Funding rounds intensify as crisis management adds up to VCs' investment criteria

Investors are expecting a bulk of changes in the ‘new normal’, making it harder for cash-strapped startups.

During the first five months of the year, some of Singapore’s startups still managed to fundraise despite trying times. One of the latest movement on this scene is biotech startup RWDC Industries, which just closed its series B funding of $188.42m (US$133m) from Vickers Venture Partners, energy and resources company Flint Hills Resources, CPV/CAP Pensionskasse Coop, and International SA. A few weeks before that, Accelerating Asia awarded startups such as iFarmer, Numu, IZY.ai and Priyoshop up to $100,000 each.

But despite these accomplishments, more difficulties lie ahead for those looking to close funds as venture capital (VCs) firms added a new criterion to their investment mandate—’what kind of impact will COVID-19 have on this model or service?’.

“How they answer will dictate whether an investor commits now, or waits until the pandemic passes,” Justin Hall, partner at Golden Gate Ventures, told Singapore Business Review.

Some VCs are also applying revisions to their investment theses. Michele Daoud, partner of Monk’s Hill Ventures, shared that they are building a thesis and conviction based on how consumers and business behaviours might shift amidst the ‘new normal’ after COVID-19.

For specific potential investments, Monk’s Hill Ventures stress tests a company’s thesis during the downturn and goes back to first principles to question underlying assumptions.

“We take the time to understand the founder’s rationale for raising capital now, as well as whether the capital will be used for survival or to capture growth during COVID-19. We also look to understand the business model’s dependence on future capital raises and what the path to break-even looks like. We build various scenarios as to how the potential investment may play out given different recovery scenarios, and work with the entrepreneur to understand what the business will look like post pandemic,” Daoud stated.

Not only that, startups should also expect the fundraising rounds to take longer than the usual investment process. For instance, Daoud explained that they’d prefer meeting startup founders in person to assess the ones they haven’t previously known.

“As a result, our investment process may take longer than usual. Founders should be prepared for longer timelines as investors build the comfort they need to back a new team,” she added.

‘Raise to survive’

Even though there is a lot of activity going on and VCs are still looking for startups to invest in, they strongly advise startups to focus away from top line growth and more into profitability and extending their runway.

“VCs are currently focussed very much on advising, hand holding their portfolio companies in managing the cash flow, supply chain or demand bottlenecks. If startups can survive this demand and supply shock VCs believe that they can grow and raise capital at better valuations in a years’ time. Reducing the portfolio risk by active management with the companies is one of the important functions currently for many investors,” vice chairman of Business Angel Network of Southeast Asia (BANSEA) Ramesh Raghavan said.

Monk’s Hill Ventures' Daoud adds that capital management, rainmaking ability, and a heightened sense of urgency are said to be critical survival tools for entrepreneurs so they can roll out plans based on different scenarios, optimise for underlying capital efficiency, and path to profitability without relying on new external funding rounds within the next 12-18 months.

“Founders and CEOs need to adapt swiftly and over communicate with their teams to protect their employees and ensure smooth business operations. It is critical for them to be decisive and adopt flexible policies while keeping close tabs on their different markets and how the environment is evolving week after week,” Daoud said.

But as for the ones that had recently bagged investments, startups now have a runway to continue their services to clients. Zhaotan Xiao, RWDC President for Asia Pacific, notes the importance of the investments in building production capacity as the company is currently focussed on facing the growing demand for polyhydroxylalkanoate (PHA), which is the biodegradable substitute for everyday-use plastic.

On the same note, hospitality tech startup Izy.ai’s co-founder and CEO Gerry Mangentang said that investment will help them shape their products to help their clients adapt to the new normal.

Meanwhile, there are some that are currently confident with their business models and dared to push for growth.

Retail marketer Numu, which received investments during the accelerator programme of Accelerating Asia, plans to continue their end-goal of providing a higher ROI to clients, increasing sales, and improving efficiency.

Rainbow after the storm

Despite all of the changes the ‘new normal’ will bring. Startups and VCs remain positive in their outlook in Singapore and in the region. Startups deem Singapore and SEA to have important roles in their success and BANSEA’s Raghavan expects that deep tech, fintech, healthtech, and digital transformation businesses will take centre stage as businesses now try to digitise whatever they can to reach clients.

“Things will change for sure. Some new opportunities will rise whilst some others will diminish. My general take would be that startup valuations and traction targets/KPIs will be re-evaluated and re-adjusted with the main underlying idea going back to the very basic principle of business which is monetisation. ‘Path to profitability’ and ‘achieving cash flow-positive’ will be key questions to be tackled which will surely affect a lot of other business aspects such as marketing spending, headcount and recruitments,” Izy.ai’s Mangentang stated.

However, startups are still looking forward to new opportunities which might emerge during the pandemic and as people transition to the new normal.

“COVID-19 crisis has also given us an opportunity to rethink our priorities and startup founders, investors, and stakeholders like the policymakers need to understand those priorities better. Businesses have to take the opportunity to leverage this growth in digital space and design products and features to enhance the services further,” said Fahad Ifaz, co-founder and CEO of iFarmer said.

By Janine Ballesteros