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Venture capitalists expect start-up funding to fall in H2
At least 31 funding agreements were announced in the second quarter this year, higher than the 24 deals over the same period last year, according to DailySocial.id data.
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unding for Indonesian start-ups will likely decrease in the third and fourth quarters of the year as investors look to profitable companies that are able to adapt to the pandemic, venture capitalists have projected.
The projection is based on data that shows funding in this year’s first six months has mostly gone to seed-stage companies.
“We expect to continue seeing funding for companies in the third and fourth quarters – most of these companies will likely fall into the ‘for growth’ category with a clear path to profitability,” said Monk’s Hill Ventures cofounder and managing partner Peng T. Ong in an email interview on July 29.
Going forward, he went on to say, greater investment would go to companies that had benefited from the crisis, such as collaboration tool and e-commerce platforms, as well as companies that supported these companies, such as recruitment firms or logistics businesses.
A recent survey by Mobile Marketing Association (MMA) and SurveySensum revealed that e-commerce and fast-moving consumer goods (FMCG) players in several Asian countries, including Indonesia, expressed optimism that their business would recover quicker than other sectors after the pandemic. They expected business to return to normal within five months, around a month earlier than the 6.2 months expected by other sectors.
The COVID-19 pandemic has forced Indonesians to stay home to curb the coronavirus spread, resulting in closures of factories, offices and shops.
McKinsey data points to a surge in customers’ use of digital channels to purchase groceries while MMA data show that increased use of digital channels during the stay-at-home period has also extended to other platforms, such as fitness apps, digital entertainment, work-from-home and online education software.
“In general, investors will prefer to fund businesses that can weather and grow during this downturn,” Ong said. “We also think that there will be a visible slowing down of seed-stage start-ups because of rapid changes in the economy, and it is hard for these companies to find a product-market fit reliably.”
He added that during the COVID-19 pandemic, companies, especially those that are early-stage, needed to adapt and would have to have an almost fool-proof demand model, which would be hard to achieve in the early stages of a business’ development.
Ong suggested that start-ups should look for ways to make their business defensible, shore up cost structures to conserve cash as runway is important for survival and maintain good relationships with current investors if they plan to raise funds in the future.
“There is a lot of dry powder in the market, and investors will continue to look for quality companies with strong teams and demonstrated traction to invest in,” he said.
At least 31 funding agreements were announced in the second quarter this year, higher than the 24 deals over the same period last year, according to DailySocial.id data. In the first quarter, 20 funding deals were announced versus 27 in the same period last year.
As many as 13 of the 31 funding agreements were made with seed-stage companies, such as the US$10 million in funds secured by supply chain start-up Ula and the seed funding for big data analytics firm Bonza in May.
However, East Ventures cofounder and managing partner Willson Cuaca said the data did not accurately reflect start-ups ability to raise funds during COVID-19 pandemic.
“Those funding graphs and data are based on when deals were announced, but the deals might have been made six to 12 months prior and probably closed during this pandemic,” he said during a webinar hosted by DealStreetAsia on Thursday.
Willson argued that funding in the next half of the year would be more representative of the current situation, adding that it would be more difficult for start-ups to raise capital moving forward.
“More investors will take a ‘wait and see’ approach to fund deployment,” he said. “Although, start-ups that manage to get funding may have to face a down-round, as the pandemic poses as a good excuse for investors to press the valuation regardless of companies’ performance.”
Willson also advised start-up founders to have at least 18 months of runway to survive the pandemic. Founders need to remove unnecessary expenses, reduce salaries or lay off workers depending on how badly the pandemic had affected them, he said.
He added that founders must be precise in taking these measures, as the margin of error was very slim during the crisis.
“However, I think how start-ups are able to rise during this time depends on how the founder responds to the pandemic. It’s not necessarily about money or which business sector you belong to,” he said.
According to a recent report from Katadata Insight Center, early-stage companies have been hit harder than unicorns and other high valuation start-ups, as the later could withstand the economic downturn.
The data show that almost 50 percent of all digital start-ups said they could survive for more than one year since March when the first COVID-19 cases were reported in Indonesia, while 20 percent said they only had runway to survive until September or December.
In the survey, 35 percent of start-ups said they had been forced to cut employee salaries, while 34.5 percent have laid off workers.
