I attended a webinar on how VCs tackle investments — hosted by Le Yu Ong, Director of Equity Capital Markets at SGX, featuring Kay Mok, Managing Partner at Gobi Partners and Chin Chao, the CEO of Innoven Capital. A really insightful session — as always, I thought I’d do a quick summary of some of my key takeaways. Before I jump in, here is some background:
Gobi Partners is one of the first venture capital firms with a Pan-Asian presence across North Asia, South Asia, and ASEAN with over US$1.1 billion in assets under management (AUM).
Singapore Exchange Limited is an investment holding company located in Singapore and provides different services related to securities and derivatives trading and others. SGX is a member of the World Federation of Exchanges and the Asian and Oceanian Stock Exchanges Federation.
Innoven Capital is Asia’s leading venture debt and lending platform providing debt capital to high growth innovative ventures primarily backed by venture capital firms.
Key Trends:
In 2019, we saw a couple of IPOs, including Uber and WeWork (not exactly an IPO), but in general, the market was slowing down
Smartphone technology has been the driving force for growth in the Venture Capital Ecosystem in the past decade, and we are currently at the tail end of the smartphone revolution.
The pandemic has shutdown both supply and demand. Moving forward, demand will be harder to restart — it has been destroyed, and is incredibly difficult to resynchronize across the various countries, with borders reopening at different periods. China may see the most growth first, since they are self-contained, and has its own supply chain.
The 3rd Industrial revolution is coming to a close, and are moving towards the 4th one, which focuses more on 5G, AI Apps, manufacturing and more.
The general sentiment is that the current markets are raw, and everyone is unsure of who the winners of this pandemic are, and demand will remain dampened for the next 2–3 years.
Down rounds are going to be more commonplace in the coming months.
How has the due diligence process changed?
With the pandemic going on, investors are unable to travel down to the physical office and get a feel of the founders, team, office, and more. Funding rounds are taking longer than in the past, and equity rounds are slower, with deals being stuck in the pipeline for a longer period of time.
How has this impacted your portfolio companies, and are the roles of the VCs changing (with regards working together with their companies)?
Almost 90% of companies have been impacted either directly or indirectly by Covid-19, with sales cycles have got longer, and customers requiring longer durations to pay their dues.
We are seeing a shift, from social to antisocial consumption. Think Netflix, Disney+, Youtube, and more.
Transportation habits are changing — people are shying away from ride-sharing services and are turning towards private modes of transportation. This includes buying more cars, hence the growth in companies selling used-vehicles, as well as private jets, which are now half the price as compared to before.
What would make a startup desirable to Investors?
With the heavy reliance on media as a revenue generator, startups that are able to scale by relying on a business model that does not depend on advertising revenue would seem extremely promising.
Existing investor base, and company’s cash runway
Ultimately, the team and business model are the most important
What about exits?
Exits take time. Companies on average will take 8–12 years to scale before they consider exiting. As such, investors who are looking at companies who are just starting out today should have a longer horizon, as the landscape would be vastly different a decade from now. Instead, focus on the dynamics of the founding team.
If you are a startup that has raised funding in 2019 or early 2020, your valuation may be impacted in the coming months — don’t forget, exits are dependent on valuations. If you want to raise funds, do your homework on where the firms are in their investment cycle, etc. Valuations in SEA are becoming exceedingly aggressive, and capital is being shifted across various asset classes, with a heavier focus on the technology sector.
In Southeast Asia, exits tend to be in the form of M&A, since the startups are generally market-driven. You usually create value in SEA if there is strong operational capabilities across the region. Instead of 0 to 1 innovation, startups in SEA focus on application of tech instead of developing our own. Hence, successful startups in SEA tend to be those that have been able to build a regional platform with footprints across the region, making it difficult for existing tech giants to come in, leaving them little choice but to acquire.