In DealStreetAsia’s latest webinar on July 30, we asked East Ventures co-founder and managing partner Willson Cuaca to share his perspective and experience on the impact of the COVID-19 pandemic on deal-making, valuations and fundraising in this region.
Cuaca, unarguably Southeast Asia’s most prolific investor, spoke with DealStreetAsia’s Kristie Neo on how his firm is supporting its massive portfolio during the ongoing crisis, the challenges of investing during a pandemic and how the second half of the year will more accurately reflect the after-effects of COVID-19.
Watch the video of the webinar or read the transcript below, which has been edited for brevity and clarity.
Kristie Neo: Willson, you are an early investor here in Southeast Asia. With regards to your investment approach and how you’ve been supporting your portfolio companies, how has the experience been like over the last two months?
Willson Cuaca: We look at this crisis like a war, and there’s a clear distinction between peacetime and wartime. During peacetime, before COVID-19, we were one of the most active investors. That also means that during this crisis, we have a lot of problems. We want to make sure that we can help our startups. So, we have done this in a systematic way.
The first thing that we want to ensure is the mindset of the management team and the founder. The median age of our founders is about 24 or 25. During the Asian financial crisis (AFC) or even the global financial crisis (GFC) in 2008, they were probably still in school. None of them have actually been through something like this before.
It is very unfortunate, but where you live matters a lot. For example, in Singapore, since February, they have been pretty strict when the Wuhan virus started popping up. There were restrictions on travel from China. But in Indonesia, it was pretty relaxed in the beginning. How the government reacts actually translates to the people on the ground. In Singapore, we have been a bit cautious, while in Indonesia everybody is still pretty chill.
I was in Jakarta at the time of the AFC and saw how things were really bad on the ground. I was in Singapore in 2008 through another crisis. But this [COVID-19] is not just an economic but a humanitarian crisis. We have taken a very conservative position. I asked my team to use the analogy of World War III for this crisis and try to understand how people survived through World War II so we know what we are going to do.
We have made sure that the founders have a good mindset to understand this crisis. Not everybody has concurred. Some of them thought the crisis will go away and that we will recover pretty easily. Others thought it wouldn’t come to Indonesia because of some public statements that claimed Indonesians are immune to this sort of virus.
With those that understand the crisis, we have gone further. We ask them how much money do you have, and what is the monthly burn? Divide that and you get the runway. Can you make sure that you have more than 18 months of runway? But for managements or companies who do not recognize the crisis, there’s no point talking for too long. Because if you drill deep into their plan, it won’t be aligned with what we are thinking.
Neo: Do you still see a difference in reaction between founders in Singapore and Indonesia?
Cuaca: There’s definitely a different reaction. We focus more on Indonesia because 80 per cent of our founders are located there. Most of the early stage [deals] are actually in Jakarta.
In Singapore, we invested a lot in the growth stage. The mindset is more mature since they recognize the situation and react quickly. How you survive depends on your response more than the sector or cash. One of the things that a lot of the founders miss is accounts receivables. You have to assume that you cannot collect money if the crisis is getting worse.
We talked about this in early March. We did a health check and put in place a systematic way to monitor companies and ensure that they implemented it. But it’s very difficult because not everybody has gone through a crisis before.
We make three assumptions: The first is that revenue drop off will be 50 per cent and you will be left with only 25 per cent or zero revenue. Based on the cash in the bank and no accounts receivables, how long is the runway? To make sure you have more than 18 months, first, you have to remove the fat: marketing, travel, any unnecessary expenses to bridge the highway.
Then you have to eat less: start cutting the salary of the top management, slowly go down, if necessary, and then ration. This probably is the worst one – that we try to avoid if possible – layoffs. Please make sure that you understand when to trigger the button. This is where the completion date becomes very important. Because even if you plan it, it takes a while before the effect of cost-cutting really affects your P&L.
A company may not need to do it immediately because its revenue may not have dropped yet. It may still be at 80 per cent and not yet 50 per cent. But you have to get ready for when your revenue is 25 per cent. By doing this, all the founders know what to anticipate when the crisis worsens.
