In DealStreetAsia’s second webinar on May 14, 2020 – Open for Business: Sequoia and Vertex on deal-making in times of COVID-19 – Sequoia Capital India managing director Abheek Anand and Vertex Holdings CEO Chua Kee Lock talked about how the disruption caused by the pandemic has dramatically altered the way fund managers go about pursuing deals.
Both Sequoia and Vertex were involved in large deals that got announced earlier this month. Live streaming platform M17 recently announced a $26.5-million round led by the Vertex Growth Fund while Sequoia Capital led the $109-million mega-round in Indonesian coffee chain Kopi Kenangan.
Based in Singapore, Anand focuses on a range of sectors including fintech, education and consumer internet across Southeast Asia. Chua is CEO of Vertex Holdings, a Singapore-headquartered VC investment holding company, and is concurrently the managing partner of Vertex Ventures Southeast Asia and India, as well as the chairman of Vertex Growth Fund.
In conversation with DealStreetAsia’s editor-in-chief and founder Joji Thomas Philip, Anand and Chua talked about the challenges fund managers face with respect to due diligence, valuations and down rounds, and the investment outlook over the next 24 months.
Watch the video of the webinar or read the transcript below (edited for brevity and clarity).
Joji Philip (JP): Let me just kick off by asking both of you what do VCs actually mean when they say they are ‘open for business’? Is it deal-making at the same pace as earlier, or is it infusion of more capital and support for your portfolio companies?
Abheek Anand (AA): It means a few things. I can just speak for ourselves in India and Southeast Asia. We are open for business in the sense that we are very actively meeting new companies to invest in. So, if you were to look at our investment committee agendas over the last few weeks, it seems like nothing has changed at all.
We are busy, running around trying to meet people, except we are doing it all virtually. But I do think there are a few things that are different in today’s world from three months ago. Among pretty much all investors, there is a very perceptible flight to quality. Given the uncertainty in the world, people are looking for more proof points in businesses before they pull the trigger.
For example, you mentioned our recently announced investment in Kopi Kenangan and there are a few others that are coming down the pipeline as well.
We actually feel that this is a very interesting time to invest because the really good businesses start to stand out and competitive intensity starts to lower. We can focus on investing in businesses where we truly believe in the vision, economics and in the path to building a long-term profitable business.
The second thing, which a lot of investors are doing and we’re definitely doing as well, is helping our portfolio navigate the situation. We are fortunate to have partners in China and in the US. Our partners in China are a few months ahead of us in terms of having seen the way this crisis has unfolded.
Our responsibility as investors and board members is to help our portfolio companies see around the corner a bit, to help them understand where the world is coming from or going towards [and] what our learnings have been from other markets so that they can prepare themselves strategically, financially and even mentally for the next few quarters ahead.
That actually is probably the most valuable thing we can do for our portfolio companies. We are spending a lot of time getting that right. We have a seed programme called Surge. We just kicked off the third batch. Unlike other batches, this is all being done virtually and it’s actually incredibly effective and definitely more efficient.
We will continue to announce investments over the next few weeks and months. As far as my day is concerned, I feel like it’s busy. I have less free time than before.
JP: Kee Lock, what about you? How is Vertex looking at ‘open for business’?
Chua Kee Lock (CKL): We have two levels of activity. Vertex Holdings is owned by Temasek. We are the global holding company of six funds: Vertex Israel, China, the US, a healthcare fund based in the US and a growth fund and Southeast Asia fund based here. Many of these funds are still actively doing business outside of Singapore.
Open for business means that the supporting staff continues to meet all the requirements of capital for reporting. On that part, I don’t think much has changed, even though some of them are working from home.
At the Singapore level, we have two investment teams based here – the Southeast Asia and India team and the Vertex growth fund team.
Like Sequoia, we have two levels of activities: one is portfolio management. These are very trying times and need a lot more communication. A benefit of having everybody working from home is that you don’t have to commute anymore. So, you have more time to schedule calls – you can even do a lot more of them back-to-back easily.
The second level is our new investments. We continue to look at investment opportunities but we are focusing on the people that we are familiar with and who we have known for a long time. I don’t think that part has slowed down. There are a lot more opportunities because some of the venture funds have exited the market. It gives us a lot more time to look at opportunities.
