Jeff (Startup Whisperer)

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.

Here are some questions you can try with your kids to have a healthy exchange after picking them up or coming home from school.

1. What happened in school today?

- this trains observation and descriptive abilities

2. What did you perform well today?

- encourages no matter what is deemed good to be shared and we can encourage them to do better

3. What did you learn today?

4. Are there anything you don't know or don't understand today? Anything disturbing or feels weird?

5. Are there areas mom and dad can help you with?

- help to figure which areas they can solve themselves and which areas parents can help solve

I have been asked many times about smaller startup ecosystems in Southeast Asia what they should do to generate large technology startups and thus attract more foreign direct investment in their countries. After yet another roundtable with a government entourage and local and regional ecosystem leaders, let me share a few thoughts. 

Start by using historical data and research to give you a place to start. We have over 10 years of startup and funding data to study in Southeast Asia of which I will not cover in depth, but for those who are keen to chat about using data driven strategies to run your fund please contact me.

Here are some high level data for you.

In SE Asia, most of the largest valued companies are:

• Global aspiration - 8% (most are B2B)
• Indonesia only aspiration - 40%
• SEA regional aspiration (usually with Indonesia as one of the aspired market) - 30% (1 in many)
• SEA ex-ID Squids - 17% (many in 1)
• SEA ex-ID only aspiration - 3% (hardly funded nor grow fast enough - 1 in 1)

With this as a backdrop, and the fact that the founders are aware that they are more than likely a copycat (99% are).

What should you do then?

1. Gather Knowledge

• Understand your environment in your beach head market or markets you are targeting and figure out your problem statement, consumer and business drivers and timing
• Figure if you and your team are the ones that are capable to address these market(s)
• Then focus on product and growth metrics while serving these markets and try to move from the bottom left to the top right corner of the chart above

We (founders and investors) have a fundamental lack of knowledge flow between capital providers from different stages. I would recommend more open conversations between accelerators and Series B to D capital providers to really understand what they are looking for. We also need to speak to other founders they are likely to copy around the world to learn what not to do in their businesses. Lastly, we need to learn from others in both developed and developing markets and understand what drivers are needed to help startups to be successful. Everyone needs to gather knowledge.

2. Market Mapping

If you are able to go global and compete with the best in class, likely aiming to be the top 4 in the world, go for it. However, from historical data, the probability of that happening is low but not impossible.

The higher probability of where you are now or will be are the 2 bolded options above.

First, if you are not addressing Indonesia from day one, you need to start planning your regional plan from day one as there will be other copycats in the region as well with a head start because they are either already based in Indonesia, or has raised more capital and/or launched in multiple markets earlier than you.

Second, be a Squid

This is where most startups get stuck, they are there but not quite. Look to be a squid with 2 tentacles and 8 arms in your home country, and plan to extend 2 tentacles to potentially 2 countries and 8 arms into potentially 8 different business lines. This way, your total combined addressable market will be larger than you originally sought out to do.

Hope this helps. 

Happy New Year!