The wonders of GOTO

Entrepreneurship 101

Disclaimer: not an invitation to buy, sell or hold any mentioned businesses or stocks in this article. This is a guest post and the author’s opinion does not necessarily reflect Recompound’s opinion.

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Entrepreneurship 101: stories from my childhood

I grow up being surrounded by entrepreneurs. Most of whom are pretty good, I would say.

As a child, one of my favourite Sunday activities is to be a shopkeeper for my Mom’s tire shop. I love observing my Mom talking to customers and then writing a kwitansi (invoice) for the customer with the old-fashioned pen and paper invoice (you know those with three layers of white, yellow and red; and you have to put carbon papers between each piece of paper so that your writings get copied down to the layers below).

Please bear with me through even more nostalgia.

I would observe as customers try to negotiate prices with my Mom. My Mom would start with offering IDR 450.000 for a tire. Her customer would ask for a discount to IDR 400.000. She would then flip through her price list, press a few buttons on her calculator, and counter-offered 425.000, saying she’s only making 25.000 from the cost of the tire. The customer would be happy to accept after hearing that.

After the customer left, I would ask her how much is her true cost and she would whisper back to me. As to the truth, it will remain just a secret between me and my Mom.

Whatever the true cost of that tire is, I learned the first principle of running a business as a little kid:

Lesson 1: To run a business, you make sure that you charge a price is higher than your cost.

I guess it’s true that leading by example is the best way of teaching. Because that is exactly what happened to me and my siblings. We took our observations and put them into practise in schools. Here is a story of my older brother.

My siblings and I grow up in an era where our entertainment was collecting Doraemon comic books. Once a week we would beg our parents to buy us one copy of the newest Doraemon; and persistent begging has brought us about 50+ volumes.

It seems that the enterpreneurial traits of our parents were so virulent that my older brother started a comic book rental when he was in primary school.

He would rent out our Doraemon comic books at IDR 2.500 if the comic was returned by the end of the school day, or IDR 5.000 for next-day return. For a cost of 0 (because he didn’t buy the comics with his own money), he made some pretty good money which he then used to buy other toys. He ran his illegal comic rental shop until his teacher caught him and called my Mom, who reacted by laughing and boasting it to her friends and relatives.

Lesson number 2: minimise your cost as much as possible.

Another story from my childhood. In my primary school, students were encouraged to bring their own packed food from home. I was always so envious of my friends who would bring Indomie, fried rice, or nasi uduk; and I would be staring disappointedly at my roti meses (sandwich with chocolate sprinkles).

Every evening, my family would make a stop at a bakery near my tuition spot to get a loaf of sandwich bread for our breakfast the next day. I remember going to this particular bakery for a good few years before they finally closed down. I then asked my Dad why the bakery closed down. And he answered, “Their business wasn’t so good. They didn’t have lots of customers.” So why did they close down? “No customer, no income. So they lose money from keeping the stores open. When the money runs out, they close down.”

That was the third principle of business: when you don’t make enough money as a business, you lose money and close down.

As I grew up, I started to be exposed to more complex business operations. One of my relatives run a very successful Chinese dim sum restaurant. One day when my family was having dinner at his restaurant, he came down and sat with us. He shared that he is going to open another noodles restaurant in a newly-built shopping mall; the concept was going to be like so and so and so. What was interesting to me was that he said that there was going to be 5 “owners”. His 4 friends would be supplying capital and he would be supplying the cooking expertise. I remember asking my Dad why did that cousin need to bring 4 other friends when he was the one with all the cooking and restaurant-running skills. And my Dad said:

He doesn’t have enough monetary capital to start another restaurant. So his friends are providing the capital and in return, he gives them some ownership of the new restaurant. I later learned that the fancy term of this is equity fund-raising.

(Sadly the noodles restaurant did not do well and closed down after a year).

This next and last story occured when I was no longer so young. I was already in high school and my oldest brother had graduated from university. He was just starting his entrepreneurial journey as well. My oldest brother is not a good student — he disliked school and skipped so many classes that my Mom had become best friends with his teachers. But my brother is a damn good salesperson — he likes talking to people, making people feel happy and buy stuff from him.

So what does he do? Sell.