JP: If I’m not mistaken, Sequoia does about 25 to 30 deals every year in Southeast Asia alone. What are the fundamental changes that you have made as a firm to continue deal-making at this pace?
AA: Let me start off with the biggest challenge all of us are facing: venture investing is inherently a people business. We need to adapt to this brave new world where we are unable to meet people in person and are unlikely to be able to do that for the next several quarters.
I actually believe that business travel is going to be very subdued for the foreseeable future. We need to adapt to that environment and are doing many different things.
To quote one of our partners in the US, Mike Moritz, “The laws of economic gravity are catching up with startups, as they do every 10 years or so.” What that means is we’re starting to see companies focus more on the underlying fundamentals of their business and less on vanity metrics like growth for two reasons.
One, they realize that the pendulum has swung and that all investors are asking the underlying questions on economics and sustainability.
And two, there is no growth to be had. A lot of businesses have frankly seen a lot of degrowth over the last few weeks and months. So, what we are doing is something that we’ve always tried to do – asking questions on the fundamentals of the business, and the path to building sustainable business models.
We realise that as we meet new companies, the founders are also oriented that way. While we may be meeting fewer companies, which is because fewer of them are in the market, the founders are starting to think the way that we have always thought: Growth is all well and good, but underlying business performance is far more important in the long run.
While the number of companies we meet might be fewer, the quality has actually gone up. That’s not to say that in terms of an absolute number of investments, 2020 will be as vast or productive as the last few years.
Venture investing follows a very strong power law. Very few companies end up driving most returns for funds. Our job is not to find 25 companies a year; it is to find the five companies that will matter.
And net-net in these markets, we find founders being more sensible, competitive intensity being lower and our ability to be able to invest in these companies quite enhanced.
So, at least from that perspective, I think this vintage is going to be a pretty productive one for all investors who are active right now.
JP: Just one related question – does that mean that companies being rewarded for top-line growth are losing out at this time?
AA: I think you’re right, but that pendulum shifts every few years. In a bull market, all investors start to show up, because there is more liquidity. Frankly, a number of them are tourist investors, who are there because they have capital and want to deploy it. They tend to reward growth.
In bear markets, those investors tend to shrink back. We have had multiple conversations with our portfolio companies and we have told them, ‘Please don’t report vanity metrics to us. We don’t care about GMV [gross merchandise value]. We care about net revenue, gross margins and unit economics.’
That is now being echoed by many other investors as well which I think is good for the founders. At some point in their journey, they have to focus on that – the sooner, the better.
When it comes to Vertex, what are the metrics that you are looking at?
CKL: We never believed in the so-called ‘burn baby burn’ model, that startups should grow for the sake of growing. That isn’t sustainable. I agree with Abheek – it’s not the metrics that we really focus on. We are ultimately looking for what is your unique position, what is your innovation, what are you trying to create that is sustainable in the long term? You could be losing money in the short term because of research and development or marketing costs, but that cannot be a permanent model to stick with forever.
All venture fund vintages from the down markets perform the best. The reason is simple economics.
In the marketplace currently, people are more realistic. They will probably not ask for valuations that are three or four times more, like they would have 12 months ago.
They now ask for more practical, pragmatic, realistic numbers. For us, ultimately it is about a fair valuation. Whenever valuation is excessively high, you will not meet the return.
Today, people are focusing on the negative parts, but I believe, venture [investing] like any other business, needs to have a cycle. Right now, people need to take a breather. Because if they don’t, you will have a lot of people who jump into the industry, unnecessarily drive up the valuation, create a lot of marginal players which will mean more damage in the long term.
JP: Let me just shift gears a little bit. Ultimately, both of you are VCs and need to return money to LPs. So in that context, how bullish are you on bargain deals during these times?
CKL: I don’t believe in trying to excessively depress valuations. Entrepreneurs build great businesses and we need to recognize the value. If they have built something that is reasonable, we need to come up with a fair valuation. If we think the valuation is $10 million, we don’t say it is $2 million. That’s not our style. But if the valuation is $10 million, in good times, people will ask for $30 million! And then we will have to resist, say ‘no’ and move on, which we did last year – we walked away from a lot of deals. The important thing is not to do the reverse. That will damage the relationship in the long term.
