Tough funding terms can hinder start-up growth - forum

“When high profile investors get burnt, people come out with an arsenal of deal terms – draconian default provisions where they can reach into the founder’s equity, put options that enable them to recover their investment,” said David He, a partner at Gunderson Dettmer.

“Part of it is GPs wanting to go to LPs and say they did everything they could, everything we do has downside protection. But the terms do not get better. If you are layering put options and redemption rights into your Series A, what are the Series B and C investors going to ask for?”

Governance has been thrust into the spotlight in Southeast Asia after a fraud investigation at fashion e-commerce platform Zilingo – which has received significant VC backing – prompted the removal of the company’s CEO. He noted there are situations where it pays to be heavy-handed, but in others, there doesn’t have to be a shareholder agreement or a negative term sheet.”

David Gowdey, a managing partner at Jungle Ventures, agreed it is vital to ensure founders start off with a fair set of terms to maintain alignment of interests. While in the past some angel investors in Southeast Asia have imposed punitive terms – resulting in Jungle and others renegotiating and repackaging deals – the introduction of standardised documentation has helped.

“When you get to the Series D and E, if a founder gets a good outcome we get a good outcome. It is all about setting them up for success, so that terms are fair and equitable when raising subsequent rounds,” he said. “Late-stage investors focus on downside protection. They always want what early-stage investors got and it gets worse every time.”

Approximately USD 16.4bn was pumped into Southeast Asia-based technology start-ups in 2021, more than three times the 2020 total, according to AVCJ Research. Growth-stage deals accounted for USD 10.1bn, roughly equal to the previous four years combined.

The pace has dropped off somewhat in 2022. Tech investment in the first half of the year came to USD 6.3bn, with a near 50-50 split between venture and growth. Investors and founders claim that the prevailing growth-at-any-cost mentality has been replaced by a focus on cash burn, business model sustainability, and realistic sightlines to break even.

“What has changed is how we look at the competition – they are not as aggressive as before. Some are running out of money, and they realise that a quick IPO isn’t happening. They have to focus on building a real business,” said Aaron Tan, co-founder and CEO of automotive marketplace Carro.

Last year, Carro closed a USD 360m Series C led by SoftBank Vision Fund 2. While Vision Fund is renowned for encouraging start-ups to scale at speed, effectively overwhelming rivals, Tan said “they are more flexible than you might think.” Carro has discussed pace of deployment with investors and whether it should be faster, but Tan stressed there is a desire to grow profitably.

Andrzej Ogonowski, co-founder and head of platform at GrowSari, a Philippines-based start-up that helps small businesses digitise retail operations, added that prioritising unit economics from the outset had made fundraising more difficult. The recent change in mindset is “more in our comfort zone,” he said. GrowSari recently enlarged its Series C to USD 77.5m.

Asked to identify issues that often prevent start-ups achieving scale, He and Gowdey highlighted agility rather than availability of capital. “You have to make sure you have a management team that can move quickly – you don’t want to have precedents that create gridlock,” said He.

Gowdey added that Jungle always assesses the ability of a founder to recognise and adapt to the market environment. He pointed to Flickr and Slack as examples. In each case, founder Stewart Butterfield set out to build gaming-related start-ups. A photo storage system for game developers became Flickr and a developer coordination tool became Slack.

“Often the business you end up with is not the business you started with and if you are rigid in mindset you will fail to see these opportunities,” said Gowdey, who previously led international corporate development and M&A at Yahoo, which acquired Flickr in 2005.

“It could be a complete pivot, or it could be an alternation to your business model, like charging people in a certain way or hitting a bigger market.”

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• Topics
• Southeast Asia
• Early-stage
• Expansion
• Technology
• Singapore
• SVCA
• TMT
• Jungle Ventures
• Gunderson Dettmer