Jeff (Startup Whisperer)

In the complex and multifaceted realm of venture capital and startups in 2023 post 2022 slow down, emerging markets present a unique set of opportunities and challenges. A significant challenge is the potential diminution of later-stage follow-on funds and a concurrent decline in the quality of later-stage investors. This situation can engender a funding gap for startups in their growth phase and a dearth of strategic guidance. However, through strategic planning and innovative thinking, early-stage funds can effectively navigate these challenges.

When later-stage capital becomes scarce, it can create a funding vacuum that hampers the growth trajectory of startups, potentially leading to a deceleration in the overall startup ecosystem. The decline in the quality of later-stage investors can exacerbate this situation (based on performance and just the law of large numbers). In such a scenario, early-stage funds need to adopt a proactive and innovative approach. Here are some strategies:

1. Strategic Partnerships: Early-stage funds should seek alliances with firstly your limited partners, corporate investors, family offices, or other entities that have a vested interest in the startup ecosystem. These partners can provide not only capital but also strategic guidance, market access, and other resources. Focus and Lean on your Limited Partners, especially those who are financially driven not just strategic.

2. Syndicate Investments: Early-stage funds should consider forming syndicates with other early-stage investors. Syndicates allow investors to pool their resources, share risks, and increase the total amount of capital available for follow-on rounds.

3. Investor Relations: Early-stage funds should maintain strong relationships with existing investors and continuously engage with potential new investors. Regularly communicating portfolio companies' progress and milestones can help attract follow-on investments. 

4. Continue to focus on Capital Efficiency (from 2022): Early-stage funds should work closely with their portfolio companies to improve their capital efficiency. Adopt an advisory mindset builds trust and results.

An Analysis of Founder and Executive Education Backgrounds at Top Southeast Asian Startups

I conducted an analysis of the educational backgrounds of founders at 99 of the highest-funded startups in Southeast Asia. Using Crunchbase as the database and then researched the schools and programs listed for key leaders at each company.

By far the most represented university is National University of Singapore (NUS), with 18 attendees out of 227. No other university comes close, underscoring NUS’s dominance as a pipeline for Southeast Asian startup talent (bachelors). 

U.S. schools are also popular, especially Stanford (6 attendees) and Carnegie Mellon (6 attendees). However, an interesting finding is Harvard Business School (MBA) comes in second with 12 attendees.

Several other insights emerge:

• Within Singapore, beyond NUS, notables include Nanyang Technological University (10 attendees) and Singapore Management University (5 attendees).

• STEM degrees are common from schools across the board.

• US schools beat UK and Australian schools by a wider margin.

• Indonesian founders - ITB is creates more of such founders than University of Indonesia.

This analysis still only scratches the surface. With additional data on companies, founders, executives, and their educational paths, we could develop even richer insights into the human capital flows behind Southeast Asia’s tech innovation and entrepreneurship. Please let me know if you would like me to pursue any further research.

p.s For Parents from Singapore: Go to NUS for bachelors and HBS for MBA - there you go no pressure. You are welcome.

Forewarning: 

I accurately forecasted the tech crash globally and in SE Asia earlier in 2021 (although I was a quarter late (Q3 2022)- I did not predict the the war). The tech industry has seen a major downturn in 2022 due to various macroeconomic factors like rising inflation, interest rates hikes, and geopolitical tensions. While the timing of my prediction was slightly off, the rationale behind the forecast was sound.

The next softer correction is expected in Q3/Q4 2023 due to declining late 2022/early 2023 funding and disparity between performance and valuations. Venture capital funding in tech startups peaked in 2021 and has been declining ever since. At the same time, the valuations of many private tech companies remain very high relative to their performance and growth. This disconnect is unsustainable and will likely lead to a downward valuation adjustment for many startups.

To safeguard your investments and your own startups, consult with trusted advisors, investors, and shareholders on your business growth, projections, and capitalisation strategy. Startup founders and investors should review financial projections and valuation models to ensure they are grounded in realistic expectations for growth and performance. Companies should also evaluate their capital needs and options for meeting those needs if VC funding continues to slow down (this slow down will stretch till end of 2023). Plans may need to be made for extending runway, cutting costs, and pursuing alternative funding sources. There will be instances where existing investors may force strategic options to even cease operations and return capital, be mindful of the rationale and use data and evidence to help with your decision making.

Brace for impact from end of Q2. The effects of reduced funding and more cautious investor sentiment will start to be felt more acutely toward the end of the second quarter of 2023 and into the third quarter. Startups and investors should prepare now for this changing landscape to avoid being caught off guard.

Stay alert. 

Art by Ivan Dubovik

Firstly, let me apologize for this really tardy post. I have been wanting to post this back in late 2019 and again in mid 2021. Startup activity and valuations crept higher in late 2019 due to the launch of several new funds in 2018 in Southeast Asia, followed by more capital inflows from US, Europe, Korea, Japan, India and China.

In 2020, we had a short burst of panic from March to July 2020 but investments restarted with smaller rounds and finally back in full vengeance from the start of 2021. This contributed to the best year ever in 2021 in terms of capital inflow in our region. To top it off we had interests from US SPACs and direct IPOs with companies in Southeast Asia. 

At the moment with the public market correction and uncertainty coupling with the effects of the US inflation due interest rate hikes and the war in Ukraine. There is a fear that this will come to the private markets, and yes it will. Valuations are 50-70% over valued since years before the pandemic.

What are the reasons? I will briefly touch on two.

1. We have not experienced a correction in Southeast Asia since the GFC contributing to a strong growth of new founders and investors in our ecosystem. In addition, without a flow of exits like quick acquihires, M&As and IPOs, many of our companies remain private with mostly paper gains and when IPOs do arise, early investors are cashing out and not invested for growth. As such, the quality of founders and investors reduces over time. This gives rise to undisciplined investments in companies where unit economics and growth rates are blurred between companies that gives venture returns vs those who don't. Finally the pandemic don't help in with the situation as it also gives rise to a postponement of performance and extension of rounds with little to no causation to performance.

2. Compressed funding rounds spread out over a shorter period of time in order to capture market share became more prevalent. If research on market size, adoption and timing is not done well, the execution of the business will be impacted. Overselling of our region's size and growth without relying on real business or consumer drivers affects the speed and consistency of market adoption. Hence some valuations of companies fails to be justified with performance. The region is still an emerging one, its maturity may sometimes be far from what we expect, making business projections difficult to forecast. 

So what do you if you are a founder or investor?

1. For new startup founders - Work on and refine your 12 year plan and capitalization strategy and find valuation comparables that are realistic to achieve. This is not an easy exercise but an exercise you have to do nevertheless.

2. For operating founders post Series A - Speak to Series C and D investors and ask them what are they expect of your business milestones and try to close that knowledge gap.

Besides the usual rhetoric of telling you to tighten your belt and extend your runway to over 18 months, you need to be operating your business at a level that will interest capital providers who have now sharpened their pencils. The silver lining here is there is still a large over hang of venture capital raised in 2020/2021 but trust me the investors will be more stringent going forward. Realign your approach to performance once you are clear of what is expected of you. There are situations when it is too late to turn back, and this will lead you to take a strategic option that unfortunately is the best path ahead for your company, employees and shareholders. 

I foresee higher stress levels for founders in the next few quarters. Do lean on your trusted network of advisors, mentors and coaches to help guide you through whatever is coming. 

If you need help or someone to talk, do reach out to me or the team at Coachable Initiative. 

Keep your heads up, we got this.