He started by becoming an agent for a renowned oil company, selling machinery lubricants to factories. Slowly, he started gaining more connections and getting more requests for bigger items like machinery spare parts, tires, etc etc. The nature of his business (like many others) is that his customer would not pay him immediately upon receiving the goods. His customers would ask for a 6-month period to pay my brother. Meanwhile, my brother’s supplier would only give him 3 months to make his payment.

Then my brother reached a point where he did not have enough money to buy the goods he wanted to sell to his customers. So he turned to my Dad and borrowed some money. Given the kindness of my Dad (with a bit of sweet-talking and nepotism), my Dad lent my brother the money with 0 interest, who paid my Dad back after 1 year. And so here goes the fifth lesson in entrepreneurship:

Another way to borrow money is through loan. Traditionally, people take loan from families, banks, and (notoriously but this still exists) loan sharks. These days, the world gets more creative and we have things like P2P lending.

The wonders of GOTO

Now that I am already an adult and have learned about mathematics, economics and entrepreneurship more formally, I become even more amazed by how practical and smart these real entrepreneurs and practitioners are. They see business opportunity, they try to serve that market and earn profits. If the business doesn’t work, either it is a bad business or there is a bad management; plus you can’t incur losses permanently, so the logical thing to do is to close down. If you need working capital, you can borrow money and either pay back that money with interest or pay the lender with some shares. At the end of the day, their goal is simple: to make money.

Now the strange thing about a lot of companies these days — or if you prefer the gen-Z word, start-ups — is that these companies seem to be able to withstand losses for many many months and years. When I first learned that Uber is not making profits, WeWork is burning money, and closer to home we have Gojek, Grab, Tokopedia, Shopee, Ajaib, etc etc — it seems crazy that these companies are violating all the principles of entrepreneurship I learned as a kid. Let me recap.

1. To run a business, your objective is to make profits. Given that $profits = revenue - cost$ this means you have to make sure your revenue is bigger than your cost

2. Try to minimise your cost as much as possible

3. If you are making negative profits, fix it. If you can’t fix it, you should close down.

4. If you need working capital, you can borrow money and pay your lenders with shares of your company.

5. Or you could go the traditional way and just pay back the money in full, with some interest.

I got curious when I heard people saying that “Do you know that Gojek is still unprofitable?” While I already kind of know that many start-ups are unprofitable, I wanted to know what is causing this unprofitability. So I went to take a look at their annual reports and collated this table.

GOTO’s profit and loss statement. Source: GOTO annual reports

This is the biggest company in Indonesia has been losing money at the magnitudes of trillion rupiahs. A record loss of IDR 19 trillion in 2019 (USD 1.2 billion). I guess it’s apt that they call themselves a (burning) unicorn 🦄🔥🤯

Distortions everywhere

Being a student of economics who learn from textbooks, I can’t help but to bring out a few jargons. (Maybe a side objective that I have is that so that when you share this knowledge with your friends, you will sound a little bit cool and smart). The jargon that I would like to introduce is the idea of distortions.

Demand (price) distortion

As I reflect on my own experience and impression of Gojek and Tokopedia, a few things stand out. First is that despite all the financial shambles they are at,

• I still love ordering food through Gojek

• I love shopping with Tokopedia

Because I love the discounts and vouchers that they give out.

I remember buying a running watch and receiving a IDR 600.000 discount during 6.6 sale.

True enough, this is reflected clearly in their financial statements under the item “customer incentives”. These vouchers and discounts are almost akin to government subsidy to consumers (think: governments giving you vouchers to buy rice or petrol BBM). So if you’ve heard of the demand curve, these consumer subsidy will increase your demand because you suddenly have more purchasing power.

Supply (cost) distortion

The second observation I have is that suddenly a lot of my friends who just graduated from university together with me started working at these start-ups. At one point in time, I think 80% of my friends are either working at Shopee, Gojek, Grab, or Tokopedia. Not only are these companies hiring so many people, they are also offering attractive salary.

As for the last observation, I think these pictures will sum it up.

In 2023, GOTO incurred IDR 5.4 trillion to pay for workers’ salaries plus IDR 3.2 trillion for share-based compensation. They also forked out IDR 2 trillion for the above-shown billboards. This gives a total of IDR 10.6 trillion.

I am not making a judgement on whether spending those money is right or wrong. But just looking at the numbers, given that the company is making IDR 10.3 trillion operating loss in 2023, it seems that GOTO could have minimise some unnecessary costs.

