THE Covid-19 pandemic is sweeping the world over at breakneck pace, impacting not simply world monetary markets and companies however disrupting nearly each facet of our every day lives.
The digital economic system, which has been on a tear during the last 10 years, has not been spared. Many tech entrepreneurs, notably in Asia, are experiencing their first main disaster and are understandably fearful on the prospect that their startups could not survive, notably if they can’t increase funding.
But, those that are sufficiently old to recollect the Dotcom Bubble within the late 1990s, and its spectacular crash in 2000/01, will recognise the similarities.
There was no virus then however, largely, the identical elements are there. The identical “irrational exuberance” of buyers driving inventory markets to new heights.
Overvalued tech IPOs. An excessive amount of enterprise capital (VC) cash chasing after tech startups (swap “dotcom” for “fintech”).
Younger entrepreneurs with five-slide energy level displays elevating cash with none underlying innovation (suppose “WeWork”) or a transparent technique and path to profitability.
Throw in some new angles similar to Rising Asia (China), unicorns and fintech and there you will have it – Dotcom Bubble II.
It was a matter of time; the bubble needed to burst (once more). Covid-19 was simply the set off.
A lot has since been written concerning the Dotcom Bubble. The occasions that led as much as it, why it collapsed and, in fact, the teachings we will study in order that historical past doesn’t repeat itself.
However historical past generally does repeat itself, particularly with regards to cash and VCs, for all their fancy levels, appear by no means to study.
If buyers are prepared throw dumb cash at tech startups, you will be certain there will probably be no scarcity of takers.
The warning indicators have been there. The hype over social media corporations (Fb, YouTube, Whatsapp, Wechat, Twitter, Instagram) adopted by blockchain (and Bitcoin et al) and extra lately, fintech.
The failed IPOs of Uber, Lyft, Pinterest and Slack and the scuttled IPO of WeWork (whose survival, on the time of writing, just isn’t but assured) have been flashing pink lights that one other tech bubble was about to burst.
Since 2015, large quantities of investments have flowed into tech corporations creating, within the course of, a rising variety of unicorns (startups valued at US$1bil (RM4.33bil) or extra), although unicorns are arguably now passe and bragging rights have shifted to those that obtain decacorn (over US$10bil (RM43.3bil) and even hectocorn standing (over US$100bil (RM433bil).
Fintech corporations, specifically, had been attracting rising investor curiosity. In response to CB Insights, in 2019, fintech startups globally raised US$33.9bil (RM147bil) as buyers seen the monetary providers business because the final bastion ripe for disruption.
In June 2018, Ant Monetary Providers, which operates China’s largest on-line cost platform, raised US$14bil (RM61bil) in what was described then as the biggest single world fundraising by a personal firm.
The funding valued Ant at US$150bil (RM650bil) at the moment or roughly, 50% of JP Morgan Chase, the world’s most precious financial institution.
Because the onset of Covid-19, the Nasdaq Index has dropped from its mid-Feb 2020 peak of 9,800 to 7,384 on March 25, a drop of about 25% in simply over a month.
The sudden drop in shopper confidence, along with lockdown measures globally, has severely impacted the companies of tech corporations and people looking for to lift funds. What does it imply for the digital economic system and its many startups?
Allow us to begin by placing some issues in perspective as a result of within the startup world, the essential guidelines haven’t modified a lot.
1) Money is essential (or king)
Firstly, money is the lifeblood of any enterprise. Tech startups can fail for a wide range of causes however finally, they fail once they run out of money, even when they’ve one of the best concepts.
Most VCs, subsequently, prioritise money movement break-even over profitability when assessing corporations. Startups, by definition, are pre-revenue and depend upon buyers for funding.
When you have not closed your funding lately, then discovering buyers within the subsequent six to 12 months will probably be powerful.
Traders are more likely to be assessing the affect of Covid-19 on their funding portfolio and taking a wait-and-see strategy.
Following the dotcom crash, funding for tech dried up. VCs that had invested closely into tech startups have been looking at large losses of their portfolio as many dotcoms, nicely, bombed.
New investments took a again seat as VCs needed to resolve which portfolio firm to avoid wasting and which to chop unfastened. Traders (often known as restricted companions) in VC funds additionally took a wait-and-see strategy, assessing how VC managers carried out and responded within the disaster.
If, nevertheless, you will have already raised some cash, you’ll need to realistically assess how lengthy it can final and whether or not you might be seemingly to have the ability to increase extra funds when it runs out and extra importantly, from whom?
Will anybody be investing in tech within the subsequent 6-12 months?
Have an sincere dialogue together with your present investor about attainable situations. In case your investor is unwilling or unable to proceed to assist you when the cash runs out, what are the choices?
Is it higher to stop operations quickly, return funds to your investor and keep the goodwill for later?
Traders respect an sincere and lifelike dialogue.
2) Timing is all the things
The final decade has been a increase interval for tech, just like the late 1990s. The worldwide monetary disaster in 2008 gave rise to the emergence of fintech gamers, offering monetary providers sooner, cheaper and extra conveniently than the incumbents.
Since 2008, the US inventory market has gone right into a 10-year bull run with the tech-heavy Nasdaq index growing by greater than 500%.
Throughout this era of considerable liquidity, we noticed tech corporations like Apple, Alphabet, Google, and Amazon becoming a member of the trillion-dollar membership.
