Intro

The economic downturn caused by the COVID-19 outbreak could be a "reset button" for lofty startup valuations in Southeast Asia, while presenting an opportunity for venture capitalists to invest in fundamentally sound companies at a cheaper price.
The valuations in late-stage funding may be still high, but "there will be a lot of risk-mitigating structures in these deals that you will not hear about, but which will become quite prevalent,"  

- Kuo-Yi Lim, co-founder and partner at Monk's Hill Ventures.


Venture capitalists The Business Times spoke to said they expect a softening in valuations which had been climbing over the past few years.

"He who holds the gold, makes the rules," said Vertex Holdings chief executive Chua Kee Lock, echoing the words of his boss back when he was cutting his teeth as a young venture capitalist.

With the current crisis putting pressure on startups' cash flow, and some venture capital firms having recently raised larger funds, it is clear where the bargaining power lies.

"(Investors) will take the chance to negotiate," said Mr Chua.

A startup's increase in valuation from its previous funding round is typically pegged to the company's growth. But in the current climate, survival replaces growth as the priority.

"The current environment, however, could enable the market to correct itself with well-managed tech enterprises thriving over companies with less sustainable business models," said Chu Swee Yeok, CEO and president of EDBI.

While market watchers have observed a slowdown in funding activity since the virus outbreak, investors are still expected to be on the prowl for good deals.

"I think if the business quality is good, investors like Sequoia are going to be very active in these markets," said Abheek Anand, managing director at Sequoia Capital (India) Singapore. "Valuations are lower, and investors are looking for the best quality businesses. People are making smart choices around business models. It's a terrific time to be investing."

While a general softening of valuations is expected to bring more sanity to the market, a handful of high-valuation deals are likely to still go ahead as large amounts of dry powder chase high-profile, desirable startups.

Meanwhile, late-stage companies might find themselves in a bind when seeking funding. These companies tap into investors such as hedge funds and private equity funds, which have exposure to the suffering capital markets.

The valuations in late-stage funding may be still high, but "there will be a lot of risk-mitigating structures in these deals that you will not hear about, but which will become quite prevalent," said Kuo-Yi Lim, co-founder and partner at Monk's Hill Ventures.

Amid the current downturn, investors hungry for a good price would have to be careful not to become too predatory. "We have to be fair to entrepreneurs. We want to invest at a good price, but we don't want to unnecessarily squeeze the entrepreneur because beyond a certain point, there's no meaning for the entrepreneur anymore, right?" said Mr Chua.

"What's the point of investing in a company where the entrepreneur is not motivated?"

Written by Claudia Chong.

Read the article on The Business Times.

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