All founders have their own bias and live in a bubble sometimes. If there is good news, they love to be associated with that. If its bad news, they think it won’t happen to them. It is human nature. But such bias is risky sometimes. This is where we as an investor have to guide them and make sure they think objectively about the situation.
Once we deploy the 18-month runway, we tell them, ‘Don’t think about fundraising.’ Because during the crisis, it is very difficult fundraising. Definitely the upcoming investor will press on the valuation. In any war, you have to try to survive. And if you do, you can cut. You are injured but can still recover if you have the muscle. We also start monitoring them monthly or weekly and in some of the worst cases scenarios, daily.
Because of this response, this is the busiest period in my VC career. And Zoom doesn’t help. Since you can call a meeting easily, in a day you can have twenty 15-minute meetings.
Neo: You mentioned that you think 18 months is an ideal scenario in terms of the runway. How many of your portfolio companies have actually achieved this?
Cuaca: Not everybody will get to 18 months, but everybody has to prepare to be there. First, it has to be identified as the target that they want to achieve. If they can’t go 18 months, then we go over the next options.
Are we going to do fundraising? What are the capabilities that we have? We go over the unit economics and cost structure to see if there is a way for us to repurpose the capability that they have built prior to COVID-19. And then, what are they going to do with that capability?
There are three types of startup impacted by COVID-19 within our portfolio. The first one is badly impacted, and this category includes retail, travel, etc. The second is slightly impacted in the B2B sector – they cannot do project completion or collect money. The third one is actually positively impacted by COVID. Businesses like media companies, education, healthcare, logistics and e-commerce.
Not everybody has to cut [but] only those badly infected. Then you have to be mentally prepared to embrace the storm.
Neo: In terms of capital deployment, what will this mean for you?
Cuaca: Instead of looking at firms sector by sector, we try to understand the founders and management team’s response. If they responded right, it will be worth a double down. Traveloka, for example – at one point, the business was going down below 10 per cent. But the way they responded, looked at their cost structure, it is pretty inspiring. And so they were able to raise subsequent rounds. The response is very important and not just the sector. You still have to think, are these growing numbers a short-term phenomenon or will it last after COVID-19? The response and reaction of the management team is the key.
Neo: What’s interesting about Traveloka is that they are now raising at a lower valuation, not surprising since it is travel related. But what does that mean for you as an investor?
Cuaca: Having a portfolio is like having children. It is like a child having a very difficult exam. You don’t penalize them because it’s not their fault. But you encourage and help them to go through the exam.
Neo: Have you encountered times where founders get caught in the bubble as you mentioned earlier? How difficult is it for someone like you to be alongside them in that situation?
Cuaca: Capital is the last thing that we talk about. It’s about how we guide and coach through this crisis. The mindset, the response, the action are the key – capital is just a tool.
You have to over-communicate and make them listen to you. Send them news articles on how bad things are and make them realize this is real.
Neo: You mentioned the GFC which was actually around the time that you guys started East Ventures. How different has it been for you as an investor – today versus 2008 and 2009 or even the Asian financial crisis?
Cuaca: It’s very different because this time it is not only an economic crisis but a humanitarian one. But there are also similarities. You see a lot of talent in the market, valuations are going down, you see new consumer behaviour – the way they consume media and transact online instead of offline. Corporates are accelerating digital transformation within the enterprise.
This crisis is a lot more than the previous crises since it’s not only a game-changer like last time; we call this a game reset. It’s like you are playing Super Mario Bros and then someone accidentally hit the reset button and everybody has to start over again.
However, capability and trust that you built before COVID-19 is very important. It is going to be very difficult to build a new relationship with an investor or a new portfolio during this [period] because you cannot do that over Zoom.
But what you have built in the past will benefit you. Those that have been doing good in the past will continue. We see that some of those who are having trouble with the crisis are not in trouble because of the crisis itself. It is accelerating or exposing some of their faults. They have been in trouble from the past year.
Neo: Are we at the beginning or have we reached the bottom of this crisis?