Many startups have been in a position to increase cash comparatively simple and a few grew to become very profitable.
However for those who consider (as many do) that each occasionally, markets have to right, then we have been already overdue. The final disaster was in 2008. Earlier than that, in 1997 there was the Asian Monetary Disaster and earlier than that in 1987, we had Black Monday.
To succeed, you might want to tick many packing containers however most of all, you additionally must be fortunate together with your timing – to dodge the black swans just like the Dotcom bubble crash and Covid-19.
3) Failure just isn’t terminal
By now, if you’re a tech entrepreneur, you must know that the probabilities of success are very small for startups and 90% of all Silicon Valley startups fail.
Regardless of the vigorous choice means of VCs, just one out of 10 portfolio corporations will succeed. In Asia, the chances are most likely even decrease.
A lot of the dotcoms that began in Malaysia throughout the late 1990s failed. However many entrepreneurs put on their “badge of failure” with pleasure.
VCs recognise the worth of failure and sometimes see it as a plus level. In the event you discover that you’re unable to proceed with your enterprise by way of lack of funding, have an sincere evaluation together with your staff and investor as to what may have been accomplished higher. The teachings will probably be invaluable.
Many entrepreneurs don’t succeed on the first try. Your dream doesn’t finish together with your first failure.
4) Different choices
What you probably have raised your Sequence A, established a market presence and getting some traction (income) however want extra funds to develop and survive?
The very first thing to recognise is that it’s now a purchaser’s market. Traders could make investments however very selectively and can search for worth. The good valuation you have been taking a look at a month in the past most likely now not applies.
Your Sequence A investor will clearly wish to save their funding if attainable. They need to be your first cease. Are they nonetheless assured in your enterprise? Will they lead the following funding spherical?
That is a crucial signal of confidence for any new investor. What would be the phrases of the brand new spherical? Very seemingly they are going to be extremely preferential to the brand new buyers however you might have no selection. These are the brand new realities you must take into account as the worth of constant on together with your dream.
Now we’ve got the fact checks out of the way in which, is all of it doom and gloom if you’re within the digital economic system?
There are some causes to be optimistic:
1) In each disaster, some companies will thrive. Not all corporations will fail. Consider the Covid-19 disaster as a validation or take a look at of your enterprise mannequin – each current and potential investor will take a look at the way you carry out in a disaster.
The largest affect of Covid-19, within the brief time period, is that there’ll now not be any face-to-face interactions. Nearly all the things should accomplished on-line.
Customers who could not have in any other case tried your enterprise mannequin could accomplish that now. From shopping for items and providers to endeavor monetary transactions; e-commerce is booming.
What an excellent alternative to point out how the digital economic system works. In case you are, for instance, an internet monetary aggregator, would your companions (banks and insurance coverage corporations) not want your digital acquisition mannequin greater than ever to seek out clients?
Branches are closed. Gross sales staff and insurance coverage brokers are home-bound. The standard channels are closed.
Equally, if you’re a P2P firm at a time when companies want borrowing and financial institution branches are closed, would a P2P platform not be a handy (perhaps solely) approach of accessing loans?
In the event you can validate your enterprise mannequin in a disaster, not solely will your probabilities of surviving be stronger however you can be in a significantly better place to lift funds later.
2) Because the early 1950s, Silicon Valley has turn out to be the worldwide middle of innovation due to know-how innovation and willingness of buyers to again high-risk startups, creating massive world tech giants like Microsoft, Intel, Oracle and, extra lately, Amazon, Ebay and Fb.
Nevertheless, within the final decade, India and China have emerged as innovation facilities, attracting a number of the greatest expertise from Silicon Valley.
Asia goes digital and adopting know-how at a tempo sooner than the US and many of the world. China is sort of cashless and residential to a number of the largest and main fintech corporations on the earth.
Asean can also be rising and with its large market (600 million inhabitants), rising middle-class demographics, a lot of whom are tech-hungry and tech-savvy, and is ripe for know-how innovation.
3) When the Dotcom Bubble burst in March 2000, tech funding didn’t get better for a decade. It took the Nasdaq Index 15 years to succeed in the identical stage as simply earlier than the crash.
Are we taking a look at a repeat state of affairs?
For a couple of causes, that is unlikely. Firstly, inside the subsequent 12 to 18 months, the affect of Covid-19 will probably be vastly decreased as we’ve got a greater understanding and management over the virus and vaccines are more likely to be developed.
Secondly, China is already recovering from Covid-19 and restarting its economic system and this could revive world financial exercise.
Thirdly, the remainder of Asia, with its rising center class, will proceed to be prime targets for know-how adoption as evidenced by the rising investor curiosity within the area and likewise, China’s massive tech corporations increasing past its house markets.
The highway to success for a tech startup is an extended one and paved with many failed ventures. However it’s a path taken by many in Silicon Valley and one which many in Asia are additionally beginning to take, maybe impressed by the numerous success tales which might be rising.
For all the explanations acknowledged above, it has by no means been a extra thrilling time to be a part of the digital economic system in Asia.
David Fong is co-founder of Greyhair Companions, founder president of the Fintech Affiliation of Malaysia and former chairman of the Malaysia Enterprise Capital & Non-public Fairness Affiliation