When China sneezes, the world catches the cold.
The ill effects of Covid-19 – the disease caused by the novel coronavirus identified last year in Wuhan, China – is spreading like wildfire across industries. So far, it has triggered a slump in the travel sector and disrupted the manufacturing supply chain, causing gadget makers such as Apple to downgrade earnings outlooks.
And with funding for Asian technology startups in January down 52% year over year, venture capital firms fear dealmaking will further slow down. With much of China in lockdown to contain the continued spread of Covid-19, deals in the mainland saw a massive decline last month.
Despite this, the outbreak’s full impact remains to be seen, as the deals that were reported in January had already been sealed weeks earlier. While some VCs such as East Ventures have yet to see much effect on their portfolio, others – including Silicon Valley-based Patamar Capital and MDI Ventures – are seeing delays in fundraising activities.
“If the fund or startup only has money left for three weeks, then this will impact fundraising or company operations,” says Willson Cuaca, co-founder and managing partner at East Ventures. “Our startups don’t have this issue.” The firm’s limited partners (LPs), he adds, are long-term partners, which makes travel for face-to-face meetings unnecessary.
Disclosure: East Ventures is an investor in Tech in Asia.
Patamar Capital, on the other hand, says it might have to extend the timeline for its ongoing fundraising due to the novel coronavirus outbreak.
“We are talking to some investors who are not based in Asia, and because there are travel advisories, there have been some delays,” says Dondi Hananto, a Jakarta-based partner at Patamar Capital. “We will probably stretch it to the end of the year, but hopefully we can close it before that.”
Aldi Hartanto, the vice president of investments at MDI Ventures, says that fundraising efforts from LPs have also slowed.
“Our main country destinations for the [LP] roadshow are China, Japan, and South Korea, which have been quite exposed by coronavirus,” he says. The firm plans to mitigate the impact of the outbreak by targeting LPs in Singapore and Indonesia, while South Korea and other markets will be covered by co-general partners based in those areas.
Hartanto suggests that LP fundraising, along with investments in regional startups and growth-stage rounds, are the activities most affected, as they rely more heavily on global capital. Most VCs, he says, are limiting international travel, while saving face-to-face meetings or office visits only for final decisions (everything else is done mostly via phone or video calls).
“[The virus] makes it difficult to close a deal due to face-to-face meetings being a ‘key art’ to build trust and comfort during fundraising,” he says. Some VCs have even decided not to meet a portfolio company’s founder in person at all prior to making an investment decision or shifting their investment focus to the local market, adds Hartanto.
Similarly, Cuaca says East Ventures has a business continuity plan in place, which it triggered two weeks before Singapore raised its outbreak response level to code orange. In the plan, the firm leverages on cloud infrastructure and video calls for most meetings – should there be a physical meeting, no two decision makers will be in the same room to decrease redundancy.
“As a seed investor, the only difference is that you must close the deal without meeting face-to-face,” he says. “But we have been well trained to read founders by their voices on a phone call or 2D impression on video call.”
Other than fundraising, startup investments can also be affected. Some VC firms could have team members who are under lockdown in virus-hit countries, which makes it difficult to source and close deals. Several tech conferences and events, such as Money 20/20 Asia in Singapore, have also been cancelled or rescheduled. Some VCs may rely on such events for networking and as a deal-sourcing strategy.
Fortunately for MDI Ventures, it relies more on guerilla referrals, Hartanto says. Other than Indonesia, it also has offices in Singapore and the US which can cover their investments there. That said, the Covid-19 outbreak does limit coverage in Vietnam, Hong Kong, and India, where the firm has “sizable inbound interests” but without local teams.
Eng Seet, the head of Indonesia at Openspace Ventures, agrees that deal flow has not changed much, though he finds that heading into 2020, risk appetite among investors has been “shaky.” The outbreak has just made things more uncertain.
What’s more critical now, Eng says, is to help portfolio companies deal with the situation. While growth may stall at the moment, smaller startups won’t be as affected from a macroeconomic sense in the same way bigger unicorns or corporations will be. There just needs to be more planning, particularly in cash management and “calculated” growth – basically, taking a “cautiously optimistic” approach, he says.
“It is very important for companies to revisit their growth strategy in light of the macro headwinds we are experiencing this year. In addition, founders should continuously stress test their budget planning and be a lot more disciplined in driving growth in a capital-efficient manner,” says Eng.
But ultimately, it is uncertain times like these that can help normalize lofty valuations, says the VC. “Despite the negative headwinds, it is also the best time for value investing, in which pricing becomes more normalized, relative to expectations.”