Is the party over in Southeast Asia's post-coronavirus tech scene?

Term sheets were exchanged, vetted and accepted. Series A funding for a Singaporean tech start-up was a done deal, or so it had thought. Then Covid-19 struck.

"[The investors] just pulled out and said they couldn't do it," said an employee of the start-up. "Basically, all that was left was for them to wire the money over."

Months of discussion came to nought. The investors said discussion would restart when the coronavirus situation had settled.

"We were stuck and even considered disbanding for a while. I had even found a job at another start-up," the employee added.

Then a white knight arrived, in the form of funds from the Singapore government, which recently pledged another S$285 million (US$203 million) to support promising start-ups. Earlier this year, it set aside S$300 million to help deep-tech firms under the Startup SG Equity scheme, in which the government co-invests with third-party investors.

But experts predict that some start-ups will still fall by the wayside as the fallout from the pandemic becomes clearer. They will have to get used to funds drying up and retrenchments mounting " a far cry from the glory days of 2015-2019, when more than US$37 billion poured into the region as venture capitalists searched frenziedly for the next Facebook.

The funds created instant millionaires and fuelled huge parties in the tech scene.

Now, instead of growth, venture capitalists are paying more attention to profitability and cash flow. Start-ups in health, e-commerce and gaming, which are thriving as people are forced to stay home, remain attractive. Those in hardware tech, food and drink, travel and hospitality are likely to take a big hit.

An advertisement for Indonesia's Gojek in Singapore. Photo: Reuters alt=An advertisement for Indonesia's Gojek in Singapore. Photo: Reuters

Facebook's messaging platform WhatsApp and PayPal Holdings offered a glimpse of the future when they announced earlier this month an undisclosed investment in Indonesia's Gojek.

Gojek, founded in 2010 as a ride-hailing firm, now offers a one-stop app where users can make online payments, and order food and other services, including telemedicine.

The news came about a month after WhatsApp announced a US$5.7 billion injection into the digital arm of India's Reliance Industries.

Covid-19 has hit all parts of the start-up ecosystem, from funding to operations and talent.

A survey by Startup Genome found that 41 per cent of start-ups globally had three months or less of cash left. Since the beginning of the crisis, 74 per cent of start-ups had terminated the services of full-time employees, and over two-thirds of start-ups had reduced their expenses since last December.

Some of the biggest regional tech companies are already facing lean times. Unicorn Grab has talked of "a long winter", e-commerce start-up Zilingo has retrenched staff and Uber has shut its regional headquarters in Singapore, affecting 120 employees.

Grab has said it faces a "long winter". Photo: Xinhua alt=Grab has said it faces a "long winter". Photo: Xinhua

For a Singapore-based hardware tech start-up, which sells smart bike helmets, supply-chain disruptions have hit home. Customers have requested refunds after lockdowns in countries like China prevented it from fulfilling its first batch of orders on time.

A project with a big transport company has also stalled after the company decided it had to reconsider its investment. Searches for new investors have drawn a blank.

"Most do not reply and those who are kind enough to will say that they will get back when the situation eases up," said its chief business development officer.

Funding in Southeast Asia could drop by 25 per cent in the short term, pushing start-ups to rely on their own cash flow for one or two quarters, a report by Singapore-based venture capitalist (VC) fund Velocity Ventures found.

This means that start-ups will have to be much more cautious about spending, putting a dent in their plans for expansion. The buzzwords these days are no longer about expansion, but survival and restructuring. Cash flow is now a key metric of survival.

Singapore-based drone start-up, Red Dot Drone, has seen a complete halt to its business, which specialises in autonomous chase technology for sports event broadcasts.

"In the past, the VCs prioritised the potential market over immediate income. But the situation has changed," said Akira Hirakawa, its chief executive. "They require us to secure enough cash to survive during this period as this situation might last longer."

As the pandemic rages, start-ups like Red Dot Drone will see significant hesitation from investors.

"The first thing VCs have done is to stop new investments and spend the last two to three months just trying to figure out what is happening to existing portfolios, how they are going to help them restructure in advance," said Wong Poh Kam, a business professor from National University of Singapore.

Furthermore, general partners " the founders of VC firms " would be spending more time working with their portfolio companies to weather the storm, shifting their attention away from pursuing new deals, said Alex Lin, deputy chief executive officer of NTUitive, the enterprise arm of Nanyang Technological University.

"General partners are always looking for proven revenue traction. It is harder for a weak start-up to show traction with much lesser consumption," he said.

For now, the party is over in the tech start-up scene. "Our internal research shows a steep drop in VC funding for the first quarter of this year," said James Tan, managing partner of Singapore-based VC, Quest Ventures.

"If the current trends hold, the line continues flat for the next two quarters before a mild recovery takes place at the end of the year, and accelerates as the new year begins."

There may be many losers as funds run dry, but a few big winners have already emerged. As the world steps into a new, post-Covid-19 order, funding has been channelled into businesses that benefit from people and workers staying home.

The ubiquitous use of Zoom's video conference service has seen the company's stock price soar by 230 per cent since the start of the year. Other services such as logistics, e-commerce and food delivery have also seen an uptick in demand. Singapore-based last-mile logistics start-up Ninja Van raised US$279 million in Series D funding at the start of last month.

Zoom's stock price has soared by 230 per cent since the start of the year. Photo: Shutterstock alt=Zoom's stock price has soared by 230 per cent since the start of the year. Photo: Shutterstock

"E-commerce and food delivery will become a way of life, and telemedicine, online education and digital media will be more relevant," said Soo Boon Koh, founder and managing partner of Singapore-based VC, iGlobe Partners.

In the Philippines, cash-loving consumers began embracing digital money when movement restrictions were imposed starting mid-March. Bricks-and-mortar stores have scrambled to get an e-commerce presence, a boost for payments processing start-up Paymongo. "Our monthly growth rate now averages at 100 per cent month-over-month," said Francis Plaza, its CEO.

When school was suspended in Singapore in April, one start-up experienced a burst of activity. In less than two weeks, education technology start-up Geniebook had received enquiries from numerous VCs.

"We have been fortunate. Looking at the net effect of Covid-19, it has been positive for us so far," said Geniebook chief executive Neo Zhizhong.

Jakarta-based edtech firm Ruangguru has likewise enjoyed growth in users as schools closed from mid-March. The firm said its platform, which has online quizzes and educational videos, had become a primary tool for millions of Indonesian students from kindergarten to secondary school in the last three months, especially after it introduced a free version called Sekolah Online Ruangguru (SORG) or Free Ruangguru Online School.

"We are also fortunate that our business can continue growing, and that we closed a successful series C round before the pandemic, positioning us in a relatively safe place in terms of cash and runway," said Arman Wiratmoko, Ruangguru's vice-president of corporate strategy and finance.

For Singapore, its role as a start-up hub is likely to be further strengthened as funding is funnelled into a few big winners which are likely to use the republic as a springboard into the region. "The past three years saw a rush of new VCs setting up shop in Singapore to invest in start-ups in Southeast Asia. Many of these companies are still not cash flow-positive and would still require constant funding support, and this has resulted in existing and new VCs taking another look at their business model," explained iGlobe Partners' Soo.

The survival of the fittest could benefit the ecosystem. "Those who can make the grade will be able to survive, post-Covid-19. Those who [can't] will fail," she added.

This article originally appeared on the South China Morning Post (SCMP).

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