Back in 2019, venture capital in Southeast Asia was seeing tremendous growth and the markets were sending all the right signals for another great year to come. But what happened after the pandemic hit? Kuo-Yi Lim, Co-founder and Managing Partner at Monk’s Hill Ventures, shares his insights on investing in the region during the pandemic.
Before the year 2020 took us for a surprise turn, venture capital firms were seeing unprecedented growth in Southeast Asia. Venture capital firms raised a record amount of $3.5 billion in 2019, an increase of 75% from the year before, according to news reports. The region’s ecosystem was buzzing with the largest number of unicorns in an emerging market. Venture capital firms were expecting another good year ahead in investing, and many were preparing to raise even larger funds.
Clearly, the year has turned out quite differently from what was predicted. While technology companies generally saw increased demand and adoption during the pandemic, venture capital investing has certainly been affected in many ways - from how deals are sourced to how due diligence is conducted.
At Monk’s Hill Ventures (MHV), we closed our latest flagship fund in late 2019. Over the last ten months of executing our investment strategy during Covid-19, we learned several things about what it means to invest during the pandemic in Southeast Asia. Let me share three perspectives.
1. Local presence and long-term relationships matter
Early-stage VC investing is a deeply human exercise. The ability to look founders in the eyes, to see and feel the team dynamics in a company, cannot be easily accomplished over video conferences. Travel restrictions have hampered due diligence and the building of relationships. As events and conferences were canceled, conventional means of socializing and building new contacts were no longer available.
Given the geographical sprawl of Southeast Asia across multiple countries, local resources have become vital. The presence of teams on the ground over a sustained period of time and who are already familiar with the local scenes is a key advantage. As the element of trust is emphasized in Asian societies, long term relationships and physical proximity have always played an important role. It is even more so now than before.
At MHV, we have been present across five countries in Southeast Asia since our early days, which today allows us to build on long-standing relationships and overcome limitations posed by travel restrictions. For example, in Vietnam and Thailand, where there have been zero daily local cases, our colleagues on the ground have been able to regularly meet with founders face-to-face.
2. Founder quality and conviction are amplified
Fundraising by startups, in general, has slowed down as investors naturally became more cautious. As the rising tide receded, founders with shakier convictions and shoddier plans can no longer ride the wave. Instead, many have retreated to safer career options.
Throughout the pandemic, we are seeing founders who have approached us with higher convictions than ever before. They are more thoughtful about their business plans and value propositions. They are also clearer in their purpose and why they would stay the course. Truly, we have never found a better time to invest in our seven years of operating in the region. In fact, we have observed a higher number of quality deals compared to previous years.
The pandemic has been the first crisis faced by most founders in our region. They say the best founders emerge from a time of crisis. We are certainly seeing strong founders remaining steadfast and continuing to tackle huge pain points that truly matter to a lot of people.
3. Impact on capital markets is a mixed bag
With the economic uncertainty and downturn brought on by the pandemic, growth in many sectors have been either delayed or affected. Follow-on funding rounds have also become harder to come by, as most later-stage rounds - typically involving international investors - are hampered by travel restrictions. Concurrently, portfolio markups and exits will be delayed or prolonged.
Fundraising by newer funds with shorter track records will hence be more challenging. High-net-worth individuals or family offices - a key source of funding for many funds - have also turned more cautious on the asset class. This will in turn affect fundraising in the near future for funds that are reliant on this group of LPs.
On the other hand, global institutional LPs continue to demonstrate an interest in the region as they look to pursue higher returns, given the low-interest regimes in the developed economies. With travel restrictions, however, these LPs now gravitate towards funds with proven track records and GPs with whom they have established long-term relationships.
Overall, the dispersion between stronger and weaker investment theses will become more apparent as we navigate through this pandemic. There will be a flight towards quality and bias towards known quantities as LPs look to deploy into the Southeast Asia VC asset class.
In the grand scheme of things, we have much to be optimistic about. The pandemic has accelerated the pace of digitalization in enterprises and the adoption of online services by consumers. This can only bode well for founders who seize this once-in-a-lifetime opportunity and build the next generation of digital champions.