COVID-19: The New Horizon for Start-Ups in Southeast Asia

Tempered investments

We expect investment deal making in Southeast Asia to continue for two main reasons, albeit with extra caution on investors' part. Firstly, many Southeast Asia-focused venture capital funds (VCs) have completed their fund raising just prior to the COVID-19 outbreak[1], are well capitalised and sit atop dry powder, and secondly, valuations in Asia have yet to reach the levels typical of the US and Europe. In this uncertain terrain, however, VCs will be more demanding of start-ups not just as regards proof of concept and suitable product-market fit, but also their spending plans, cash needs, staff utility as well as the relevant product consumption landscape, which many predict will see a shift for years following the COVID-19 outbreak. Lower valuations, smaller funding rounds and alternative modes of funding such as venture debt and convertible loans may also be par for the course for investments to come. 

The degree to which businesses may be impacted would also vary largely based on the industry sector they are in. Some start-ups could find the pandemic catapulting their products into the spotlight, as the world develops new consumption patterns while seeking out solutions to the novel problems it faces. Healthtech, edtech, videoconferencing and e-grocery start-ups for instance, have seen a spike in both investor and consumer interest of late. On the other hand, travel, event planning freelancing, ride- and space-sharing platforms may find themselves struggling. The unprecedented challenges of today present a unique opportunity for innovation. Businesses able to swiftly adapt and craft new solutions to the new problems before the world may find it easier to ride out the storm.

Increased M&A activity

SoftBank's recently announced plan to sell over US$40 billion in assets in the thick of the COVID-19 outbreak, is poised to set off a chain of divestments, acquisitions and consolidation.[2] M&A activity may prove to be the perfect marriage between start-ups grappling with cashflow and financing crunches, and larger enterprises looking for cheaper opportunities for strategic consolidation. These sales could be to unicorns which remain well capitalised, or even to large corporates – each looking either to acquire competitors, or to widen their product offering. The reality that start-ups may have to accept, however, is that these exits would be at lower valuations and less favourable terms than they may have previously come to expect.

While exits in the form of initial public offerings are likely to be few and far between in this climate, secondary sales may be the way forward for shareholders seeking an exit at this time. This trend seems to already have started in the region with minority shareholders of Grab and Gojek looking to the private secondary market to cash out on their shares.[3]

Robust governance

In a note to its portfolio companies advising them to brace for the impact of the COVID-19 outbreak, Sequoia Capital urged start-ups to question every assumption they may have about their business including runway, fundraising, sales forecasts, marketing, team headcount and capital spending.[4] Start-ups with higher burn rates will start to look harder at paths to profitability rather than unit economic costs and size of markets. The costs of customer acquisition will also have to be cut back on. These are issues that many start-up boards will likely begin to consider during the COVID-19 outbreak, but companies may benefit from putting in place more structured measures to ensure that these issues are adequately tackled.

Such measures could include the setting up of dedicated committees for oversight and to tackle certain specific issues such as isolating conflict of interest situations, mitigating agency costs and managing 'founder's syndrome'. Independent directors could also be appointed to boards and tasked with monitoring the management of the business – in particular to control the rate of cash burn, in light of these new circumstances where start-ups' focus is seen shifting from growth to survival.

Insolvency and debt restructuring

Tougher times will inevitably see businesses fall prey to debt, with some going under and folding. Singapore robo-advisor, Smartly, is among the latest to decide to wind down operations amid the COVID-19 outbreak.[5]

In recent years, Singapore has been taking steps to solidify its position as the leading corporate debt restructuring hub in the region, having enacted new legislation incorporating several features of chapter 11 of the U.S. bankruptcy code. We may well see start-ups in the coming months making use of the augmented debt restructuring framework to salvage their businesses in the face of the COVID-19 outbreak.

In conclusion

The COVID-19 outbreak, termed the 'black swan of 2020' by Sequoia Capital,[6] has upended nearly every aspect of business. Start-ups face new challenges such as dealing with national lockdowns and related logistical issues, while being compelled to tighten the purse strings. However, a look back at some past economic downturns would remind us that a number of the unicorns of today were born out of global crises – Alibaba's big break came from the SARS outbreak of 2002, and the likes of Uber and Airbnb arose from the 2008 financial crisis. Likewise, the COVID-19 outbreak will undoubtedly deliver both losers and winners, and start-ups in the region that manage to stay prudent and remain alert to innovative opportunities and solutions will find themselves truly capitalising on this new normal.

This article is produced by our Singapore office, Bird & Bird ATMD LLP, and does not constitute legal advice. It is intended to provide general information only. We will continue to monitor the situation and provide updates on any changes as soon as these are communicated to us. Please contact our lawyers if you have any specific queries.

[1] https://asia.nikkei.com/Business/Business-trends/Southeast-Asia-VC-funds-on-track-to-raise-over-4.2bn

[2] https://www.bloomberg.com/news/articles/2020-03-23/softbank-ramps-up-share-buyback-to-sell-41-billion-of-assets

[3] https://www.techinasia.com/minor-gojek-grab-investors-rush-exits-big-backers-hold-fast

[4] https://medium.com/sequoia-capital/coronavirus-the-black-swan-of-2020-7c72bdeb9753

[5] https://www.dealstreetasia.com/stories/vinacapital-smartly-2-181473/

[6] https://medium.com/sequoia-capital/coronavirus-the-black-swan-of-2020-7c72bdeb9753