Tech crunch: Bridging the Series A gap

America's venture capital community has been preoccupied of late by talk of a "Series A crunch," whereby Silicon Valley start-ups struggle to bridge the gap between seed-stage funding and a second round of institutional investment. Growth companies in Asia find themselves in a similar position. 

"Asia is a maturing market so a lot of the money available has been at the seed stage," says Vinnie Lauria, co-founder of Golden Gate Ventures, a Southeast Asia- focused start-up accelerator based in the Singapore and Silicon Valley. "Once portfolio companies need to do a Series A round there aren't a lot of people to turn to." He isn't optimistic about entrepreneurs' prospects over the next 18 months.

AVCJ Research supports the idea that Asia could well be experiencing Series A crunch. Since 2010 the number of venture capital investments under $3 million has increased by 20% to more than 400 deals. At the same time, transactions between $3-5 million, the traditional sweet-spot for Series A, have dropped by 33% to fewer than 100. The contrast is so pronounced that in 2012 deals under $3 million where at their highest in four years while those investments in the higher bracket were at a four-year low.

"We have definitely seen it across Southeast Asia," confirms Frederic de Bure, a partner with IDG Ventures in Singapore, which typically targets Series A rounds. "Around 18 months ago, you would see many more investors willing to go into a Series A round with us, and they felt comfortable taking that risk. But in the last nine months we have seen a retrenchment in appetite for guys who are traditionally Series A investors."

De Bure blames this decline on greater uncertainty at the broader macroeconomic level compared to 6-9 months ago, which has put pressure on GPs to take less risk.

Digestion problems

Another contributing factor is that there has been so much investment at the seed stage that there are simply more companies seeking Series A funding than in the past. It comes as no surprise that the need for early-stage institutional support is most acute in the technology sector: the computer and IT sectors accounted for 46% of all sub-$3 million deals by value in 2012 and 43% by volume.

"I think it is very simple," says Chris Evdemon, a partner with Beijing-based incubator Innovation Works. "We had a couple of amazing years in 2009 and 2010, a once-in-a-decade opportunity where we had the whole mobile internet sector opening up. Every VC covering the China market jumped onto it and it made for an over-heated environment."

Evdemon likens the drop off in the series A investment to the the calm after the storm, anticipating a rebound in investor confidence as company valuations rationalize. "When put it in context it is a very natural trend but if it is looked at in isolation that's people start to get worried," he adds.
The counterargument is that there is no shortage of capital at all and would-be Series A investors - in China, at least - are being put off by the lack of a clear exit channel.

The US IPO market has beenmore or less closed to Chinese listings, due to investor suspicion of small- to mid-cap companies for nearly two years. The bourses in Hong Kong and mainland China offer little respite for tech start-ups because listing candidates are expected show several years of profitability. Even if the profits are there, the waiting list for mainland IPOs is long. 

"It is a shortage of visibility of liquidity; you simply can't forecast the exit timing," says Gary Reischel, founder and managing partner with Qiming Venture Partners in Shanghai. "This means there is a disincentive for large early stage investors when you consider the amount of time required from the time of the initial investment until you can take the company public."

Into the breach?

So who is filling the gap in funding? One trend has been for larger investments to be made at the seed stage is through so-called "super angels," a relatively new addition to the Asian start-up landscape. Jungle Ventures, which launched its $10 million super angel fund last October, did so with a to view supporting go-to market plans of investee companies. But sometimes companies need more than just cash.

"I suppose they can be one way of bridging the gap and from a funding standpoint they are sufficient," says IDG's de Bure. "But what they don't provide is the experience and knowledge of a traditional venture capital fund. It is not just about the money, it is the network they provide."

The flip side is that the Series A crunch may sober up Asia's venture capital industry. While there may be a return to early investment euphoria as confidence recovers, some hope the crunch may lead to greater restraint in future. "In bad times you have to pull the belt tighter and instead of doing ten investments, you may do five," says de Bure. "It just makes you focus on your returns and mitigate the downside even more so than in the past. It is not a bad thing from a fund perspective."

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• Topics
• Venture
• Investments
• Technology
• Greater China
• Southeast Asia
• TMT
• Venture
• IDG Capital Partners
• Innovation Works
• Qiming Venture Partners