The COVID-19 pandemic has changed the startup landscape around the world. There is a sense of fear among startups, VCs and customers/consumers. Many startups are staring at the spectre of going irrelevant, as demand has depleted and VCs have decided to tighten their purse strings.

Startups now are looking for ways and examples to help them survive the crisis.

In this interview, Wallace Guo, Managing Partner of Beijing-based investment bank Taihecap (formerly TH Capital), is sharing insights on what Chinese startups and VCs are doing to tide through the COVID-19 crisis and what Southeast Asian startups can learn from their examples.

Edited excerpts from the interview

On Chinese startups and VCs

For startups, different sectors have different outcomes from the COVID-19 outbreak. We saw offline retail and services, and travel & hotels industries losing business due to the situation. Some companies are already starting to shut down their loss-making shops or shifting attention to online.

Social influencer marketing and live stream shopping are becoming more and more popular.

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Healthcare, online education, online fresh content platforms, SaaS/ tech-driven B2B models are seeing a boom. These are mainly because of the massive shift of user habits; people tend to consume fresh goods, content and lessons online.

Also, large companies see the needs to digitalise their business while increasing the efficiency, so their willingness to pay for SaaS services and AI platforms has increased.

As for VCs, we did a survey with over 40 mainstream VCs/PEs in China during the outbreak. The results suggest the slowing down in the investment space is mainly caused by the restriction on travel as well inability to do onsite due diligence.

Among the investors participated in the survey, only 10 per cent expect to expand their investments in 2020 and they are mostly newly-raised funds and strategic investors. About thirty per cent of the VCs surveyed will be more conservative in their investment strategies, but this is mainly because of the overall slowing down in the market.

Some funds are curious about the Southeast Asia market, so they are ready to step into the market once the situation got better.

Also, our observation is that more and more funds are spending more and more time with portfolio management.

Lessons that Southeast Asia startups can learn from China

• Startups should invest more in technology than in user acquisition
• They should stop trying new strategies that will burn a lot of money
• Talk with existing shareholders to get help on short-term funding (e.g. convertible bonds, internal round of investment)
• Embrace strategic investors that are resourceful
• Cash management is very important, review the budget and prepare for long term.

Startup ecosystem post-COVID-19

We have witnessed economic cycles in China. After every downturn of the market lies the opportunities for unicorns.

• Top players of each vertical industry will definitely get more attention from investors with abundant capital and resources, and they are more likely to become ecosystem builders
• Economics matter a lot for all businesses — cash flow, margin, take rate, etc.
• Data-driven business model will become popular among early-stage VCs
• Education, healthcare, content, and fintech companies will draw more attentions from investors
• Warehouses, logistics and supply chain services will be driven by online shopping boom but will take longer term to ramp up.

Global strategic investment is becoming more active

Based on our own experience in transactions, we can see that global strategic investment is becoming more active, which is supported by the results of deals in the past two years.

A lot of global strategic investors are trying to build up their ecosystems in India, such as Facebook investing Jio, and Meesho and Tencent investing in Swiggy, and Udaan and Twitter investing in ShareChat.

Late-stage investors have shifted their focus to new economy

More and more attentions from the late-stage investors have shifted to the new economy companies/startups. Two or three years ago, investors like Carlyle and KKR looked to invest in the banking, financial services or real estate sectors. Nowadays, they’re looking to invest in online education, fintech and logistics.

Entertainment industry booming

When people spend more and more time at home, entertainment industries such as gaming, social media and content will benefit because active users and time spent on theses platform will increase.

According to a research by our colleagues in charge of entertainment investment, the financial crisis or the epidemic outbreak will bring a wave of spiritual consumption.

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For example, after the Great Depression, Americans’ ways of consumption transferred from parties and expensive alcohol to cheaper theatres, so that’s how the Hollywood experienced its first golden ten years.

Another example is that Japan has gone through the so-called the Lost Decade (about 1991-2001), but this Lost Decade is also the most prosperous decade of the Japanese cartoons and comics. Since then, the Japanese animation was exported to the world and it has become Japan’s second or third largest industry by now.

Therefore, I believe that this COVID-19 may bring a new era to the entertainment business throughout the world. I think that’s why platforms like Facebook and Twitter are trying to invest in some of the companies in the emerging market. I think they are trying to build up ecosystem to capture this kind of new era.

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Image Credit: Taihecap

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