Coronavirus & Southeast Asia VC: Unpleasant surprises

Back in February, Ben Cheah, an associate director at InnoVen Capital, was busy doing credit health check-ups on a few Southeast Asian companies with China links that were potential default risks. Before long, that mandate extended to the venture debt provider’s entire portfolio as business activity in Southeast Asia shut down in response to coronavirus outbreak.

“The team had to scramble to try and readjust how we look at the companies. To borrow a metaphor, we looked to see if there’s a freight train coming towards our companies,” he says.

InnoVen currently has 40-plus Southeast Asia-based companies on its loan book. Many of the founders can only give vague estimates of their near-term revenue projections. It means InnoVen must stay in constant contact with these companies to understand evolving business concerns. The lender expects to adopt a conservative stance in the future.

There is some help available for Singapore-based start-ups. The government has launched an ambitious relief package that also includes capital for investments in start-ups made by local venture capital firms, with TNB Aura one of the first local GPs set to administer the funds. For start-ups in Malaysia, COPE Private Equity has set up a similar a MYR180 million ($41.5 million) investment program. However, they must be shariah-compliant.

In other countries, start-ups must largely fend for themselves. Governments are prioritizing support for micro businesses and low-income workers hit the hardest by the sudden downturn, while traditional banks have always been reluctant to lend to start-ups.   

It doesn’t help that every week brings a new development. Notably, Singapore recently saw a surge in infections among the country’s 300,000 migrant workers that reside in tightly-packed dormitories. With no clarity as to how strong this second wave might be, the government to join its peers in imposing a “circuit breaker” – otherwise known as a lockdown.

Southeast Asia early and growth-stage technology investment data offers few pointers. Indeed, more capital was put to work in the first quarter of 2020 than in the last quarter of 2019, and the March total exceeded the January total. This is the distorting effect of intermittent large funding rounds.

However, one data point can’t be contested: VC firms in the region have more dry powder than ever before, with 500 Startups putting it at $3.9 billion. The money is there to invest if they want to. “They have all raised growth funds of $100-500 million that have not been deployed, they are flush with money,” says Amit Saberwal, founder of local hotel booking start-up RedDoorz. “Valuations are reasonable as well because Southeast Asia never witnessed a bubble like some other markets.”

Amit Anand, a managing partner at Jungle Ventures, echoes this view. He believes the region’s start-up ecosystem as a whole should be able to shake off this first economic shock in its existence. “I cannot imagine what would have happened if COVID-19 had arrived in 2013. We probably would have gotten wiped out,” Anand says. “But now entrepreneurs, companies and funds have enough capital to make them resilient in face of the shockwave.”

Impending distress

InnoVen will watch the actions of these VC investors closely to understand how they rate start-ups in this environment. Sourcing deals is one of Cheah’s many other responsibilities that has currently taken a backseat to portfolio monitoring efforts.

“Because of the uncertainty, the capital that they put out now will be more at risk,” he says. “I think it will be interesting to see what type of company can raise equity capital in this climate. We are trying to answer this question as well.”

Some investors remain wary of supporting start-ups at present. Deepak Shahdadpuri, a managing director at DSG Consumer Partners, who is also based in Singapore, warns that many start-ups looking to raise money in the coming months are likely to be in a quasi-distress state. That might also apply to VC firms as well. LPs in Southeast Asia VC funds vary markedly in terms of sophistication and some might be unable to meet capital calls, though there is no sign of this happening yet.

“All LPs invest in multiple asset classes - private capital is probably one of the smaller asset allocations. [If they default], funds specializing in secondaries will be waiting to lap up the good assets,” Shahdadpuri says.

 

SIDEBAR: Case study - RedDoorz

Amit Saberwal, founder of hotel-booking start-up RedDoorz, doesn’t mince words when asked how his company has suffered following the sudden collapse of domestic and international travel across Southeast Asia. The platform has worked with hotel partners to help Malaysian workers trapped in Singapore, quarantined Filipino returnees, and stranded international travelers in Indonesia, but it’s been a miserable month.

“There are pockets of opportunity but overall, it’s fairly pathetic,” he admits. “Honestly, no one has gone to the office. As of now, everything is at a standstill.”

Saberwal, however, is not a doomsayer. He believes governments will eventually have to re-open borders and travel will resume even if the exact timeline for recovery is uncertain. It helps that RedDoorz has cash in the bank: the company raised $115 million across two funding rounds towards the end of 2019.

The expectation is that markets known for considerable domestic travel will pick up first and the RedDoorz team is constantly discussing the best ways to take advantage of the return to normality. “We’re making sure that when it rains, we do the best rain dance,” Saberwal says. “We are better than most when it comes to funding, at least that reduces the existential risk.”

Currently operating in four countries, RedDoorz had decided at the start of the year to prioritize achieving profitability over chasing rapid growth. December was identified as the target break-even month, but the company must move faster to counterbalance the substantial losses incurred last month. How it does that remains to be seen.  

Despite being caught in the eye of the storm, Saberwal is putting on a brave face. What would be his message for VCs looking with concern at Southeast Asia? “Don’t get stressed. More than the founders, I see VCs are getting stressed,” he jokes. “It’s a cycle and the cycle will get fixed.”

 

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• Topics
• Southeast Asia
• Technology
• Early-stage
• Venture
• Jungle Ventures
• Innoven Capital
• DSG Partners Asia
• TMT
• covid-19
• coronavirus