Key insights from Michael Lints:
On executing deals in the pandemic: The venture capital market is very connected. Although, for instance, Vietnam has managed COVID really well, it’s still difficult to fly to that country from Singapore or Indonesia. This makes doing deals in these markets nearly impossible even with COVID being managed.
On building a portfolio in an evolving market: As a firm, we have always looked closely at consumer behavior across Southeast Asia. … Leveraging data allows us to follow these trends closely and find investment opportunities accordingly.
On which COVID adaptations may be here for good: Currently, our investment team spends more time on desk research. This is an interesting development, because desk research and expert reviews give a more neutral view on the scalability of a business. Deeper research will definitely remain an important part of the investment process.
Based on Cooley data for the quarter, how does your experience in the Southeast Asia market compare? In Q2, even in the midst of the coronavirus pandemic and response, our data points to resilience in deal volume and valuations. Does this align with your experience in the market?
We look at several data points, such as deal volume and funds raised, from early to growth venture. The amount raised by startups fell sharply from April 2020 onwards, following the COVID-19 outbreak. Despite the deal count from March plummeting rapidly, the deal count over June and May has been pretty much on par with the same months last year. In our view, this is because fund managers focused their efforts initially on managing the portfolio through these rough times. COVID has not severely affected the Series B+ rounds, which could be because of dependency wherein the startup has already fundraised earlier rounds. Current investors already have a vested interest in seeing the startup survive. Also, while still relatively early, Series B+ rounds give fund managers a more risk-mitigated opportunity during the pandemic. The survival rate of later stage companies should be higher than seed or Series A investments.
There has been a significant dip in median amount raised for seed series of fundraising, likely because the pandemic resulted in reduced interest in deal flow on behalf of VCs as they prioritize supporting existing portfolio companies over investing in new ventures. Also, traveling restrictions prevented fund managers from “visiting” new deals.
Obviously Asia is further down the COVID timeline than the rest of the world – have you seen any major shifts in the market? How has COVID impacted your investment process and how you are connecting with early-stage founders? Are there any changes you think will stick beyond the pandemic?
The venture capital market is very connected. Although, for instance, Vietnam has managed COVID really well, it’s still difficult to fly to that country from Singapore or Indonesia. This makes doing deals in these markets nearly impossible even with COVID being managed. An important part of doing new deals is meeting the founders in their environment and getting a grasp of local dynamics. During COVID, we had to make some adjustments to our investment process – especially given face-to-face meetings are such an important part of our due diligence. Currently, the investment team spends more time on desk research. This is an interesting development, because desk research and expert reviews give a more neutral view on the scalability of a business. Deeper research will definitely remain an important part of the investment process. Our firm has found several ways to stay in touch with founders. Besides one-on-one sessions across the portfolio, we have also hosted several online workshops around fundraising, navigating your startup through COVID and managing down rounds.
As far as VC deal terms, have you see anything new in Southeast Asia? Have terms shifted in favor of investors?
What trends are you seeing in sector activity? Do you see any changes in Golden Gate’s sector preference as you look to the future?
As a firm, we have always looked closely at consumer behavior across Southeast Asia. The way consumers purchase over time has an effect on logistics, payments, insurance, etc. Another key data point is a rise in disposable income, which leads to consumers spending on healthcare, education, lifestyle, content and travel. Leveraging data allows us to follow these trends closely and find investment opportunities accordingly. We haven’t made any shifts in sector activity. I would say our strategy evolves as the Southeast Asian region matures.
What trends are you seeing on exit activity?
In September 2019, our firm forecasted 158 exits in total for that entire year, with the majority exiting via an acquisition. We issued a research report in partnership with INSEAD. As part of this research report, we predicted an increase in exits for the three subsequent years – 386 exits in total. However, in September of last year, a global pandemic was practically unforeseeable. What we’re likely going to see is fewer exits in the next two years than we had predicted pre-COVID. In Q1 and Q2 2020, exit activity has significantly slowed down.
Any other observations on VC data worth noting?
One trend to note is the rise of secondaries in Southeast Asia. Southeast Asia VC hasn’t been known as a strong market for secondaries, given that the market was too nascent and secondary deals were too small. Now, fund managers are close coming to the end of fund life for their first fund. As they’re trying to exit those portfolios, we’ll see a larger number of secondaries in the coming years. Another data point is the number of companies that have successfully raised Series B and C rounds. These larger rounds provide liquidity events for earlier investors such as angels and seed investors.
About Michael Lints:
Michael is a partner at Golden Gate Ventures. He joined the firm in 2013 and leads the Growth venture fund. His entrepreneurial journey began in 2000 when he co-founded an IT managed services startup that was acquired in 2006.
About Golden Gate Ventures:
Golden Gate Ventures is a venture capital firm investing across Southeast Asia. Since 2011, the firm has invested in more than 50 companies across more than seven countries in Asia. The firm invests in internet and mobile startups across many sectors, including marketplaces, payments, healthcare, education, mobile applications and B2B SaaS platforms.