Venture capitalists in Southeast Asia can breathe a sigh of relief as deal activity has gradually started showing signs of a pick-up after a lull this year amid the COVID-19 fog of uncertainty that prompted investors to tighten their purse strings.
The bounceback, however, is likely to take time to reflect in numbers as startup investments typically take 3-6 months to close. And, given the throes of the pandemic are far from over, the closing of a transaction at this point in time can stretch even longer.
According to our report SE Asia Deal Review Q3 2020, startups based in the region raised at least $1.8 billion in announced funding in the July-September period, a drop of 34 per cent quarter-on-quarter, and close to 40 per cent year-on-year. In terms of volume, the number of transactions during the said period stood at 151 compared to 184 in the previous quarter.
It is understood that these figures constitute deals that primarily had been initiated before the second quarter of this year when the uncertainty pertaining to the COVID-19 crisis was at its peak in Southeast Asia.
According to Chandra Firmanto, partner at Indonesia’s Indogen Capital, deal activity started inching back from July as the fund managers started understanding the impacts and challenges of the pandemic better.
“VCs have been more active for sure since Q2 when they had been spending their time managing portfolio that may have been affected by COVID-19 and making sure all portfolios have healthy cash flow,” he said.
However, despite the resurgence in VCs’ appetite for capital deployment, there is one critical challenge pertaining to due diligence (DD) that most fund managers are willing to resolve.
Traditionally most DD matters required investors to hold in-person meetings with founders to evaluate a company before deciding whether or not to offer a term sheet.
However this, according to Firmanto, is increasingly changing as VCs agree to shift the DD process of most transactions – but not all – online. Indogen’s investment in the $5 million Series A-round in foodtech startup Wahyoo in August is proof that the new way of deal-making would work.
“When we invested in Wahyoo, our team still carried out due diligence on the ground. We just do it more efficiently and selectively. If we are unsure that we want to invest in the company, we won’t take the due diligence forward – other VCs are doing the same,” he said.
Having seen funding by Indonesian startups drop by over 50 per cent (both QoQ and YoY) in the third quarter this year, the resurgence in deal activity on the ground would suggest that Indonesia can expect its numbers to recover early next year, Firmanto said.
In Vietnam, meanwhile, Do Ventures co-founder and general partner Vy Le says that the funding “momentum has been picking up since Q3” as well, and attributes this rebound to the country’s success in controlling the spread of the COVID-19 cases.
Vietnam was the first country in SEA to close its borders to curb the spread of the virus, which consequently suppressed a large amount of deal activity in a country that had been earlier enjoying a generous flow of investment from overseas fund managers. Our report showed that in Q3 2020, Vietnam’s deal count plunged from 34 to eight, while funding shrank 90 per cent.
The decisive action by its government has prompted the country to witness the fastest COVID-19 recovery in terms of GDP growth after the semi lockdown was lifted at the end of April. This is expected to generate an increase in investment interest, especially once the country reopens its borders.
According to Le’s conservative estimates, deal activity in Vietnam is unlikely to return to pre-pandemic levels until two-or-three quarters after international travel resumes, while uncertainties surrounding global finance may also be a factor to watch.
“Having said that, if some of the existing Vietnam startups could outperform investors’ expectations, we can expect deal activities to rebound sooner,” she said.
While Vietnam’s upward trajectory is still being anticipated, Singapore seems to have already benefited from its effective handling of the crisis. According to our Q3 report, the city-state was the only market in Southeast Asia to witness a growth in both deal count and deal value, replacing Indonesia as the region’s top investment destination as local startups amassed 58 per cent of total funds raised in the region.
According to Yinglan Tan, partner at Singapore-based Insignia Ventures, the pandemic recovery in Southeast Asia hotspots such as Singapore, Vietnam and Thailand is one of the main factors that has boosted investor and startup confidence.
Other factors, he notes, are the overall better understanding of the impact of the crisis, and liquidity spillover from the West and China into the region resulting in greater investments in the region, especially for later-stage companies.
Tan agrees that dealmaking activities in the region have started to pick up, but expects the total number and value of announced deals in Q4 2020 will remain subdued, as it is set to “reflect the slowdown brought by COVID-19 more so than say Q2 or Q1 did”.
Historically, the first quarter of the year is the time when a flurry of deals is announced by SEA startups, our data shows. In 2019, the Q1 period saw the highest value of startup investment deals in the entire year at just over $3 billion. So far, in 2020, the first quarter also recorded the highest total deal value at just under $3 billion. The high annual Q1 figures indicate significant activity in the previous quarter – something Tan reckons will not change despite the pandemic.
“… the final months of the year have conventionally been the time for many companies to stock up for the following year, so we can also expect activity to increase, though it may not necessarily result in closed deals,” Tan said.
Though deal activities are slated to recover and slowly climb towards pre-pandemic levels over the next few months – particularly once lockdown policies are lifted – Tan believes some impacts of the pandemic on the dealmaking process could be here to stay.
“Even when travel resumes, we can expect to see a more digitized and data-driven dealmaking process. These “upgrades” are not meant to replace the still vital human aspect of getting to know founders and their companies but help investors be more strategic and efficient in the scope of their dealmaking,” he said.