Tink Labs, the first unicorn from Hong Kong, is a notable member of the ranks of startups with jaw-dropping funding that nonetheless managed to go bankrupt.
The company was founded by University of Chicago dropout Terence Kwok in 2012, and over the years, managed to raise the impressive $200m from investors like FIH Mobile, Cai Wensheng – chairman of the Chinese selfie app Meitu, and Sinovation Ventures – a VC fund headed by the former chief of Google China, Kaifu Lee. Moreover, in 2018, SoftBank’s mobile unit invested via a joint venture with Tink Labs in Japan (it’s worth noting that SoftBank is a recurring name in the list of fabulously over-funded and spectacularly under-performing startups like Katerra or WeWork).
Tink Labs’ business model was to supply hotel chains with smartphones that their visitors could use for free. The main value proposition was the ability to avoid roaming charges by using Tink Labs’ devices. Still, Tink Labs also sold hotels on the idea that by using their devices, hotel visitors were going to learn about and pay for more services in the hotel they were staying in - about 30% of the people using the devices were visiting the information page of the hotel.
In the first few years, it seemed that the startup had found a great product-market fit - Tink Labs was proliferating. By the end of 2018, their devices were in 600,000 hotel rooms in over 82 countries. They managed to achieve these impressive numbers by winning over big hotel chains. Their most notable clients were Hyatt Hotels, InterContinental Hotel Group, and Shangri-La Hotels and Resorts. By the time of the SoftBank joint venture investment, the startup was valued at $1.5 billion.
While the picture from the outside looked pristine, many employees were worried about the future of the business.
Most venture-backed startups value growth more than they value profitability. While this seems counterintuitive to owners of traditional businesses, this is, in fact, entirely rational behavior in some new market niches.
The reason is that the genuinely innovative startups are usually fighting in winner-takes-all markets. Strong network effects (value grows with each additional user) and low marginal costs (serving additional users is cheap) mean that the first business that hits product-market fit and manages to capture the market usually becomes a monopolist.
Consequently, if your business plan is to grow slowly, steadily, and sustainably, you risk that another more aggressive company will overtake you. And in the genuinely innovative technological niches, the dollar value of the market leader could be orders of magnitude larger than that of the runner-up (think of Google and Bing).
Hence, for some innovative startups burning money to grow is a requirement rather than a preference.
All of this growth would be in vain if the startup can’t successfully switch to profitability. Having too much money to throw in growth could make it more difficult to judge if you have good product-market fit. Would customers happily use your service if you weren’t selling aggressively, making promises, and giving discounts and promotions? It could easily be the case that an alarming number of people aren’t willing to buy at the actual price to make you profitable.
According to former Tink Labs employees, the company was pursuing extremely ambitious growth targets – sales personnel were given very high quotas. They were also threatened they would be fired if they didn’t meet them. At the same time, the unit economics weren’t working in their favor, which means that as the company was growing, it was running out of money more quickly.
Growing an unprofitable product aggressively is probably one of the best ways in the world to burn cash. Unsurprisingly, Tink Labs ran into liquidity problems.
One of the most significant blows that forced it to shut down was the abrupt discontinuation of a major project because SoftBank was concerned that Tink Labs was funneling money from their Japanese joint venture to keep itself afloat in other unprofitable regions.
The shut-off of this liquidity valve meant that Tink Labs didn’t have money to pay its employees and contractors. For example, Italian telecom operator Wind Tre confirmed to the Financial Times that it had an overdue payment from the Hong Kong startup on a $180,000 bill. Moreover, a lot of employees were owed money at the time of the lay-offs.
When asked about potential ongoing labor disputes and business transaction details, Terence Kwok said, “I am trying to do what I can, but a lot of things are now out of my hands.”
While in 2012, the company’s primary offering seemed to have good product-market fit, this didn’t stay true for long. The widespread popularity of internet-based communication tools (Viber, WhatsApp, Messenger, etc.) and the overall decrease of roaming charges over the years meant that the value proposition of Tink Labs was quickly losing its appeal.
The startup was looking to expand its offering into software and marketing tools for hotels. However, such pivots are hard to pull off in large companies. The size of Tink Labs (and the speed at which it was burning money) meant that this switch needed to be an instant hit to save the business, and of course, this is very hard to achieve.
As the company found itself on the wrong side of technology changing its market, the loss of PMF quickly invalidated all of Tink Labs’ successful growth efforts.
People rarely have a lot of empathy for the fortunate – it’s hard to feel sorry for a startup that had access to $200m. However, in reality, the biggest sin of Tink Labs wasn’t that it burned money too quickly or that it wasn’t profitable while doing so – the same could be said for Facebook and Amazon and they are currently some of the most influential organizations in the world. The biggest mistake of Tink Labs was that it failed to foresee the direction in which technology is heading in its market and adjust its long-term strategy preemptively.
Trying to pivot is the right call, but doing it after you’ve already hired an army of employees to sell an offering that’s quickly becoming obsolete is simply a little too late.
Pivoting requires you to be lean, flexible, and with a long runway, and unfortunately, Hong Kong’s first unicorn was not.