AA: I couldn’t agree more with Kee Lock. High-quality businesses are never cheap. Even in a bear market, there are enough investors out there who will reward high-quality businesses and help them get a fair price. And so, bargain hunting is never the way for any of us to generate returns. It’s always trying to focus on businesses that become valuable in the long term.
Look at early-stage investments. At that stage, the difference between $10 million pre [money valuation] and $15 million pre doesn’t really matter materially, as long as you can get sufficient ownership. Because over time, you are betting on the company becoming really large. I can tell you that in the investments that we’ve made more recently, there has not been very much movement on price.
The completely unreasonable price conversations have gone out of the window. We are still paying up for high-quality businesses.
JP: Sticking with deal-making, how difficult is it to do due diligence in these times?
AA: That’s an excellent question. We are all trying to figure it out – it is not something that anyone has nailed just yet.
Let’s talk about businesses where we had to do physical in-person diligence. Let’s say we wanted to invest in Kopi Kenangan. That is a chain of coffee shops, and it’s impossible for us to go to Jakarta right now and taste the coffee because we can’t fly there.
The reality is in today’s world, many of those businesses are really hurting, and frankly are not going to have an easy time raising capital. We are not meeting a lot of companies that have any kind of physical component to their businesses.
We are however meeting a lot of companies that are purely digital. We’ve always said internally at Sequoia, that bits are better than atoms is better than cells. We are meeting companies that rely on bits and not atoms or cells.
For us, to [do] diligence [on] those companies is relatively easy. If you want to get a product demo, it’s actually easier to get one on Zoom than to go meet a founder in person. It is the same thing if you want to look at metrics. If you want to talk to customers who are all digital, their businesses are still running. It is relatively easy for us to set up a call with them and frankly, it’s more efficient, since we can call more people. For those types of businesses, diligence has actually become a lot better.
The challenge is the human aspect – how do we build a point of view on founders without ever having met them? And I can tell you that we’ve made a number of bets globally post-COVID with founders that we’ve never met in person.
We just use proxies for that – spending a lot of time on video. We do a lot of references and spend time looking at their numbers. I don’t think that the quality of the diligence that we have done or that I’ve seen any of our team members do has in any way gone down. I think it’s actually gone up because we’re just far more efficient, doing it remotely.
JP: Kee Lock, are you going back to founders you have met in the past – does that help in deal-making during these times?
CKL: In the Southeast Asia and India team, there are 16 of us and in the growth fund, there are 6 of us. We know a lot of people and have many from our own network. That’s the first level we focus on – these are the people we are familiar with. It’s not about face-to-face meetings, and so if it is somebody you have never met before, the first time is a bit more challenging. But if it is somebody that you know through somebody else, and there’s some relationship, it is probably easier.
For Vertex, it is quite different since we only do about six or seven deals a year.
So, we need to spend more time with the entrepreneurs who we are familiar with. I also agree with Abheek that some part of the due diligence can be done online – you can look at numbers, the technology, how they describe it, show you what they have done and what they are thinking about. All of that can be done on the computer anyway. Instead of a PowerPoint projecting on the screen, you are projecting onto a computer. That part is no different. The physical due diligence that most of us don’t do a lot of is probably more challenging.
JP: Both Sequoia and Vertex do deals across Southeast Asia and India. Are you noticing any differences between the two geographies, or are they pretty similar?
CKL: There is not much difference per se. But India unfortunately has one short-term issue driven largely by the recent government regulation to beat Chinese investors and the fear that they will buy out Indian companies. That has probably put a dampener on India.
We all know that over the past few years, a lot of tourist Chinese VCs arrived in India. And with every deal, they referenced back to a Chinese company saying that Series A is $30 million but in India, it is just $15 million and so really cheap.
We had many conversations like that. And now, suddenly all these investors have disappeared – the tourists have left. That part is affecting India a little more. Southeast Asia has been more subdued since they left two years ago. So, in that sense, the difference is larger.
JP: Abheek, do you see any differences?
AA: I agree with Kee Lock. We haven’t seen too much investment activity being newly different. Obviously, there are government policies that are very different. India is under complete lockdown and that has affected its companies, much more perhaps than Southeast Asian companies. But that’s hopefully a temporary thing that should iron itself out.
We have been talking a lot around investment activity. Thinking the world has changed and investment activity should go down. But it’s helpful to think of what’s happening in the public markets as a proxy for what’s happening with technology.