Cuaca: I can’t really answer you precisely because we are still in the middle of it. Based on the data from Indonesia from our portfolio, the bottom was actually in April. We see a slight recovery in May after Hari Raya. After the lockdown is eased up, we see a lot more activity right now. What worries us is a possible second wave.
Whether there will be another lockdown is something we really can’t predict. On fundraising deployment, more investors will take a ‘wait and see’ approach. The graphs that you see going up in Q1 and Q2 do not really reflect what is going on right now. Because those graphs were based on when the deal was announced.
The deal was made three to six months earlier and was probably closed in this period. A lot of announcements that say that some of these deals were raised during the crisis. I don’t think that’s true. It gives a very wrong picture of what is going on. The real impact, the real number will hit your graph in Q3 and Q4 this year. Q4 will be worse – it normally is slightly lower because of the holidays.
Neo: How have you seen valuations look like so far? Have you seen any moderation yet?
Cuaca: As long as you don’t fundraise, you don’t feel the variation. As long as my startups are able to survive longer, we don’t need to raise money or lower their valuation. But definitely, the virus will be a good excuse for investors to depress the valuation, regardless of performance.
Neo: So are you expecting more downward pressure from investors?
Cuaca: Of course, but I think all the good companies will still get funded.
Neo: Do you see this as an opportunity to be aggressive when it comes to deploying capital? Or is it an opportunity to be more cautious with capital deployment?
Cuaca: A philosophy of East Ventures is [to be] pragmatic aggressive. We are very careful in picking up startups, so we will continue what we are doing.
Neo: Are you still as aggressive as before?
Cuaca: It’s not really aggressive. But we easily fall in love with the founders, when they have a great idea. Most of our deals are actually inbound. We don’t go out and find deals most of the time. 95 per cent to 98 per cent of all the deals are referred to us. So, are we aggressive? Not really. It is them aggressively approaching us, and we really like them and then deploy the money. It’s not like we naturally go out and hunt.
Neo: Moving forward, do you see yourself keeping pace when it comes to deployment? Or will that slow down?
Cuaca: Frankly speaking, I don’t know, because it depends on the inbound deals that come to us. But this crisis actually gave us a lot of clarity on who is a good and a decent founder. The way they responded and analyzed the crisis helped us a lot. The way they observed the business changes on the ground told us a lot.
This kind of filtering is actually natural and is easy for us to select them. In this crisis, you can easily differentiate between what is essential and what isn’t – the painkiller and the vitamin. When you have less, your priorities change compared to when you have an abundance.
It’s very easy now to make a decision on this. If the volume is going up, and it’s easier for us to make investment decisions, the output will be that a lot more startups get funded. And when we go to the media, they will call it aggressive.
Neo: This crisis has also brought about a lot of bad behaviour from some VCs who call themselves founder-friendly. Have you seen an increase in a number of such cases?
Cuaca: Yes, we see when the portfolio is in trouble, some investors have immediately resigned from the board and run away.
We see many funny things happening on the ground. Crisis also brings clarity on who is a real friend, just a business partner or an opportunistic business partner.
Neo: A lot of founders or startups who are unable to make money during this time, have started to get into very creative accounting practices. For instance, EBITDA before COVID-19. How concerned are you as an investor?
Cuaca: We are not that creative in accounting. So, we have never experienced that with our portfolio.
Neo: How big is your portfolio?
Cuaca: We have about 170+ on the seed fund and about 20+ on the growth fund – almost 200.
Neo: How do you keep track of the progress and development of all your different companies?
Cuaca: We ask them to send us reports, and analyze all those numbers on a monthly basis. But during a crisis, of course, it depends on the severity of the situation. It could be weekly or hourly sometimes in a panic situation.
Neo: Considering your size, how challenging is it for you to hire and retain talent?
Cuaca: We have a very low turnover – almost none have left the company. And if they have left, it is because they want to study further. We always tell them, ‘Don’t see us as your superior or boss. Look at East Ventures as a platform for you to grow. Do your best, and if you want to explore different roles, let us know. We will give the best chance for you to explore and improve your capability so that you can become the best.’
We don’t really look, for example, at age or education background, or experience from a big company or sector. What we consider is the ability to interact with their peers, how they learn and how to do self-reflection.
