COVID-19 liquidity crunch puts SE Asia’s VC value-add to the test

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During the last global financial crisis of 2008, none of the region’s largest unicorns – Grab, Gojek, Tokopedia or Traveloka – even existed.

Southeast Asia was just beginning to wrap its head around the very idea of venture capital. In July that same year, Singapore’s National Research Foundation (NRF) had funded its very first batch of venture funds to support early-stage tech startups. None of those VCs is known to be active today.

In short, the COVID-19 epidemic and ensuing market turmoil is the first major crisis for many of Southeast Asia’s venture capitalists. Many are witnessing the last few years of climactic exuberance completely unravel as limited partners (LPs) adjust their portfolios and sky-high startup valuations taper. At a time when cash is king but hard to come by, VCs must prove their “value-add” in good times as well as bad. But are they doing so?

Not all, say founders. 

At least seven Southeast Asian founders and investors told DealStreetAsia in confidence that they have either had their own term sheets pulled by investors or know someone who did. Term sheets are typically non-binding, which means that VCs get away scot-free if they renege on promises to invest. 

“You’re absolutely right, that is happening,” acknowledged Sequoia Capital India’s Singapore-based managing director Abheek Anand. “I know founders who had this happen to them and it is frustrating…Various investors tend to get cold feet for many reasons. If you’re a founder right now, nothing is sacred, except money in the bank.”

That being said, at least six other Southeast Asian ecosystem players also said that they have not seen term sheets pulled from their investors or from within their circles. Several expected fundraising delays to still take place, with one adding that he’s seen “term sheet pulling” happen more frequently in India than in Southeast Asia. While such activity is concerning, it’s unlikely this is as prevalent as many markets outside the region. 

The reason: Asia Pacific’s enormous stash of dry powder. 

In recent years, this region has drawn investors from far and wide to invest, accumulating year upon year of record private capital. According to Bain & Co citing Preqin data, the Asia Pacific region raked in $384 billion of private equity (PE) capital across buyout, growth and venture capital funds in 2019, close to 15 per cent higher than the year before. This uptrend has been a consistent feature since 2014, marking five straight years of continuous PE growth.


Graphic: DealStreetAsia (Data Source: Bain & Co.)

Closer home, Southeast Asia’s venture capital firms have raised large sums too. DealStreetAsia data shows that Southeast Asia’s VCs raised $3.6 billion from investors in 2019, a 68 per cent increase from the year before. The number of funds has risen as well – 34 venture funds in 2019 compared to 19 in 2018. 

This precious pile of cash is likely to soften the impact of COVID-19. LPs with idle cash are likely to keep deploying and funds with ample reserves are likely to keep investing, albeit more cautiously due to the prevailing uncertainties. But overall, the foreboding downturn is likely to be more of a hard bump than rolling off a cliff. 

“We have an unprecedented amount of dry powder in the industry in APAC today, close to $400 billion against an annual investment peak of about $100 billion which would mean there is almost four years worth of dry powder across different types of capital,” said Suvir Varma, Senior Advisor for Private Equity at Bain & Co, during an online webinar.

He added that a significant increase of this dry powder came from venture capital, which also supported much of tech investments seen recently.


Graphic/Source: DealStreetAsia

Sequoia Capital India, Insignia Ventures Partners and Jungle Ventures — all of whom have recently closed sizeable funds — told DealStreetAsia they will continue to make new investments for the rest of the year. However, all declined to provide specifics on portfolio allocation, an aspect which will grow in increasing importance if COVID-19 decides to stick around much longer than anyone expects. 

“It’s often been said that this crisis is a test for founders, but it’s also a test for investors,” said Tan Yinglan, Founding Managing Partner at Insignia Ventures Partners. “We get asked a lot about capital allocation for our portfolio, but really the most valuable resource a VC can give to its companies is time.” 

This refers to time spent getting to know exactly what each company needs, which can translate into the right investor introductions, business partnerships, and money in the bank that ultimately buys time for the companies to survive and grow out of the crisis,” explained Tan.

Jungle Ventures shared similar sentiments.

“It really depends on how long the lockdown will last and what the recovery looks like, particularly in the back half of this year. It’s kind of early to call, but I think at this stage I would say we’re probably not dialling down new investments for this year,” said Jungle Ventures managing partner David Gowdey.

Ultimately, how VCs respond during COVID-19 will depend on multiple factors including how recently they’ve been capitalised, portfolio makeup and LP base. But VCs are all too aware (as are startup founders) that capital isn’t about to flow as freely as it did in previous years. Fund managers across the board – regardless of how much money they have in the bank – will have to look into stretching their dollar this year and maybe even the next.

At the same time, venture funds also have to strike a fine balance between preserving their existing portfolio while staying active in the market.

Pursuing new investments means eating into long-term capital for existing companies. Not doing so will set tongues wagging. Rolling back any kind of investment, whether future or existing, will be something VCs will be cautious not to show to the public.

Startup founders are all too aware of this. But during such times, most will be quite happy to just have enough to tide through the next 6-12 months financially, operationally and emotionally.

“Not stepping down is the new stepping up,” shared Rohit Jha, CEO of space technology startup Transcelestial. “As long as investors are committed and not stepping down citing reasons like COVID-19, I think that’s okay. This could be in the form of fair bridge rounds if portfolio companies are facing issues or working hard to find government schemes or policies to help ease the burden for startups.”

Reynazran Royono, CEO and founder of Snapcart, said: “So far I can vouch that our investors have been tremendously helpful in our business, supporting us across many fronts in investments, structure, business development, operations and legal. They definitely are not letting us hang out to dry. We’ve asked help and they’ve been giving those promptly.”

Royono adds that he also actively taps beyond his immediate investor base, including networks such as the Endeavor Network for extra material, coaching and webinars.

Until then, caution is likely the mainstay for 2020. The days of overly-exuberant, almost frivolous venture investing are over. VCs are heading back to fundamentals, as are startups. “Spray and pray” is unlikely to be a sound strategy for VCs moving forward in this climate too.

“VCs don’t want a reputation of signing term sheets and withdrawing,” commented Lee Bagshaw, Partner at Simmonds Stewart on term sheet pulling. “The impacts of COVID-19 are already well publicised – devastating on the global economy. It’s more likely that we’ll see fewer term sheets signed in the first place, rather than VCs signing and then changing their mind.” 

Everyone wants to be here for the long haul. 

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.