If you look at the NASDAQ, it is back to January 1 levels. It almost feels like the dip that happened because of COVID never took place. Now, of course, the problem is that in the aggregate, the economy is hurting a lot. The US unemployment numbers are 15% and India is projected at 25%. We don’t have a lot of numbers from economies in Southeast Asia, but they’re going to hurt as well. We’re almost definitely looking at recessions across all of these economies. But one thing that has been very clear is that this has accelerated a shift in both investment interest and value accretion – more so towards tech companies than non-tech companies.
COVID is a massive humanitarian social, political, and economic crisis that is global in nature. But this has basically accelerated the shift to tech. At this point, you cannot afford to not be a tech business. From our perspective, if you were to just look at tech investing, the set of opportunities that exist today and the ones that will come up over the next 12 months are actually going to be really interesting. Any non-tech business is just going to have a very hard time surviving.
JP: One of the ways to look at the whole COVID-19 situation is like a time machine. In some sectors like edtech and health tech, it could have pushed the speed of adoption by 3 to 5 years or even more. But in other sectors, it has also pushed back all the work done by entrepreneurs by 3, 5 or even 10 years. How do you reset valuations for such companies?
AA: I want to go back to something that Kee Lock said: valuations are not that important. Over the course of the life of a company, at some point, they will be undervalued and at others, overvalued. Net-net, it gets ironed out in the long run. When we invest, we do so for a seven to 10-year time horizon. We don’t invest in what’s happening right now.
But the analogy that you are using is a good one. To go back to a classic book on technology adoption cycles called Crossing the Chasm by Geoffrey Moore – the curve around innovators, early adopters, early majority and late majority represents a normal distribution. The job of the startup is to keep moving rightwards on the curve, trying to get more people to adopt a digital service.
What has happened for a lot of sectors is that they have just been moved three steps to the right, which is amazing.
Let’s say you’re an education company – online education used to be a luxury and a preference. Now it’s an absolute necessity. Or take M17, a company that Vertex is a shareholder in – if you’re providing digital entertainment at home, that’s the only way to entertain people right now.
For these companies, it’s actually a massive boost. This shift to digital, which would have taken 5 to 10 years, has happened in a matter of 5 to 10 weeks.
Conversely, what also happens in technology is when markets in flat companies get disrupted. If you were building an app for a Nokia phone in 2006, you may have felt pretty good about it since there was a lot of distribution of those phones. But in 2009 or 2010, your company was probably dead in the water.
Right now, the same thing has happened to companies where the market has changed so much that instead of an inflexion happening in 3 to 7 years, it has happened in 3 to 7 days in some cases. And so, it’s an acceleration of what happens in the technology adoption curve over time. It’s just that we’ve never seen such a rapid acceleration of that change as we have over the last quarters.
JP: A related question – how do you help companies in your portfolio where valuations have tanked, ESOP values have crashed for the teams and they’ve had to lay off a lot of people. How do you motivate them or get them back on track?
CKL: First of all, I genuinely tell founders that layoffs should be absolutely the last resort. In a technology business, presumably, you have hired the right people. They have the capability and you’ll probably need them 12 to 15 months from now. A short-term measure like laying them off and then having to fill the same positions later is kind of silly.
The first step you should take is pay cuts. Some of our founder CEOs – I was quite surprised – took a 60 per cent pay cut themselves. Those are the actions that we generally recommend.
We have told them to analyse it in three ways: analyse the business – some of them are at an inflexion point, and others have shifted to the right. Be clear about what businesses are temporarily reducing and the ones that have permanently gone away.
The second part is to analyse your expenses. Which parts can you push down for the moment? And last but not the least, figure out what is the runway.
After all of this, if you need to raise money, you ought to be realistic – the valuation has to be lower. You have to realize that what you’re trying to build is something good. And over time, you will recover the value if you are pragmatic. But sometimes it takes entrepreneurs a while. A lot of them have unfortunately never seen something like this before.
To them, valuation is, I guess, self-gratification. $100 million means I am worth a lot and $200 million means I am worth even more. When you suddenly tell them that the more realistic valuation is $15 million, they feel they are not worth that much. But they are still worth $15 million! That requires mentorship – for you to talk to them so they understand that it is not the end of the world. It requires a lot of conversation and discussion – it takes time.
