Vitavin Itti · Follow
Published in · 6 min read · Jun 22, 2022
The year of 2021 was a record-breaking year for venture capital (VC) funding globally. Southeast Asia was no exception, as the region minted a record 25 new unicorns in the year, according to DealStreetAsia.
While ASEAN countries are slowly adjusting to and recovering from the pandemic, 2022 has been a year of uncertainty, stemming from geopolitical tensions and macroeconomic instability, further compounded by the recent performances of large tech companies in both the private and public markets.
This post re-shares some of my thoughts on the questions that were asked at the panel “Fundraising: Are the Good Times Over?” recently organized by the Thai Venture Capital Association (TVCA) on 26 May 2022.
Thailand’s tech ecosystem is still at a very nascent stage compared to not just well-known startup hubs, but even our regional neighborhoods like Indonesia and Singapore. The economic impact facing tech companies that we see on the news headlines are typically more immediate to companies in the latter stages of the life cycle, such as public companies and growth stage ones that previously absorbed large amounts of capital at skyhigh valuations. We still have limited numbers of such companies as most of the tech companies in Thailand are still in their early stage with reasonable financial upside for investors. Therefore, the overall impact on the local market here is relatively mild at this point, in contrast to many’s concerns.
Thailand is also a very unique market in terms of its sources of capital. Majority of the local investors are corporate VCs, who tend to have a more balanced investment objectives between strategic value and financial returns. Disruptions will continue, likely at an even faster pace than what we are witnessing today, and so is the competition among the large enterprises. Therefore, corporations will continue to look out for new capabilities, build on their competitive advantages and retain their customers. Investment activities should not slow down much, particularly for startups that can demonstrate strong value proposition to incumbents in various industries.
Market cycles naturally come and go, and everyone within the ecosystem has a role to play while growing together through the noise and challenging times. Eventually, as the local founders become more experienced, so will the investors in becoming more disciplined. Collectively, the community becomes more robust and stable for new exciting companies to flourish and make genuine, lasting impacts to the society.
Just a year ago, everyone was probably into crypto and all things relating to ecommerce, on-demand services and food delivery. Today, however, we already observe another shift in how consumers spend their time and money, as people are gradually transitioning back to more offline activities.
There will be hot sectors all the time, and the valuation of these hot sectors tend to be very rich relative to the business fundamentals. This is something both investors and entrepreneurs should be very mindful of, especially in the period of uncertainties.
While most people like to talk about venturing into the unknown and being bold, seasoned investors only invest in businesses that they thoroughly understand. This is not to say that they only restrict themselves to mature sectors or traditional business models. For frontier opportunities, they are often the ones who admit they may not have a sufficient understanding yet and take time to build up the thesis and conviction, while the rest of the crowd simply rush on the hype-trains and assume more and more people will hop on. With humility and diligence, great investors are not only able to reduce their investment risks but also bring much more value to the companies they invest in.
Fundamentally, when people don’t really know the businesses they put their money into, they won’t have any idea when is the last station for that train either, regardless of how fast or how far it goes. There will always be trending sectors, and these will always change but good things take time, and disciplined investors will not be there without a strong conviction on the underlying fundamentals.
Balancing growth and profitability has always been, and will continue to be, a preference issue amongst venture capitalists. Between one startup burning lots of cash for 5x year-on-year growth, and another achieving 2x growth while almost breaking even, which would be in a better position to raise funding, or which would have a better chance of surviving the market downturn? The answer might be both, or it might be neither. Essentially, nobody knows. With survivorship bias, people often listen to whatever the winners say and rarely bother to hear from the graveyard of many similar companies.
At the end of the day, profitability is the only way that companies can truly take care of their own expenses and become sustainable in the long term. Being able to pay their employee salaries and grant them job security should ultimately be the company’s responsibility, not the responsibility of new investors onboarded every one or two years when the cash from the previous fundraising dries out. Companies that cannot survive on their own books will never be able to pursue a purpose or make any positive impact.
Every company has its own unique story, and rather than constraining themselves to a fixed playbook, it is more important for the founders to think through and have a clear picture of their company’s roadmap to profitability — how and when the company will eventually be self sustaining, and how can the team ensure that they are on the right track to reaching this goal.
First, fundraising is never easy, regardless of the market conditions. Never assume that it will be easy to raise capital, even if the company has been performing well.
Secondly, running out of cash is one of those situations in which there is no replay button. Founders should always closely monitor their company’s cash, not only the revenue and expenses. Going out to fundraise when the company is already running out of time with so little cash left will put themselves in a relatively weak position from the start. Not many investors appreciate a lifeline deal and for those who are willing to, the terms will likely not be very friendly.
It is very important for entrepreneurs to regularly evaluate their own status, whether their company is in default alive mode or not. This means whether the company can make it to profitability with their remaining cash. This could be done by either (a) maintaining the expenses while continuing to achieve aggressive growth (optimizing growth), or (b) cutting down expenses while maintaining the revenue (optimizing efficiency). Generally the two common drivers of high burn rates are weak unit economics and high fixed costs, with the latter often related to mis-hiring or over-hiring.
Lastly, surviving through a market downturn period can be considered a win to take for many startups. This is because many companies with less discipline will go out of business and there will be more customers waiting to be served after the storm. Startup journey is not a sprint but rather a marathon. Successful entrepreneurs are barely the fastest but simply know the timing at the heart of it — they know when to run and when to jog.
I hope this post has been useful to the readers in some way. For more resources like this, follow us on LinkedIn or Medium. If you are an early stage company looking to raise a seed or Series A funding, please feel free to reach out to us.
Disclaimer: The opinions expressed in this article are that of my own. The facts and opinions expressed here do not reflect the views of Vertex Ventures.
