The ‘funding winter’ is here, and the startup ecosystem is undergoing a correction globally.
After a blockbuster year in terms of capital flow into Southeast Asia and significant interest from SPACs and direct IPOs with companies in Southeast Asia, funding in 2022 has suddenly become scarce as Limited Partners became wary of investing in VC funds. Consequently, VCs have cautioned startups to tighten their purse strings, urging them to prepare for the long haul.
The shortage of funds has forced many companies, including unicorns, to stall their aggressive scaling/growth activities. Tech firms, such as Shopee, Zenius, LinkAja, and JD.id, have downsized their workforce to cope with the crisis, and many more companies are expected to follow suit. The panic in the market has led to the plunging of the valuations of many startups.
But there are many ways for startups to come out of this crisis, according to experts. Some investors are pausing investments to see how the situation develops, while some are still actively investing although the appetite might’ve changed and the deployment might be slower. Profitable companies and those with a clear roadmap to profitability need not worry much.
“For profitable companies raising investments, there’s not too much pressure because it’s not a raise-or-die situation. Having extra funds in their coffers can help them grow and gain market share in a market where competitors might be pulling back. So this is a good time to scale, but maintaining that balance between growth and bottom line will still be important after a successful raise,” says Elsha Eliasa Kwee, Investment Manager at Japanese VC firm Genesia Ventures. Genesia has invested in over 100 companies, including Qoala, bobobox, and Finantier, among others.
For post-revenue companies that are not yet profitable but are confident of achieving profitability with the existing capital and runway, it’s best to hit the milestone as soon as possible. This can be achieved either by maintaining the current level of operations or increasing revenue or cutting costs. There is no need to rely on further fundraising to survive.
“However, companies that are burning cash, don’t have enough funding or runway to reach profitability but are out to raise funding are in a tough spot. It is best to extend the runway as much as possible regardless of the situation,” she advises. “Increase revenue, cut costs, and pause projects that do not directly contribute to the top line in the short term. Also, form a realistic plan to reach profitability or at least as close as possible to profitability and share this with potential investors.”
For companies currently fund-raising, it’s best to raise for a minimum of 24 months runway. It is risky for them to raise for a 12-18 months runway. “We usually suggest that companies start raising six months before the target close (but now this might not even be enough). Having a short runway means the team will have to raise again soon in uncertain market situations. So raising for 24-36 months runway is more advisable. If market conditions improve, the company can always adjust for accelerated growth.”
At the moment, with the public market correction and uncertainty, coupled with the effects of the US inflation due to interest rate hikes and the Russia-Ukraine war, there is a fear that this will come to the private markets, says Jeffrey Paine, Managing Partner at Golden Gate Ventures. To tide over this crisis, he advises that new startup founders work on and refine their 12-year plan and capitalisation strategy and find valuation comparables that are realistic to achieve.
“For operating founders, post-Series A, speak to Series C and D investors, ask them what they expect of your business milestones, and try to close that knowledge gap. They also need to operate their business at a level that will interest capital providers, who have now sharpened their pencils,” Paine adds.
“The silver lining is that there is still a large overhang of venture capital raised in 2020-2021. However, investors will be more stringent from now on. So, realign your approach to performance once you are clear of what is expected of you. There are situations when it is too late to turn back, which will lead you to take a strategic option that unfortunately is the best path for your company, employees and shareholders,” he warns.
Sharing similar sentiments, KK Fund Founder and General Partner Koichi Saito says that it is time for Southeast Asian startups to prepare for winter, just as it is for developed countries. With the share prices of listed stocks, such as Grab, GoTo, and Bukalapak, falling across the board, we can expect to see a decline in investment appetite from investors targeting the pre-IPO stage and other later-stage firms for the time being.
“In response to this trend, early-stage investors will also become more selective in their startup investments, and the overall number of deals is likely to decline,” Saito says.
On the other hand, because of the dry powder in the early stages, there is a strong possibility that investments will be concentrated on better entrepreneurs, and the amount of funding in the early stage itself will likely remain the same. Since the funding period may be longer than usual, more careful cash management will be necessary if you want to burn more cash and get ahead of user acquisition.
The bright side is that funds from developed countries such as the US will likely flow into Southeast Asia. A big chunk of this will come from corporate funds. If a startup pitch is made with a strong awareness of the synergies between the company and the corporate entity, and the possibility of future collaboration is presented, the probability of fundraising success will increase.”
“Unlike US hedge and PE funds, which only aim for capital gains, corporate funds are more likely to invest in startups that can be expected to have synergies with their own companies under these circumstances although they will be more cautious,” Saito adds.
The funding winter will also have a great effect on your mental health. “I foresee higher stress levels for founders in the next few quarters. Do lean on your trusted network of advisors, mentors and coaches to help guide you through whatever is coming,” Golden Gate’s Paine says.
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