We’re coming to a pivotal point in the early-stage ecosystem in Southeast Asia where a number of businesses that have been scraping by will need to shut their doors. There are three key personas that I’ve seen in founders with how they approach the capital that they have raised.

There are those founders that treat the capital as if it were their own. The other types of founders are more willing to spend the capital that they have raised but for different reasons. There are those founders who are naïve and don’t completely understand the amounts that they’re spending. Then there are the founders that act as mercenaries, who will aggressively spend because they perceive that they have been given the mandate to do so.

Frugal Founders

Typically, the Frugal Founders have spent some time bootstrapping the business, so they are mindful of spending capital. They might have come from a more conservative background where resources were scarcer and aren’t comfortable going after growth-at-all-costs. While I’ve found that it’s typically optimal working with these founders because there are minimal principal-agent conflicts, it can be challenging to get them to change their mindset and scale with the business when the time is right.

For example, the Frugal Founders might always try to create the tools they need internally instead of focusing on their core competencies and outsourcing the other problems. They could spend too long weighing small purchases because they’re spending more than what they would have previously spent on themselves. This isn’t necessarily useful because some of these costs are unavoidable when building a business. I’ve found that it’s useful to help them to create spend rules that they can use to reduce the friction that they face as they get used to scaling up. Froogle Founders are typically able to adjust relatively quickly and get more comfortable when they’re deploying internally generated cash flows. I haven’t had a lot of issues with Froogle Founders because are always treating the business’s capital as if it were their own.

Reckless Rationalisers

Next, we come to the Reckless Rationalisers, the founders that spend aggressively but not maliciously. Generally, these are first time founders that might have come from a more academic background. In the early stages of the company’s life, it could be necessary to spend aggressively on salaries as the offering is built out with the revenues coming later. There’s a level of blind faith that’s required in this stage. However, if sales don’t materialize as fast as hoped, then it’s necessary to start cutting that spend.

Reckless Rationalisers might be spending more in a month than they were previously earning in a year. The number might feel so large that it doesn’t have any meaning for them. They are also likely being encouraged by the VC funds or investors that want them to grow-at-all-costs. Considering the VC funds will typically have more experience than the founders, they are willing to take their advice because they’ve “been here before.” However, the incentives of the VC funds might not be aligned with those of the company – the VCs want to show a mark-up to investors and they have the diversification in their portfolio to allow a few companies to fail, a founder doesn’t have that same diversification.

I’ve typically had the most problems with Reckless Rationalisers because they are hamstrung by the desires of the most influential investor in the room (typically the largest brand and not necessarily the most experience). They also don’t take the time to understand the implications of having an aggressive burn because if they did, it would potentially lead to physical illness (I’ve seen this happen). They can be coached into bringing their burn more in line with what’s commonly accepted, but it requires a lot of time and patience.

Salacious Spenders

Finally, we have the mercenaries that are willing to spend the capital that they have raised aggressively without any regard for the consequences. They have been given a mandate by investors to spend the capital in the pursuit of growth and if it doesn’t work out, then they’ll attempt to raise more capital and do it again. It’s not uncommon for these founders to start multiple businesses at the same time, raising capital from different pools in the hopes that one of those opportunities pans out for them – too bad for the investors that didn’t bet on that horse. Their behaviour isn’t necessarily unethical but at times, it can operate quite close to the line. Salacious Spenders have no problem scaling up teams and can build impressive organisations at lightning speed as long as the revenue scales to quickly catch up with burn or there are sufficiently deep pockets to facilitate the growth. There are times that this strategy can work but it’s definitely the high-beta play with a correspondingly high risk of ruin. Personally, I haven’t had as many issues with these founders because I typically don’t work with them. Operating in Southeast Asia is fraught with difficulties because we are typically dealing with fragmented regional markets so businesses don’t scale as quickly as they would in a larger more homogenous market. This makes it harder to generate the required momentum in sales and sufficient interest from follow-on capital to continue to operate the business.

Conclusion

It’s easier to get Frugal Founders to upscale their mindset than it is to get the Salacious Spenders to reduce their spend. Given, that different approach may be required in different markets and at different stages of a company’s lifecycle. However, the bill is about to come due for a lot of salacious spenders as investors slow down their cheque writing, and customers upstream reduce their spend. In my experience, the Frugal Founders are typically more successful over the longer-term because they can stretch out their runway and find the opportunities. The Salacious Spenders are always reliant on external sources of capital, which eventually dry up.