This brings us to the second source of distortion: cost distortion. As a company, they are likely to not have been the most cost efficient, resulting in a significantly higher cost structure. What this means is that if they are cost efficient, they could have a supply curve of S0; but because they are very generous (or from the other side of the coin: less prudent) in their spending habits, their supply curve shifts up to S1.

Spillover wage distortion

While you may think that it is good that there are so many start-ups hiring so many workers and paying them very high salary, I contend that these hiring practises are creating more harm than good to the economy and the society.

1. First, these practices are unsustainable. Sooner or later, after the piggy bank money from VC runs out, they will need to start firing workers.

2. After being fired, because these workers were previously overpaid, they face greater challenges in looking for the next job. Any job will seem like a “downgrade” to them.

3. Third, these workers may not have the right amount of skillsets and human capital to match the salary they are paid. Plus, they might not be placed in a good environment to learn, acquire human capital, and create value. I’ve talked in detail about the importance of human capital in this post.

Burn baby burn

From this point onwards, there are 3 numbers that are of interest to me:

1. Gross revenue = IDR 24.3 trillion

2. Customer incentives = IDR 12.8 trillion

⇒ 1 and 2 means that the true revenue is IDR 24.3 trillion - IDR 12.8 trillion = IDR 11.5 trillion

1. Operating loss = IDR 10.3 trillion

In graphs, these numbers look like so. Let’s study them slowly.

The true demand of consumers is D0, but with the free money given by GOTO, the demand curve shifts right to D1. The efficient supply curve is S0, but due to the generous (imprudent) spending habits, the supply curve shifts up to S1.

Now we look at market demand and supply curve on the left panel. We focus on the point where the demand intersects supply (D1 intersects S1). At this point, the quantity produced equals the quantity demanded, at Q0. However, at this quantity, what consumers truly pay is the price P0. The gap (P1-P0) is covered by the consumer incentives given out by GOTO.

Now from the market, let’s look at the firm demand and supply curve on the right panel. I assume that GOTO is operating in a perfectly competitive market (although technically it is a duopoly market, where Gojek competes with Grab; Tokopedia competes with Shopee). But regardless of whether I conceptualise this as a perfectly competitive market or a duopoly market, the effect is the same. That is, I assume that GOTO faces a horizontal demand curve as a firm. This is because if Gojek/Tokopedia increases its price slightly, consumers will immediately switch to Grab/Shopee, thus the demand goes to 0.

Before I go on to explain the reason why GOTO is burning money, here is a quick microeconomics crash course.

• Marginal revenue (MR) refers to the additional revenue a firm earns from selling an extra unit of output. For instance, you have sold 100 bread. Now you are going to sell the 101th bread for IDR 10.000. There goes your marginal revenue: IDR 10.000.

• Marginal cost (MC) refers to the additional cost a firm incurs from producing an extra unit of output. For instance, your home ingredients currently is enough to produce 100 bread a day. If you want to produce the 101th bread, you need to go and drive to the supermarket to buy more flour, sugar, eggs, packaging — all of which cost you IDR 10.000 for that 1 extra bread.

• Firm maximises profits when the MR = MC. Think about this:

  • If MR>MC, then the money you earn from selling that extra bread is higher than the cost you incur. So you get positive profits and you want to produce more

  • If MR<MC, then the money you earn from selling that extra bread is lower than the cost you incur. So you are making losses and want to produce less

• But what truly determines whether you make profits or losses is your average total cost (ATC). The ATC sums up the fixed costs and variable costs, then divide this sum with the total quantity. For instance, to produce 101 bread, you need to buy an oven, pay for electricity and water bill, buy the ingredients, etc. So you sum up all of these and divide by 101. Now note that:

  • Total revenue = price * quantity

  • Total cost = ATC * quantity

  • If total revenue > total cost, then you make profits

  • If total revenue < total cost, then you are making losses

Going back to the graph above, the fact that GOTO is making losses means that

total revenue < total cost ⇒ P * Q < ATC * Q ⇒ P < ATC

As I have drawn in the right hand panel chart, at quantity Q0,

• Customers are paying P0 → the true revenue obtained from customers is IDR 11.5 billion in 2023

• Customer incentives are covering the gap (P1-P0) → GOTO spends IDR 12.8 billion in customer incentives in 2023

• The operational costs are so high that the ATC is above the price charged → GOTO incurs operational loss of IDR 10.3 billion in 2023

Why are they doing this? How can they do this?

