The future is digital. This is a common agreement among venture capital management firms, as investors rethink their approach in a landscape drastically altered by the COVID-19 pandemic.
Even as major economies in Asia including India, Thailand, and Singapore begin to emerge from prolonged lockdowns to relaunch their economies, once deep-pocketed investors are warning that new startups will need to work harder to secure additional funding.
Still, there is a way forward for those that are willing to try, said Paul Santos, managing partner at Wavemaker Partners, a go-to-seed stage VC with more than 100 investments in Southeast Asia. Changes in consumer habits combined with restrictions on travel and work will continue to sustain demand for services like online shopping, learning, and entertainment, Santos explained.
In a vote of confidence, Wavemaker Partners is continuing to prioritize startups focusing in areas like software development and artificial intelligence, which make up 85% of the firm’s current investment portfolio.
Gobi Partners, a VC firm with over USD 1.1 billion worth of assets under management across Asia, is also bullish on the prospects of new tie-ups between startups and regional governments, said firm’s managing partner Kay Mok Ku.
“We believe the recovery will be led by the supply-side of production, rather than demand,” as governments put a renewed focus on developing new technologies like 5G and robotics to deal with current and future medical challenges, Kay said. Startups are therefore ideally primed to attract support from government agencies seeking innovative technological solutions, he added.
In India, where a two-month-long lockdown has sharply hurt economic growth, embracing technological change has become a necessity, according to Tej Kapoor, co-CEO at FOSUN RZ Capital, a Beijing-based VC firm which focuses on technological startups.
With social distancing set to become a “new normal,” as new coronavirus cases continue to climb, only firms that can quickly enact changes and target customers online will be able to fend off economic headwinds, Tej added.
Survival is the best indicator of growth
Caution dominates the thinking of VC firms as uncertainty persists. How quickly Asian economies will be able to control the virus and see a full-scale recovery is yet to be seen. However, there is widespread agreement, said Kay, that COVID-19 is here to stay, and that a second wave, or at least new local outbreaks, will be inevitable until a reliable vaccine becomes available.
“We are still unsure if the recovery will be V-shaped, U-shaped, or L-shaped, but demand is likely to remain depressed in the short-term as unstable income and a rise in consumer debt drags on shoppers’ willingness to spend,” Kay explained.
The challenge for startups is to weather the storm, said Santos. “I tell startups we invested, half-jokingly, that survival is the best indicator of growth in these times. Only the fittest and luckiest companies will be able to survive.”
Kay added that the biggest challenge for companies is to quickly adapt their business model to the changing times. He warned that startups accustomed to a period of easy cash, when investors were willing to tolerate “cash-burning businesses” on the basis of a promising business model alone, will soon face a rude awakening.“ With cash flow difficulties, startups determined to pursue a strategy of aggressive growth are courting disaster,” he said.
In India, startups are already feeling the pinch. Just 44 IPOs have been announced this year compared to 77 the same time last year. Tej explained that firms will have to quickly reduce fixed costs and formulate long-term plans lasting at least one and a half years to secure financing from different sources.
Currently, VC firms are still optimistic about their investment prospects in the long-term, despite potential black swan events, says Santos. However, there are practical challenges to overcome, such as meeting startup’s founders to understand better their goals and business, he added. Given the circumstances, VCs, such as Wavemaker Partners, are adapting to the “new normal” by using video-conferencing to establish relationships with new startups.
“We are still committed to the key process of investing in companies pioneering cutting-edge technologies, which has not changed despite the pandemic,” Santos said.
On the other hand, Tej of FOSUN RZ Capital disclosed that his firm will make four to six investments in the Indian market this year, although the screening criteria for new investments will naturally become more stringent.
Nevertheless, he warned that while VCs are now refocusing on business models poised to reap opportunities created by the pandemic, like remote working or food delivery, startups must still prove themselves by being transparent about their business strategies and adopting sustainable business models.
“Our overall investment strategy remains unchanged,” he said.
Venture Matters speaks to leading venture capital firms focusing on Asia to understand challenges and opportunities for investors in a post-pandemic world.
Our next article will feature Ondine Capital, ATM Capital, and Future Hub. Stay tuned!