JP: To take this ahead, something that nobody really talks about – even in the industry – down rounds. I’m sure down rounds are inevitable during these times. What do founders and teams need to watch out for?
AA: I want to caveat everything by saying valuations are all point-in-time calculations. We are supporting a lot of our portfolio companies in whatever way we can – financially and otherwise. If we believe that this is a temporary glitch, they should be able to navigate it without a very significant negative event in the life of the company.
A down round is a pretty negative event. Not because the valuation gets reset. There is a fair valuation and it’s just a number like Kee Lock said. But the future impact of these things can be a little adverse. It could have a pretty negative effect on employee morale. It could be almost a stigma that the company has to overcome when future investors ask, ‘Hey, what happened back then?’
The caveat is that in today’s market, everybody understands that things are very different. I personally believe that the financials for 2020 are going to be ignored. People are going to go from 2019 to 2021, because there’s just so much volatility in the market today.
But we haven’t seen down rounds happen yet. They may happen in the future. But I think it’s unlikely that they will be substantial.
An investor backing a company today still believes that the business has a right to exist in a post-COVID world. We keep a lot of dry powder to help our portfolio companies – if it means helping them have a small bridge to get over to the other side when the markets improve, I’m sure inside investors will be more than happy to step up.
JP: Assuming there’s a down round, as an existing investor, what role can you play?
CKL: We also have a lot of dry powder. It’s not so much about focusing on the down round or whatever round – but focusing on what they are trying to do or to build. Assuming that the market changes the business, we need to teach them as a mentor, because we have enough reserves to help the entrepreneur.
The challenge is always when it comes to investors who don’t do that and won’t help. That’s the portfolio that will probably face that down round situation. We are more institutionalized, disciplined, and have our reserve behind us; so we will just do what we think is necessary to buy more time for the entrepreneur to build the business.
AA: Kee Lock actually hit on a very important point which all of us tell our portfolio companies, all the time. It is very important to get the right investor on board. And the right investor is not necessarily the right investor for a bull market.
But what happens when the market changes? If you have a tourist investor who is going to completely leave the market, they are much less likely to support you in a time of difficulty. At times like this, the choice that founders make about which investors to partner with really becomes important. Hopefully, that’s a learning that people carry on from tough times in terms of who they choose to partner with in the future.
JP: I’m not taking names, but we’ve seen examples of term sheets getting pulled. Some founders have even seen them get revised after they sign but before the money hits the bank. How do you deal with such situations?
AA: It’s an unfortunate reality in today’s market that some investors are being very short term focused. We are seeing, including some in our portfolio companies, terms getting renegotiated or term sheets getting reneged. I tell our founders a few things: nothing is certain until there’s money in the bank. That is true in every market, but especially true in today’s market.
Number two: It goes back to the previous comment on the type of partner that you pick. If you pick a partner who’s truly committed to the region, it’s reputationally very damaging for that investor to renegotiate a term sheet. I can tell you right now from a Sequoia perspective, we take this incredibly seriously. If due diligence checks out, we close our term sheets. And the reason we do that is because we are committed to the region for a very long period of time. Once this environment settles down, we don’t want to have people saying, ‘Hey, you can’t trust the word of this investor.’
So, if you take a longer-term enough perspective, it’s important for us, even if it means leaving some money on the table, to have a reputation that attracts founders in a bull market, because that reputation is far more important than any particular investment might be.
JP: Kee Lock, does that mean a VCs’ reputation will be determined by how they behave during challenging times like this?
CKL: The experienced VC knows that this is an important market where you build over time. The current shutdown won’t go on forever – Singapore will gradually open up its economy.
I hope entrepreneurs will remember this but I feel most of them will not. In good times, they will go back to the best, highest valuation. In bad times, they will come back to people like ourselves – Vertex and Sequoia. But in the good times, they will pick the best tourist VCs whose term sheets have a 50% higher valuation. It’s unfortunate but it’s a reality of life we have to accept. This is a cycle. Just move on and don’t take it personally.
JP: Because of what you mentioned, I wanted to ask you about M17 – a company that has seen a lot of pivots and controversies. It saw a listing in New York fail at the last minute. What made a cautious investor like you go back and do such a large round with them?
CKL: I think the New York listing failed largely because of the settlement issue. Fundamentally the company’s business was good. In fact, revenue has exceeded what they projected doing the IPO.
