The COVID-19 pandemic turned the last few months into the busiest period of his career as a venture capital executive, says East Ventures co-founder and managing partner Willson Cuaca.
The prolific investor, whose VC firm has funded over 120 early-stage companies in Southeast Asia, is spending considerable time with its portfolio companies to help them tide through the pandemic.
“It’s not a game-changer like previous crises. We call this a game reset,” Cuaca said during a DealStreetAsia webinar on Thursday. “It’s like playing Super Mario Bros, and then someone accidentally hit the reset button. Everybody had to start all over again.”
Since the COVID-19 virus struck, Indonesia has seen three venture-backed startups shuttering, the most recent casualty being fashion commerce brand Sorabel. A handful of other companies, meanwhile, have had to lay off staff to stay afloat.
Ironically, the situation does not seem so apparent in the dealmaking realm, as startups and venture capital companies appear to continue to press on with funding announcements over the last few months.
According to DealStreetAsia’s Southeast Asia Deal Review: Q2 2020, the second quarter saw at least 184 deals, up 26 per cent over Q1, and 63 per cent over the second quarter of last year. In terms of value, startups have raised at least $2.8 billion in the second quarter of this year, only slightly lower than the $2.9 billion in the previous quarter.
East Ventures itself does not look as though it applied brakes on capital deployment. It has announced investments in Nusantics, Bonza, BukuWarung and Sociolla since the virus outbreak.
Cuaca contends that the deals announced during the pandemic so far do not accurately reflect startups’ capability to raise capital or investor appetite amid COVID-19.
“I think that that doesn’t represent exactly what’s going on right now. Because those graphs are based on when the deal being announced, but the deal was made probably three to six months before and probably closed during this pandemic,” Cuaca said.
The reality is that it will be difficult for startups to raise capital, he said. Those that manage to do so may have to face a down-round, as the virus “will be a good excuse for the investor to press the valuation regardless of performance.”
For many startups, their saving grace at this challenging time would simply be the trust they have built before the pandemic.
“It is going to be very difficult to build a new relation with investors or the new portfolio during this time because you can’t spend time with them. But the things that you built in the past, this will benefit you. So those that have been doing good in the past? I think they will continue,” he said.
For East Ventures itself, the current crisis has seen it spending more time with portfolio companies than ever before.
While it may seem that access to cash will be critical to the survival of startups during COVID-19, Cuaca says it is the “last thing we talk about” with portfolio companies.
It is more important for founders to develop the right mindset and response in navigating through the crisis, which Cuaca described as being both an “economic and humanitarian crisis.”
To help its founders, many of whom have never previously lived through a crisis, take the right measures, East Ventures has put in place hypothetical scenarios along with an advised course of action for each.
Ideally, to weather the storm, startups should have 18 months of operational runway, Cuaca said. If not, they would need to carry out some bold actions such as cutting unnecessary expenses, reducing salaries and laying off staff, depending on the extent of revenue drop.
One of East Ventures’s portfolio companies that saw revenue drop to as low as 10 per cent was unicorn Traveloka. Despite the downturn, Cuaca said the company’s response has been “heartbreaking,” having made hard decisions. The company announced a fresh $250 million funding earlier this week.
DealStreetAsia had reported in April that Traveloka, which is among Indonesia’s most valuable startups, had laid off hundreds of employees as the pandemic had led to an unprecedented collapse of travel businesses.
Not all companies, however, have reacted to the pandemic commendably. Cuaca says that some founders “live in a bubble” and simply fail to realize that they are in a crisis.
“Sometimes they read the newspaper, and if it’s a good thing, they love to be related to that. If it’s a bad thing, they think it won’t happen to them. This is human nature, and this bias kicks in sometimes,” he said.
“This is where, as an investor, we have to guide them and make sure they think objectively about the situation.”