As we start to emerge from the global panic and economic downturn brought about by the COVID-19 outbreak, start-ups have found themselves especially hard-hit. In this article, we explore some of the trends we are seeing for start-ups in the Southeast Asia region and some key considerations for the months to come in this uncertain climate.
Investment deals in Southeast Asia are expected to continue in the months ahead. Many Southeast Asia-focused venture capital funds (VCs) completed their fund raising prior to the COVID-19 outbreak and as a result, are well capitalised. Valuations in Asia have also yet to reach the levels typical in the US and Europe. However, in these uncertain times, VCs will be more demanding of start-ups when it comes to proof of concept and suitable product-market fit. This is also the case for their spending plans, cash needs, staff utility as well as the relevant product consumption landscape, which many predict will see a shift in the years following the pandemic. We can also expect lower valuations, smaller funding rounds and alternative modes of funding such as venture debt and convertible loans for future investments.
SoftBank's recently announced plan to sell over US$40 billion in assets in the thick of the COVID-19 outbreak, will set off a chain of divestments, acquisitions and consolidation. M&A activity may prove to be the perfect marriage between start-ups grappling with cash flow and financing crunches, and larger enterprises looking for cheaper opportunities for strategic consolidation. These sales could be to unicorns which remain well capitalised, or even to large corporates – each looking either to acquire competitors, or to widen their product offering. Start-ups will need to be aware that these exit options however would be at lower valuations and less favourable terms than before.
While exits in the form of initial public offerings are likely to be rare in this climate, secondary sales may be the way forward for shareholders seeking an exit at this time. This trend seems to already have started in the region with minority shareholders of Grab and Gojek looking to the private secondary market to cash out on their shares.
Tougher times will inevitably see businesses fall prey to debt, with some even folding. Singapore robo-advisor, Smartly, is among the latest to decide to wind down operations amid the COVID-19 outbreak. Singapore has been taking steps in recent years to solidify its position as the leading corporate debt restructuring hub in the region, having enacted new legislation incorporating several features of chapter 11 of the U.S. bankruptcy code. We may well see start-ups in the coming months making use of the augmented debt restructuring framework to salvage their businesses in the aftermath of the COVID-19 outbreak.
The COVID-19 outbreak, termed the 'black swan of 2020' by Sequoia Capital, has overturned nearly every aspect of business. Start-ups face new challenges such as dealing with national lockdowns and related logistical issues, while being compelled to tighten the purse strings. However, a look back at some past economic downturns show that a number of the unicorns of today were in fact born out of global crises – Alibaba's big break came from the SARS outbreak of 2002, and the likes of Uber and Airbnb arose from the 2008 financial crisis. In the months to come, COVID-19 will undoubtedly deliver both losers and winners, and start-ups in the region that manage to stay prudent and remain alert to innovative opportunities and solutions will find themselves truly capitalising on this new normal.