I always believe a couple of things: everybody makes mistakes and faces challenges. The important thing is how do they pick themselves up and move on. It’s like a life lesson. When this happened, the team at M17 instead of saying, ‘This banker did not do the job,’ focused on their own business. They said, okay shit happens. Our business has a great future – let’s execute well.
And they have done that. When the whole COVID-19 thing happened, their March numbers were 10 per cent higher than February and they thought maybe this is an anomaly. When April came in, it was higher than March; and then the first 15 days of May have come in and they’ve extrapolated and found it will be 50% higher than April.
This team to us is validated – they essentially learn what they need to learn – focus on execution and what they need to do. The worst entrepreneur begins to blame everyone else when they make a mistake, instead of figuring out what the problem is.
JP: Abheek, if I were a founder, would you advise starting up at this time?
AA: This is probably going to be an answer that a lot of VCs give. I would say you should do that. Let me tell you why: as investors, we often think about a new investment in the context of a very simple question of ‘why now?’ Why does this business have a right to exist today and not five years ago? Typically, the answer to that question is an inflexion point in the market.
For example, if you were trying to build a mobile business in 2008, the ‘why now’ is obvious – the iPhone just came out last year. If you were trying to build a cloud business around the same time, you would say AWS is starting to get some green shoots, it might be a very interesting platform to build on.
Inflexion points generally create lots of opportunity.
What’s going to happen with COVID is a short to medium-term impact. But let’s imagine what happens medium to long term. A founder starting a company is not starting for May 2020 but for May 2027 and beyond.
Over the next few years, or even the next few quarters, multiple inflexion points are going to show up. Large businesses that were created and were very successful up until January 2020 may suddenly find themselves out of business. That’s not to say that the customers’ need for that product or service has gone away. It’s just that the business model that existed before that is suddenly completely obsolete and deserves to be disrupted.
And so, founders are always trying to find a way to disrupt or create a new category. Because of COVID, many categories will get disrupted and many new categories will get created. I would say that’s the number one reason to start a company today.
There are many other reasons. A second reason, for example, is that competitive intensity in whatever you start today is not going to be that high. I hate competitive intensity because it causes all sorts of perverse behaviour to happen amongst investors and competing founders. Low competitive intensity means you can build a more sensible business.
Finally, in the markets, at least on the financing side, there is still a lot of liquidity available for founders. It’s not as if fundraising is going to become dramatically harder. It might be hard in the short term, but I do think that’s going to rebound very quickly.
Suddenly you’re looking at a world where you have a vast menu of potential ways to build a business. If I were a founder, I would look at every single valuable company out there and at every single business line and ask myself, ‘Does that business line deserve to exist today?’ And if it doesn’t, I would go after it.
I would be able to raise capital because a lot of investors – Vertex, ourselves and a bunch of others – are always looking for new people to invest behind. I’d be able to hire the best quality people because guess what – a lot of very smart people are out there looking for a job. And I would be operating in an environment with a lower competitive intensity which means for the next 12 to 18 months, I have a shot at building something very reasonable and valuable without taking on any of the decisions that people make in a bull competitive market. Honestly, there’s not been a better time in a long while to create a business.
CKL: I think the down cycle is the best time to start. Speaking from my own experience in 1997, during the Asian financial crisis, I was an executive in a big company in Singapore. I decided to leave and start a VoIP company with a bunch of my friends. A lot of people asked me why are you doing this and believed it was very risky.
But the Asian financial crisis was the big leveller of its time. Since everyone was starting from zero, I also started from zero. And knowing that if I build value faster than anybody else, I will get something better over time.
If you have a great idea, that will change everything, this is the best time.
JP: I have a question from Randy from RC consulting. Are you preparing your respective portfolio companies to plan for a minimum of 12 to 18 months of uncertainty, or are you preparing for a shorter period? How are you preparing to manage cash flow accordingly?
AA: The advice that we’re giving to our portfolio companies broadly is cash is king. We’re asking everybody to have a clear path to 18 months of runway, if possible. What I mean by cash is king is that accounting measures are less important.