The next question I have is: how is this possible?

I recall lesson #3 from my childhood: If you are making losses, try to fix it.

The next next question I have is: Is it the case that they do not want to fix it?

I posit 2 potential reasons for why they are doing this:

1. GOTO is engaging in a predatory pricing strategy. This means that they are trying to drive prices down as much as possible in order to drive their competition (aka Shopee and Grab) out. When this happens, they will have monopoly power. As a result, they are willing to withstand some period of losses before later on start making profits.

2. The owners/management of GOTO have a different objective function. Their objective might not be to maximise profits, but to maximise valuation of the company. This is a very short-term-ist way of thinking. Owners who think this way will be thinking of how they could find the opportunity to increase the valuation of the company as quickly as possible, after which they will sell their ownership in their company, and therefore earn 5x, 10x, 100x returns. And then, sayonara! This is unlike the traditional businesses that I am surrounded as a child, where the owner treats their business like their lifeline. These businesses will be the source of money that enables them to buy a house, buy a car, pay for their children’s university education, pay for their retirement, and later on to be passed down to their children and grandchildren.

But regardless of whether they want to fix it or not, how is it possible for a company to continuously lose money since the day they were established, at a magnitude of trillion rupiahs? If I were to sum up their losses in the past five years (2019-2024), they are at IDR 63 trillion.

The answer lies in the multiple rounds of fund-raising they’ve had.

• Since 2009, Tokopedia has “borrowed money” (but in today’s fancier term, fund-raise) for a sum of USD 2.7 billion.

• Since 2014, Gojek has borrowed a total of USD 5.3 billion.

• After they joined hands, they have borrowed money from the public (you) for a sum of USD 1.1 billion (through IPO), on top of borrowing money from other institutions for a sum of USD 1.5 billion.

• That is a whopping total of USD 10.6 billion (IDR 165.5 trillion).

Source: Crunchbase

It seems pretty extreme that it has been a good 15 years for Tokopedia and 10 years for Gojek. For 15 and 10 years, they have continuously lost money year after year. Yet for 15 and 10 years, they have successfully borrowed money year after year.

Remember the story of my brother who also borrowed money from my Dad? If he had been unprofitable consistently and could not pay back his debt, my Dad would definitely stopped lending him money after 2 years. Unless maybe he is a very good persuader and can convince my Dad times after times that “this time will be different.”

How to fix this?

In theory, the solution is extremely simple. Stop thinking like a “start-up” and start thinking like a normal business owner:

• Return to the traditional objective function of a business: to make profits.

• Remember that $profits = revenue - cost$ So you want to increase your revenue, reduce your cost, or both. This brings us to the next point.

• Spend only what is necessary. Don’t spend IDR 2 trillion on billboards if it is not generating returns. Don’t pay your workers IDR 200 million a month if they are only generating IDR 50 million in revenue.

• Don’t think that you always have USD 1 billion of VC money in your piggy bank that you can splurge and burn.

To bring back the math, this simply means that GOTO should eliminate the demand distortion by stop giving out vouchers that generate temporary demand increases — bring back the demand to D0. It should also stop spending money on unnecessary stuff (like billboards), overpaying their workers, overhiring people, and renting excessively fancy offices — bring back the supply curve to S0. This will eliminate the customer incentives burn and the operational burn.

What if I stop giving vouchers and everyone flocks to Grab and Shopee?

Going back again to economics 101: don’t compete with price, then! Compete with product differentiation. Give better services to your customers. Make your application super OP, your delivery process so seamless, your customer service like that of a 5 star hotel. You will then operate in a pseudo-monopolistic market, where people choose you for the extra good stuff you can give them.

This is not hate

The purpose of me writing this article is not to bash GOTO. In fact, it is the total opposite. I keep hearing people criticising GOTO, predicting the gloomy future of the company, roasting the management, enraged at the owners after losing money from GOTO IPO.

Whenever I hear these, I would think: But I do think Gojek and Tokopedia have significant value to offer to people. As I am currently living overseas, I rely on Gojek to send cake for my Mom on Mother’s Day. When my Dad’s is in need of a new phone, I told him not to worry and ordered a new one from Tokopedia immediately.

So the main point I am trying to make in this long post is that the people running the company needs some mindset shift and needs to do some cleaning up. It is going to be a tough job, but I do hope they succeed.