“Bad companies are destroyed by crises; good companies survive them and great companies are improved by them.” - Andy Grove, Former Chairman, and CEO of Intel
CoVid-19 has ravaged the world for more than half a year now, and as I’m writing this article, we have seen the death toll cross the 1 million mark and infections hitting more than 38 million people worldwide. Our lives have been affected in every way possible, and as someone deeply rooted in the startup industry, the disruption is particularly jarring as we have witnessed many startups desperately fighting for their survival.
Over the last 6 months, our jobs at Plug and Play have been helping corporations accelerate their digitization process, as well as working with startups to react to the immediate impact, respond with strong short-term actions to either provide more to an existing user base or traverse horizontal industries with their existing offering. Sooner or later, all startups will need to rethink what their future might be, so that they can plan and build for a slightly different long-term vision.
While helping our startups with their investment strategy, here are the top 3 questions that we have been asked in recent months.
Should I fundraise right now?
Unless you are part of a small fortunate group of startups that is doing well against the current, chances are that your cashflow and revenue have been affected because of a drop in sales or restrictions to the supply chain. As a founder or management, you should have already taken quick and precise actions to reduce costs and preserve your cashflow.
At this point, if you’re planning to fundraise to support scaling purposes, I would suggest you to hold off unless you are part of the small fortunate bucket that I’ve mentioned earlier, or if you are able to demonstrate growth digitally, otherwise general confidence in expansion at this time is low especially with restrictions to international travel and lockdowns still occurring frequently, especially in regions like Southeast Asia.
If you are running into cashflow issues because of the prolonged pandemic situation, you will have no choice but to consider additional funding. There are many ways you can raise funds, but if you would prefer to do so through an external investment, your best chances of doing so would be to look at existing shareholders who might be able to tide you through with a loan or help lead a bridging round. Rounds typically might take longer to close during this period, so my suggestion is to manage your investors well and consider doing a rolling close to reach your target amount.
This then brings us to the next question.
Are investors still actively investing?
In short, the answer is yes.
Investors have different setups and structures. There are investors who have one or multiple different funds and there are also investors investing off their balance sheet. For the latter, we tend to see a preservation of cash for purposes such as funding their core business lines, but for venture capital firms with active funds, they’ll definitely still be more active on the lookout for startups to invest.
Most Venture Capital (VC) firms function on a typical 10-12 year fund lifecycle. In this lifecycle, the first 3-5 years are the periods where VC firms will be actively looking to invest, so it will be useful to understand VC firms better to figure out whether they have funds which are still in its active disbursement stage. In order for them to reap returns within a limited timeframe, VCs will still be actively looking to invest.
However, you should note that most investors will be spending more time and more money to support their portfolio companies, so they might not have as much funds to invest in new startups. As a result, most investors will be more selective with their investments. We see that happening within Plug and Play as well. For the past 3 years, we have been investing in more than 200 companies globally per year, but for this year, we have just passed the 100 mark only recently.
From Cento Ventures’ report published in August 2020, you can see an obvious drop in the total number of deals in the first half of 2020 as compared to the same timeframe in 2019. This clearly shows that investors are still actively investing, just not as many deals as compared to the past.
Are valuations and fundraising amounts getting affected?
By virtue of investors being more selective with their investments, the competition among startups will get fiercer. Lower valuations in this case will be more attractive to investors, and when it comes to coming up with the valuations, it might just boil down to a numbers game.
If you consider the different methods of coming up with a valuation, be it discounted cashflow, financial projections based on recurring revenue or gross merchandise volume, many of these figures have now been effectively lowered for most startups, and that influences how an investor might value your company. At the end of the day, the Internal Rate of Return (IRR) for investors will be lowered because of the delay depending on how long the industry takes to recover and ultimately when your startup is projected to exit.
If you dive deeper into the Cento Ventures report, you can see that although the volume of deals has fallen, the average amount per deal remains largely the same, except for growth-stage startups raising between $10m to $50m, which has seen an increase in deals but a drop in average amount raised. This indicates that more startups in the Series B to C stages have been raising smaller amounts, probably to pile up on cash reserves to help outlast the pandemic.
What should I do now?
I’m a bit of a sadist myself, but I really believe that in order to be the best, you’ll really need to compete with the best out there and stand out. This thought is echoed by Hanif Joshaghani, co-founder of Symend, during a fireside chat with our CEO, Saeed Amidi. Symend, a Plug and Play portfolio startup, helps companies identify financially at risk customers and provide them with alternative ways of making their payment. Symend managed to close their funding round of US$52 million earlier this year.
Brian Chesky, co-founder and CEO of Airbnb, has advised founders in a recent Simon Sinek interview, not to “waste” this crisis and use it to define what a success your company can become. Although Airbnb has found itself right in the middle of the CoVid crossfire, it has continued to explore an IPO in 2020, moving fast during this period to launch virtual experiences. This allows homeowners and hosts to offer virtual experiences to anyone around the world who would like to learn about foreign experiences and cultures even if physical interactions are being shut down. Closer to home, Joel Leong, co-founder of Shopback, a company heavily dependent on transactions in the travel space, have mentioned that they have expanded their product scope slightly to focus on providing cashback for essential purchases like grocery shopping.
So, if you do need to fundraise during this period, you should target to impress investors not just on how your company has coped with the CoVid pandemic, but also how your vision has been broadened based on your growth and learnings from the current crisis. As Hanif has put it during the fireside chat, “Strive to be the best and the funding will come. Be smart with how you raise money.”
ARTICLE WRITTEN BY: WAYNE SOH
Wayne Soh is the Director of Investments (Singapore) at Plug and Play Tech Center. Wayne leads the Plug & Play team in Singapore and oversees Plug & Play's investments in the APAC region. He has been active in the local technology and startup ecosystem for more than 10 years, working with government agencies, corporations, universities and community groups to help promote the adoption of the latest technology and to boost the chances of success of the startups that he works with.
As an in-house venture capital, our goal is to fund the teams that are building the defensible businesses of the future. By leveraging our capital, our network of VCs, and our corporate partners, we give our portfolio companies an added advantage. Find out more here!
Interested in joining our programs, click here!