Only then can you understand your weakness and strength and plan what you want to do with it. In the beginning of the crisis, even before the government announced work from home, we had already started in Singapore. We started in Jakarta in March, again, before the government announcement.
A COVID-19 positive patient in Jakarta had run away from the hospital. We were kind of shocked and decided that everybody will work from home.
Everyone thought work from home is good. In some developed countries, it is good because the infrastructure is ready, along with internet connections and housing. In emerging countries, it is not that simple.
So instead of forcing them to work from home, we enable and empower them. We are actually giving COVID bonus to our staff so that they can feel comfortable working from home. We want to make sure that everybody really uses their potential to improve themselves.
Neo: With your staff working 100 per cent from home, how does that affect deal-making?
Cuaca: Not 100 per cent. Some of them go to the office once in a while in Jakarta. In Singapore, it is 100 per cent.
Neo: When it comes to doing due diligence for East Ventures, is that all conducted through Zoom at the moment or have there been any changes on that front?
Cuaca: What is due diligence? When a startup comes to us and pitches an idea, there’s just a young gentleman in front of you, there’s no data point. At the seed level, it is business as usual. The way we make investment decisions is by talking to the founders – whether through Zoom, or meeting in person, to us it doesn’t really matter.
For the growth side, you probably need some due diligence. Then you go through Zoom and other means. But we have people on the ground and so it has not been a problem so far.
Neo: If that’s the case, how will dealmaking look like in Q4?Is it going to slow down?
Cuaca: At the seed level, no. At the growth level, yes.
Neo: How do you see the exit landscape shape up in the next few months or years?
Cuaca: So far, we have no issues. We recently sold Moka to Gojek. There are few trade sales that we are working on right now but I can’t comment on them.
Neo: Who are these buyers? Are they mainly venture-backed tech firms?
Cuaca: You don’t target the buyer, but the value gap – the kind of value you build on your portfolio and the values that the other people are trying to look for. If there is one, there will be a transaction regardless of who they are – a corporate, a family office or a PE firm.
Neo: Where do you see more of this coming from in Indonesia, specifically? Will it be the big conglomerates or will unicorns be the ones acquiring smaller companies?
Cuaca: Other than the value gap, the next factor is who has liquidity. We cannot profile them since we don’t know who does or doesn’t have money. But as long as they have liquidity and a funding gap exists, it could be a potential transaction.
For example, when Grab acquired Kudo, they announced that they will allocate $250 million for Indonesia. So, it means they have money and want to do something. Boom – they get Kudo. Gojek bought over our portfolio companies like Loket and then Moka. Tokopedia bought Bride Story.
Neo: Are all these cash exits?
Cuaca: It’s cash. Otherwise, how am I going to return my fund? That’s the reason we have a good return and have been awarded as one of the top-performing GPs.
Neo: The IDX is encouraging more tech firms which are still loss-making to be able to list. They are also in conversation with a number of the US boards that allow dual listings. Is IDX moving fast enough for these companies to consider it as an exit option?
Cuaca: The IDX is on the right track right now. They are willing to adapt and be relevant to the market. We have seen the rise of the retail investors – the millennials. During this period, we do see a few trends, other than education, health care and media. We also see interesting platforms getting a lot of momentum.
Some of our portfolio, especially retail, that are buying share stocks are growing very fast. Everybody is in the right direction right now, in my opinion.
Neo: How would you describe founders who are able to fundraise? What are the key criteria for success?
Cuaca: This is one of the most common and important questions. There are three traits that we track – integrity, a high level of self-awareness and the third one is paradoxical.
Integrity covers what is true and what is right, no creative accounting but creative marketing. The second one is about self-reflection as I mentioned earlier. It is necessary because when you run a 50 team company, you need to upgrade yourself. And that can only happen if you understand what you are and are not good at. If you know your weakness, you know how to hire someone better than you.
And the third one – the paradox – you must have contradictory traits: for instance, global knowledge, but local wisdom. You have a strong will and vision, but a mentorable ear – you still listen to advice. You are a generalist – familiar with accounting, marketing, business processes and how to build an SOP – but at the same time, you are a specialist who knows how to go deep and solve problems.