If you have cash that is stuck in working capital cycles, if you have to do a lot of capex, if you have a lot on the balance sheet that does not show up in your bank account, that cannot be used. We are asking all portfolio companies to revisit the way they’re managing cash and manage it very prudently. The reason we are suggesting 18 months is I think there are still a lot of companies that are countercyclical – M17 was a great example. We have a number of companies in our portfolio that are very similar. They’ll find it very easy to raise cash right now.
But a company that is waiting for the market to turn might need six to eight months before they can actually go out.
It turns out that going out to fundraise in October or November is a terrible time because December is coming up and people start to sort of lose steam a bit. Let’s say you want to fundraise in January. The advice we give everybody is to always fundraise with at least 12 months of runway. If you want to fundraise in January 2021 and if you want 12 months of runway, broadly speaking, you need to have at least 18 months in the bank right now. That’s broadly the advice we’re giving.
CKL: I agree with everything Abheek has said. Some additional comments we have made to our entrepreneurs is that firstly, the so-called current movement control measures and travel restrictions for some countries are going to go on until maybe early next year. You better exclude activities that require movement for the moment.
More fundamental and more important – is the entrepreneur thinking beyond what is it going to be like 18 months from now? This is an important question since we just saw the WHO chief scientist say that COVID could last for four years.
That means the world we knew six months ago is not going to happen again. So entrepreneurs need to ask themselves, beyond the 18-month runway, what is it going to be like for the business? You have to start doing that now because that will be an 18-month problem, 18 months from now.
JP: One of the things that you’d mentioned with regard to India was it taking a hard stand against Chinese investors and VCs. But at the same time, I wanted to ask you what do you think of India’s recently announced ‘Look East’ policy?
CKL: It should be a logical conclusion since historically, Southeast Asia and India have had a lot of cross-fertilization going on. It’s a very good policy and a great thing that is going to happen for India and Southeast Asia.
JP: Abheek, what are your key observations when it comes to working from home – what habits will permanently change and will have a big impact on businesses going forward?
AA: You probably heard Google announcing work from home is an option until 2020 and Twitter announcing that they’re always going to have a work from home option for the foreseeable future, even beyond 2020.
What a lot of us are discovering is that a lot of stuff that we thought was essential travel has become completely non-essential. We are realizing that even if we can get 80 to 90 per cent of the way there without actually getting on an airplane, that is more than made up by the increased efficiency.
Business travel is going to fundamentally look very different for several years to come. The era of all of us waking up at five in the morning, getting on a flight to do a meeting in Jakarta and coming back – Kee Lock is laughing because I am sure he has done hundreds of those – that’s not going to come back anytime soon.
A more interesting thing that we all need to figure out – and this is true socially for all of us and not just for investors – is if you have work from home as more and more of a norm, what does that mean for the quality of life? On the one hand, you’re much more efficient, but high efficiency also comes at a cost.
I don’t know about you guys, but I don’t know the difference between a weekday and a weekend anymore. And in the beginning, it is great – you feel so productive. But eight weeks later you realize I have a bunch of white hair and am starting to get more. Managing happiness, mental health and productivity over a very long period of time, that’s an unanswered question that needs to be figured out by all of us.
JP: When it comes to issues like mental health and happiness, all of these were not a VC value add. When you talk with founders, do you address these issues which may not have been a part of normal conversations earlier?
AA: This is actually a topic that’s pretty close to my heart. One of my partners, Mohit, last year wrote a post on LinkedIn called ‘It’s okay to not be okay.’
And the reason he wrote that was that our observation has been that entrepreneurship has always been an incredibly lonely journey. If you think about founders, a lot of them for very good reason have to project an external aura of confidence, while hiding or suppressing any sort of questions or doubts that might exist in their minds.
They typically tend to not be very vulnerable. As VCs, we see this all the time – we reward founders who are chest-thumping and telling us all the things that are going right and ignoring everything that is going wrong.
Entrepreneurship is not just a marathon but an ultra-marathon – a decade long journey, if not longer. An analogy we use a lot is that of professional sports teams. How many have managed to stay at the top of their game for 10 years in a row? I would really struggle to think of any such team. But that’s what every founder has to do. And the way you do that is by focusing on longevity and not as 10 one-year sprints.
