Discipline is the name of the game as startup valuations soar
Singapore
A YEAR of shake-ups in the venture capital (VC) industry has spurred VC firms in South-east Asia to train a watchful eye on rapidly rising valuations.
It is no secret that the startup space moves at the speed of light compared to other industries, owing to the nature of tech disruption and the abundance of capital backing company expansion.
So while venture capitalists were waxing lyrical about the potential of tech startups at the start of 2019, the party quickly ground to a halt when big-name tech firms headed for initial public offerings (IPO) opened up a Pandora's box of lofty valuations and questionable business models.
"Investment discipline remains more important than ever in an environment with emerging new domestic and foreign funds expanding into the region," said a spokesperson from VC firm Openspace Ventures.
"In the US, the largest tech companies such as Uber, Pinterest and Slack went public in 2019 after a long gestation period in the private market. Their pressured stock performance together with high profile debacles such as WeWork has refocused the market's attention to long-term business model sustainability, the cost of high growth and the importance of healthy governance."
The spokesperson highlighted that South-east Asia has seen a surge in international investor interest, as a result of the ongoing challenges in the US, China and India.
"There are also lots of new growth funds coming into the market - it would be interesting to see if fund flows go beyond Singapore, Indonesia and Vietnam."
The wave of exuberance in South-east Asia has cast the spotlight on startup valuations, with some industry players predicting a correction in 2020. Christopher Quek, managing partner of VC firm TRIVE, called valuations "over-rated".
"It's no celebration for those who raised another round of funding, unless there is a clear growth in earnings," said Mr Quek, who has passed on deals in 2019 that he found had unsensible valuations.
Many new categories of startups have been created, he said. "While these startups have great potential to impact society positively, the ability to scale and shift the product from novel to mainstream is very challenging. I have learnt not to get involved in things which do not have immediate product-market fit, as it will be difficult for the startup to survive in the long term."
To be sure, investors remain optimistic about the potential in South-east Asia, where slow historical economic growth and underdeveloped infrastructure means many opportunities are still untapped.
And the focus is no longer just on investment returns.
"Over the last couple of years, more and more investors are keen on environmental, social and governance (ESG) investing, especially at the early stages," said Huang Shao-Ning, founder and chief angel of AngelCentral, an angel investment network based in Singapore.
Ms Huang said that beyond impact and sustainability investing, ESG considerations look at responsible businesses - that is, how a business conducts itself and its impact on society and the environment.
"On the AngelCentral front, quite a few of our members have come forward and asked if we can support their impact investment intentions but in the same breath, they ask if there are many people like themselves who could invest together in this area. So the first thing we are planning is to hold a learning forum on this topic," she said.
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