Based on these three, we know that they are good founders, have a growth mindset and can go for long. But the key trick of investing in early-stage is how are you going to identify these traits? The first time you meet, you have no historical background, no data points and with no relation before the meeting. We will leave that detail for the next webinar!
Neo: As an early investor, what is your take on Sequoia Surge?
Cuaca: I think Sequoia Surge is the gold standard for a seed accelerator. They have money, capability and conduct training to make sure all the entrepreneurs know what to do and have a network. It’s a very good program for the whole of Southeast Asia. It will lift the standards of the founders across the ecosystem.
Neo: In the overall seed landscape, there have been complaints about term sheets at the seed level which were not founder-friendly and about having little choice and heavy dilution. When you enter a time like COVID, I guess these are the cases that come up.
Cuaca: No, I don’t think this has something to do with the crisis. It is something to do with the VC themselves. Irrespective of whether there is a crisis, there are always good and bad VCs. It is very important to understand the VC core values. Talk to the portfolio, their networks, the LPs, their friends, etc. Understand what they are actually looking at and how they make decisions. Then you know how to interact and what to expect.
Neo: The next audience question – we understand that EV Growth has begun sounding out LPs on plans for a second fund. How much of your first fund has been deployed and can you share some targets for fund two?
Cuaca: EV Growth I – we deployed maybe 70 per cent to 80 per cent. We are going to fundraise for EV Growth II very soon and we are excited because we have a very healthy deal flow.
Neo: According to a survey, 20 per cent of Indonesian startups only have runway from September to December this year. Do you have any tips for the startups to retain or even gain funds for survival?
Cuaca: Those are the things that we explained earlier – having a good mindset, understanding your cost structure. If you have to do cost-cutting, please do so. Understand that all cost-cutting will not happen immediately because there are processes that they have to run through. You must precisely measure when this will be effective, and you must be quite precise in implementing it.
Neo: How are you evaluating potential consumer investments amid pandemic related behaviour changes? Are there certain behaviours that you expect to be permanently changed?
Cuaca: One of my portfolio companies is an interesting example. At Sociolla, they have been selling a lot of beauty products. We see that the SKUs are moving in personal care. But anything below the nose, sales have dropped. And anything above the nose, sales have increased. Because everybody is wearing masks, they don’t buy lipstick.
Many women are buying skin care products. My assumption is that because many people are on Tik-Tok, they realize they have to fix some of the face maybe.
Neo: How do you align and negotiate with startup founders in terms of valuation during COVID-19?
Cuaca: It is the same without COVID-19, as well. You negotiate and see what makes sense. It is a negotiation between a willing buyer and a seller.
Neo: East Ventures has been considered a bit of a hands-off investor. How has that changed post-COVID 19?
Cuaca: The way people picture us as being hands-off is wrongly understood in my opinion. The way we look at the portfolio is that first, we have to align my vision, the firm’s vision and the founder’s vision. Then we move into strategy and we advise them at that level. Most of the time, we tell them to avoid pitfalls instead of advising them what to do. Because if tell them what to do, they will be limited by your capability to advise them.
If you advise them on what not to do, they can avoid pitfalls, run faster, and then fly. Because learning from our experience is better.
At the tactical level, we are not too involved – how do you run marketing with Facebook or Google or run accounting or some simple hiring. We don’t advise on those too much. You need a certain quality of management skill before you can run a company. If you can’t even run simple accounting, why do you want to become a CEO of a startup? You should just work for someone else. So, there is vision, there is strategy and practical elements.
To give you an example, if you want to go from Singapore to Jakarta – that’s the vision. What is the strategy? We can take a flight, drive or swim. We realize the most cost-efficient way is a plane. Then do you want to use SIA, Garuda or Lion Air? That is tactical – we leave it to the founders to decide what flight they want to take. We can’t be deciding every single thing for them.
If they were to ask us, what plane to take, they are not investable. Based on that, it seems like we are not hands-on. But it’s not true. We are hands-on at a different level.