No more 'burn, baby, burn': VCs expect more caution in 2020

Singapore

THE South-east Asian startup party is far from over, but venture capital firms expect that the music may hit a note of caution, as investors emphasise business fundamentals over pure hype.

2019 brought a bumper crop of mega funding rounds in South-east Asia, particularly for regional unicorns such as Grab, Gojek and Bukalapak. The early-stage funding scene also remains vibrant, Michele Daoud, a partner at Monk's Hill Ventures, told The Business Times.

But the days of "burn, baby, burn" may be over, with the fallout from WeWork reminding players of the importance of profitability, reckons Chua Kee Lock, managing partner of Vertex Ventures South-east Asia and India.

Jeffrey Seah, a partner at Quest Ventures, similarly thinks that 2020 may bring more mindfulness and perhaps even more rational valuations.

BT spoke to the three venture capitalists for their reflections on the 2019 startups scene and how the coming year will likely shape up.

At which investment stage have you observed the most activity in South-east Asia in 2019? Are there any segments where valuations seem to have peaked or are peaking?

Mr Chua: The pre-A and Series A stages are the most vibrant investment stages. We are also seeing more activity in the Series B and C rounds. On valuations, it is always a cycle - valuations go up when FOMO (fear of missing out) strikes, but valuations go down again when the momentum players leave the market.

Ms Daoud: We are still seeing significant activity in the seed and Series A stages. At the same time, we're seeing more deal flow for Series B and venture funds being set up for Series Bs and beyond. While specific verticals in certain markets like Indonesia have witnessed valuations increase, valuations remain reasonable overall across the region.

Mr Seah: The investment stages have seen "transgression": what used to be demarcated by product and growth metrics is now overshadowed by market hype, like in Indonesia, and there are multiple rounds of raising in one stage.

How is the exit market looking in South-east Asia? Do you see a sizeable cohort of IPO candidates in the region? Or might more opt for the mergers and acquisitions (M&A) route?

Mr Chua: The recent unfortunate hiccups of technology initial public offerings (IPOs) may have put a dampener on the IPO market in the short term. M&A is always an alternative for startups. This, of course, has to make financial sense for both the company and investors. In recent times, we also see interest from strategic investors to buy shares from existing shareholders through secondary transactions.

Ms Daoud: While the exit market is still relatively nascent in the region, the M&A activity has been picking up nicely and has already overtaken that of India, with regional unicorns joining international players as active acquirers for tech companies.

We do expect the exit market to progressively include more IPOs as the ecosystem continues to mature. For example, the Nasdaq and SGX's Collaborative Listings Agreement will likely pave the way for more IPO exits in the future.

Mr Seah: The challenge remains for the stock exchanges to grow their (investor) bases and for their traditional bases to be open to tech IPO valuations. Trade sales and M&A will form the majority of exits, as enterprises step up their digital transformation drives.

What are some other major trends you've observed in the South-east Asian venture capital scene in 2019?

Mr Chua: Increasingly, we are seeing more innovation around the financial sector. Singapore started the ball rolling in Asean last year by announcing its plan to release up to five licences for digital banking, and many countries are expected to do the same shortly. This will likely result in increased demand for technology solutions or innovation in the region.

Ms Daoud: We're seeing a wave of overseas returnees who are fuelling the regional ecosystem by bringing back their tech and entrepreneurial expertise to the region. At the same time, we are witnessing second-time entrepreneurs and tech executives who are venturing to South-east Asia to build their own companies.

Mr Seah: (There is) a more mature and mainstream lens in evaluating venture ideas as going concerns, versus the past cavalier "spray and pray" approaches to drive coverage and seize market share.

Having a 'path to profitability' seems to have been a catchphrase in 2019. Do you think that investors will demand a greater emphasis on startups' bottom line before investing?

Mr Chua: The "burn, baby, burn" approach is not a viable business model. We have always reminded our entrepreneurs that while it is important to focus on building a differentiated and competitive solution, it is equally important to create a long-term and sustainable business. Therefore, getting to profit should be the ultimate goal, albeit not immediately.

Mr Seah: The traditional health metrics of 'going concern' businesses are increasingly being adopted in the VC world in light of the less-than-desirable US IPOs of some of the unicorns.

Ms Daoud: We have always been disciplined in our investment approach and invested in companies with sound business models. . . Ultimately, prioritising speed over efficiency should be a contextual choice depending on the stage of both company and market. Founders focused on creating value by building businesses with strong fundamentals will always prevail.

If you could sum up your outlook for the 2020 regional venture capital scene in a short phrase, what would it be?

Mr Chua: "Cautiously optimistic": Investors are more cautious now and more selective. However, innovation continues in good times and bad times, and for Vertex, we will continue to actively invest and support startups in both good times and bad.

Mr Seah: "Maturing and more mindful". Less, in terms of lower valuations, might just be more.

Ms Daoud: "Accelerated technification". We will continue to see a retooling of various industries by smart founders tackling the biggest, most complex problems. They will either find a better mousetrap or build a whole new one that will change the lives of many.

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