Southeast Asia Tech: winter is coming?

By Yedda Wang, Asia Editor, TMT Finance

A cold winter snap and strong headwinds may be moving its way across the tropical climates of Southeast Asia in 2019-2020, according to several senior bankers and VC investors active in the sector.

Talking to TMT Finance, the sources are anticipating a growing caution and uncertainty among tech investors, which could lead to tougher funding conditions, with less options for companies to raise cash. It may take companies active in Southeast Asian tech much longer to raise funds, with tighter terms and more expensive funding available. Some sources expect this to lead to a flurry of market consolidation in certain sectors, as companies scramble to keep growing.

Change in the investment climate

Sources told TMT Finance that tech investors including high-profile venture capital funds are generally expecting a market downturn over next 6-18 months. The causes for the downturn vary. It can be an economy cycle, and investors are still haunted by the bad memories from the internet bubble over 10 years ago and became cautious at what may come in the next one to two years.

The concerns are also thought to be holding investors from making new investments. Sources said that some of the large VCs have mentioned that they’re not going to add new portfolio companies (making new investments), so they can ensure their capital will be available for the existing portfolio companies when these startups are going to raise funds. This signals that the investors are not confident about the future, sources said.

Investors are also asking more questions about cashflow and whether the business is profitable when startups come to ask for funds. Cashflow and profitability are very important, however, these issues have never been so emphasized by investors for the last two years than recently, which also sends the signal that a change in the investment climate is approaching.

Another change is the emerged investors targeting tech firms’ secondary shares. Sources said that as investors are getting nervous about the market, they have started putting the shares they hold for some tech firms up for sale, so they can try to lock in value, even though making a significant discount during the sale. Some of the discount can be as big as 70% and even big tech firms such as Didi, Go-Jek and Grab are not exempt from secondary shares sale, according to sources. As the sale transactions are growing, funds that are targeting to buy secondary shares from sellers have also been set up.

How will the changes affect tech firms?

Having difficulties in raising funds: sources commented that tech firms expecting very high valuations may struggle, as they will find investors became unwilling to pay for the valuation expected by the tech firms. “The issue is,” one source commented, “some of the startups haven’t even met their business plans. But they have very ambitious expectations for high valuations”.

“Then what you see is some of these tech firms have to turn to internal funding rounds and raise a bridge from existing investors to continue the business and expansion, as they can’t raise funds through a normal funding round given new potential investors are not willing to pay the high price.”

The fundraising period gets long. Some fundraising, even for well-known tech firms in Southeast Asia, would take 9-12 months or even longer. Sources commented that most of the them, when a funding round gets a lead investor committed to making an investor, other investors would normally follow and participate. However, things are also changing as it is seen on some fundraising cases that even though lead investors have signed term sheets, other investors may still not join.

Subject to market consolidation: if companies are unable to raise funds, they’re looking for sale. Merger and consolidations between smaller sized companies are expected, as these companies are too small to IPO and also too small to become a target for big strategic players to acquire.

The pressures also fall onto investment banks. Big investment banks normally would consider tech fundraising deals under US$100m rather too small, yet they started to join competing with investment banking boutiques to get businesses, sources said.

Who can survive the winter?

Companies better make hay while the sun shines. One senior executive from one of the largest tech unicorns in Southeast Asia advised smaller tech firms, “Winter’s coming. Grab the money while the music is still playing.” The companies with a profitable business models definitely have a better chance. “You’ve got to own a business, and ensure that the business is making money,” the source said.

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