Private market for startups getting frothy; correction expected 'soon'

Singapore

THE private market for startups is getting increasingly frothy and might be headed for a correction, warned panellists at the Private Equity Tech Conference on Wednesday.

Jeffrey Chi, vice-chairman (Asia) at Vickers Venture Partners, said valuations are somewhat dependent on what goes on in capital markets. "And we are coming from an environment that's very, very frothy."

Dr Chi pointed out that valuations today are shooting through the roof. "One of the reasons why even though we said one-third of our funds will be deployed in China but in the last fund cycle, we've deployed less than a quarter in China, is because we felt that China valuations were very, very high. I think in South-east Asia, we see similar trends."

This is a global issue, and private markets are due for a correction "fairly soon", he said.

Moderated by The Business Times journalist Sharanya Pillai, the panel also featured venture capitalists Raditya Pramana, partner at Venturra Discovery, Andy Zain, managing partner of Kejora Ventures, Leck Ting Yan, partner at TRIVE, and Vishal Harnal, partner at 500 Startups.

Mr Pramana said valuations at the seed stage have been rising rapidly. One to two years ago, it would have been common to raise US$500,000 to build a product. Now, it is common for pre-product and pre-launch companies to raise a million or more.

At the same time, investors' need to deploy capital is pushing startups to expand to the region prematurely, he said.

Asked whether founders have been paying more attention to building sustainable businesses since the WeWork saga and Uber's less-than-stellar public listing, Mr Pramana said: "I think the market will come into the phase of sobriety when all of the unicorns and all of the much larger companies are having trouble raising... I've been hearing that it's increasingly difficult and there have been bigger liquidity discounts on secondaries. So when that hits, then the early stage will be hit as well."

Touching on whether a downcycle is looming for the region's startup ecosystem, Mr Harnal said part of it is linked to the fundraising cycle of funds. In the last 12 to 24 months, there has been about a billion dollars raised by local venture capital firms focusing on the Series A and B stages, with a few on Series C, he said.

"That capital can't wait. It has an active investment period and it needs to be deployed. They're sitting on cash that affects the IRR (internal rate of return) of those funds."

Mr Harnal added that there is plenty of opportunity at the seed stage, and plenty of angel investors cutting cheques at the early stage for there to be opportunities for these funds to deploy their capital.

"So the question is, are those opportunities going to be attractive enough to keep the ecosystem afloat?"