US has more money and a culture willing to take a lot of bets, while Asian investment in tech is relatively smaller and more risk-averse.
That said, he believes that becoming a unicorn should not be the primary measure of success. "A lot of money is being made by founders and investors from start-ups reaching the $100-million-plus valuation range."
Mr Apichai added: "The whole idea of a unicorn comes down to a product that is nice to have or can eventually be tweaked to a must-have."
Start-ups should focus on what value they can add, he says, what gaps they can fill and what kind of real growth story they can offer. It doesn't matter whether the company will grow globally or regionally or get valued at billions of dollars, but we have to agree that it will grow.
In his view, the entrepreneur's job is to offer a compelling story on how something launched today can be adopted everywhere, why people will rely on it and why they will come back.
"No need to tell me the global growth story, it is the VC's job to put that together," he said.
"The definition of a unicorn is ever changing. Having a billion-dollar valuation is superficial given that it doesn't mean companies can sell at $1 billion," added Gobi Partners' Mr Chua.
"The market is the very key and you want to have as much presence as possible given the fragmentation in Southeast Asian countries."
Uber's Mr Park said he had observed some positive signs with a number of smart, aggressive, risk-taking entrepreneurs coming up in Asia.
In his view, VCs are betting on people and teams, rather than business models. "There is the movement toward a risk-taking culture [in Asia] when people are starting to move away from the traditional career paths and start their own investments."
MONEY AND LOYALTY
While hard cash was usually the measure of success for traditional businesses, the profitability of the 21st-century start-ups is derived in two ways: money and loyalty.
"Most unicorns today are relying on the latter," said Mr Apichai, adding that if a start-up will always struggle to make money, it must build a market place or user base that is completely reliant on it. "Build a loyal user base that will never leave you as it will be a cumbersome task to do so."
Gobi Partners' Mr Chua added that he prefers to invest in companies that can scale across the region as quickly as possibly. "We like to invest into companies with huge market size and business models that can be scaled almost immediately.
"We are confident in the start-up scene in Southeast Asia," he said, adding that one of the strong points of the region is that each market has its own problems to be solved.
Mr Hall of Golden Gate Ventures said market size needed to come with a rational business model -- "how reasonable it is to expect the company to take over a big chunk of that market. That's what really counts."