David Gowdey, Managing Partner of Jungle Ventures
According to a Cento Ventures report, proceeds from the startup exits in Southeast Asia fell by nearly 50 per cent in the first half of 2020.
The COVID-19 pandemic, together with its ensuing economic recession, has wreaked havoc on exit plans for startups across the region. Investors are scrutinising startups with a sharper set of lenses and a greater focus on sustainable business models. Gone are the days where startups were allowed to have a high burn rate in exchange for potential growth.
Amidst the current challenges faced in the exit landscape, David Gowdey, Managing Partner of Jungle Ventures, has a piece of advice to share.
“I think the biggest point to make is that exits have to be driven by the founders. As individualistic as each founder is, every company is on a different path,” the seasoned investor shared in an interview with e27.
Gowdey opined there are three main exit ambitions for founders, and VCs should work together with them to achieve an aligned exit strategy.
The first bucket consists of founders who desire to take their companies public through an IPO. However, he cautions only certain companies can thrive in the public markets.
Besides being of sufficient scale, companies should have what Gowdey terms “market comparables”, where there are identical listed companies in the industry for investors to compare and value the company against.
Also Read: Why the TradeGecko acquisition by Intuit is a promise fulfilled by the SEA tech startup ecosystem
The second medium of exits founders is through trade sales. These occur when a company is fully or partially acquired by another. It is usually part of a strategic plan by the acquirer to increase its market share within the industry or utilise the acquired company’s products to complement their existing offerings.
An example Gowdey shared was the complete acquisition of Jungle’s portfolio company TradeGecko by American software giant Intuit.
Another exit strategy brought up was through the sale of secondary shares. He noted this usually only applies to later-stage companies.
“If you think about Grab or gojek, early investors in those businesses would see the valuations go up. The new investors coming in will tend to purchase and invest primary capital in the company but will also purchase secondary shares from earlier-stage investors,” Gowdey explained.
Preference for trade sales
Remarking that trade sales represent the bulk of exits VCs take in the region, Gowdey shared regional stock exchanges have played a role in that preference.
Though exchanges in Thailand and Indonesia have sufficient liquidity for domestic businesses to list, there is a lack of a regional large-cap exchange such as Hong Kong or New York for tech startups to list and expand in.
Further supporting the rising trend of trade sales are the complexities present within the region. According to a report by the Boston Consulting Group, Southeast Asia is one of the most diverse regions worldwide, with more than 100 ethnic groups and 655 million people speaking over 1,000 languages and dialects.
Despite being one of the fastest-growing regions worldwide, foreign companies often find it difficult to directly partake in the rapid growth in SEA, therefore turning to acquire regional companies to increase their presence here.
The Managing Partner shared exits could be broadly classified under two categories — reactive or proactive.
Defining reactive exits as one where companies reach out to purchase a stake in another, Gowdey shared how the pandemic threw its fair share of curveballs during Intuit’s acquisition of TradeGecko.
“Talks started before the pandemic. Then, it went on hold in March when the stock market dropped in the US. Intuit, like most of the people, was quite worried about the future of the economy. Once the stock market rebounded and the economy stabilised, they came back and re-engaged and ultimately we got that closed,” he disclosed.
On the other hand, proactive exits entail companies reaching out to prospective investors. Given the pandemic’s increased impact on certain industries, Gowdey remarked that a founder’s view of an exit might have changed as they look to spin up a sale process due to a shortened financial runway.
Turning things around
A 2019 report by Golden Gate Ventures found that 54% of respondents feel startups are not prepared for an economic downturn.
Having worked with later-stage investments at Jungle such as Kredivo and Pomelo Fashion and overseen multiple exits including iflix to Chinese tech giant Tencent, Gowdey has seen it all as an investor.
When quizzed on what were the best traits he noticed in founders able to turn negative events around, he had a straightforward answer.
Terming negative events such as the current pandemic as “catalyst events”, Gowdey observed the best founders were able to utilise them to take a step back and re-evaluate the business.
Also Read: Companies shut down not because of crises but only when founders give up: Joseph Phua of M17
Remarking that entrepreneurship is no easy feat and founders often have their heads down working long hours to build up the business, he shared taking a step back in tough times could ultimately prove beneficial.
“The pandemic is a catalyst event to make founders kind of step back and say ‘ can I be doing this better? Am I running sales the right way? Do I need more customer support or is my marketing the best that I can be doing?’” he elaborated.
Beyond that, he encouraged founders to scrutinise their business efficiency and look for ways to reduce their OPEX while renegotiating deals amidst tightened financials.
Sufficient early-stage funding
According to reports, overall pre-Series A funding saw a 20 per cent plunge in 2020, coming off a plateau in recent years.
However, Gowdey does not view this decline as an issue for early-stage startups. Sharing that Jungle and other regional early-stage VCs such as Golden Gate and Wavemaker continue to write cheques for seed-stage startups, he opined the rise in angel investors within the region has also ensured there is no shortage of funding opportunities for early-stage startups.
“There’s a lot of angels around who will write, US$50,000-100,000 cheques. If founders can pull together a few of them, they could secure a US$500,000-600,000 dollar-type seed round,” he elaborated.
Alongside the rise of cohort-based investing by incubators run by VCs such as Accelerating Asia, Antler and Sequoia India, alternative ways of obtaining early-stage funding show the 20 per cent plunge would not be a cause for concern.
Also Read: The future VC will be a hybrid between accelerator and incubator. Here’s why
In response to whether startups should look to fundraise independently or rely on an accelerator, he shared the decision would be dependent on the characteristics and needs of each company.
Accelerators that support companies in business development or talent acquisition would serve well for companies that can benefit from these opportunities.
“On the other hand, founders may have a complete team formed and have friends and family who can raise enough of the seed round that they don’t need to be part of a seed fund or an incubator accelerator. They’re happy to do it on their own,” Gowdey concluded.
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Image Credit: Jungle Ventures
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