CKL: I agree. Being a founder is a very lonely business. You raise money from investors and you don’t want to disappoint them. You always want to deliver good news. And in this kind of difficult time, investors like ourselves have seen many of these cycles. We know what it is like. And so, we have a conversation and talk about the issue. The important thing is to focus on the positives and not the negatives. If there is a problem, so be it. And if you have a solution, move on. There’s no reason to dwell. Everyone has hiccups and nobody thinks of them as a problem. It is normal. We can talk for five minutes about issues that an entrepreneur thinks is bothering them. You can talk and don’t have to feel weak. Everyone has issues.
JP: Kee Lock, I have a question for you from Han Scott. What’s your view on these Southeast Asian unicorns in the changing environment?
CKL: It is not just Southeast Asian unicorns – for any unicorn, this is going to be a challenge. We are in a perfect storm. A trade war going on and then this COVID-19 situation. So, the good times’ valuation always marking up higher from the next round is over for a period of time. Some of them may not be able to raise money at the same unicorn value anymore. It may be lower – whatever that is. So long as you are dominating the market, and executing well, so what if the valuation goes from $5 billion to $3 billion? It is still a billion right?
JP: Another audience question. What about companies like Gojek, Zilingo and ONE Championship? Their prospects might change quite a bit because of COVID. What’s the road ahead for them?
AA: It’s hard for me to comment on individual companies. One of the things that we at Sequoia believe in is that, on average, change favours startups more than it favours large companies. Startups have the ability to morph and adapt far more than anybody else. If I had to make a personal investment of my own capital, I would put it in a startup like Zilingo or ONE Championship any day over a large company like Singapore Airlines.
The reality is all of these guys started from scratch relatively recently, and they’ve managed to build an organization and culture that thrives on high performance and adapting to change. So yes, of course, there’s going to be challenges because the market environment has changed quite dramatically.
But I think we always believe in the power of a startup to adapt very rapidly and we’re already starting to see that in many companies in our portfolio. It’s quite incredible to see how quickly they have changed things in response to what’s happening in the market.
CLK: It’s a very important point that we need to bear in mind – whatever is happening now, there are two phenomena. One is temporary, the other permanent. Whether startups or big companies, they will certainly face a setback. The important thing is, which part of this component is temporary? And which part is permanent – for instance, we were talking about how business travel is going to be completely different. For us investors, you need to differentiate between these two. Everybody is down, but some are temporarily down and will be back to normal over time. It is important to make that separation.
JP: Before we wind up, Kee Lock what is the conversation that you’re having internally at Vertex? What’s the investment outlook looking like for the next 24 to 36 months?
CLK: The most important question now that nobody has an answer for is what is it going to be like for COVID-19 in terms of for the next six to 18 months? In the New York Times, there’s a very nice article talking about the three possible scenarios of a COVID situation. The conversation that we are having a lot of time among our portfolio and ourselves is to consider these scenarios and ask ourselves the probability of each of them. And in each situation, how do we do a better job in terms of investment, managing portfolio and execution?
I think working from home is going to be a permanent feature for most companies, and not just Twitter.
Because of all this change, the investment environment, the portfolio, the revenue and opportunities are all going to be different. We are trying to have more conversations around this – what do we really need in each of these scenarios?
JP: The last question is from Deepak Saluja. He wants to know what’s the outlook on digital consumer financing business in the short to medium term? Will the benefits of under-penetrated markets from a credit perspective continue to outweigh the collapse of consumption demand in the medium to long term?
AA: It’s a good question. Let’s go back to the fundamentals of consumer lending. It is basically the equivalent of standing on the corner of a street handing out money. It’s actually very easy to do that. It’s the collection and risk control that’s hard. We would caution everybody who’s doing any form of lending right now. Several unique things have come together to make the demand for consumer lending incredibly high. A lot of consumer lending companies have stopped. There has broadly been government support to try to prop up lending.
And on top of that, there is a massive drop in overall GDP output and a massive rise in unemployment. What that means is the demand for these services is actually incredibly high – you have 25% unemployment in a country like India. Guess what, all of them want financial support to tide over things. That actually makes it a very risky time to be lending.
So we’re advising all of our portfolio companies in lending to be extremely cautious. It’s very easy to give out money. It’s incredibly hard to make money back. Especially because we don’t know, like Kee Lock said, how long this will last, or what the recovery cycle will look like. Don’t be tempted by low customer acquisition costs, high demand and the ability to charge more. That’s all there for a reason. We need the underlying economy to stabilize before something like lending can become viable and profitable.