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.