Asia has been an attractive tech hub for investors from around the world for the past few years now. With tech hubs like India, China, Singapore, Malaysia, Indonesia, and Vietnam among others producing unicorns and decacorns every year, the investment scene in the region has been bustling with VCs ready to ride the digitalisation and tech disruption waves.
However, 2020 has brought about a shift in VC sentiment. With the coronavirus pandemic bringing life as we knew it to a halt, many sectors almost shut down while some like edtech, fintech, and healthtech soared. Emergent trends in the tech scene in Asia have changed and so has the overall approach of investors.
We spoke to several regional investors who helped unpack the current VC climate and shared how startups can rely on technology to leverage due diligence for better fundraising.
What the new fundraising landscape is starting to look like
There are three key changes to fundraising, according to Alex Toh, fintech investor of SC Ventures’ Innovation Investment Fund.
Firstly, VCs have been looking more inward in their portfolio for potential internal rounds before looking for new deals. Secondly, VCs tend to scrutinise startups more carefully and with great focus on cash flow and paths to profitability. Thirdly, due diligence has been limited to virtual and as such, most deals that are done during this period are with companies that investors have already met and shortlisted.
“While there are ‘pure virtual’ deals done where investors have never met the founders in person, these are rarer and we may see less ‘new’ cross border deals for now,” Toh added.
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With that, key areas of focus for startups looking to raise funds, grow business, and scale have also changed.
In the new normal, agility is key. Being open to understanding the changing landscape and pivoting accordingly while being ready for due diligence is the way forward. The investor approach towards risk-taking has naturally changed — VCs are more inclined towards startups that have a future-proof plan in place, who show openness and preparedness for due diligence, and who lean on business safety and success.
This is where startups can leverage technology to eliminate human errors, maximise data analytics, and create a robust and secure data room that helps them attract funds that enable them to survive, scale, and succeed in a post-pandemic world.
Improving fundraising efforts in terms of due diligence
Christopher Quek, a Managing Partner at TRIVE, a Singapore-based VC firm focused on Impact tech startups, shared, “Due diligence is a critical and minimum obligation for institutional VCs who are responsible for the funds given by LPs (Limited Partners). It is crucial in alternative investments as well where not all information is public. At TRIVE, we have rejected deals after stringent due diligence in the past. Due diligence also includes checking with fellow VCs and ecosystem players on the background of the founder and the startup.”
Startups, SMEs, and even big corporations can leverage technology and embrace digitalisation to help improve the overall process of due diligence. Although the efficacy of this largely depends on the nature of the business, VCs believe that tech startups tend to be easier in terms of due diligence as compared to traditional businesses that lack any form of digitalisation. In the new normal, due diligence in traditional sectors such as material sciences, food, and pharma is even more challenging due to the restrictions in visiting physical spaces.
Quek shared, “To help facilitate a smooth due diligence process, startups need to have set up data rooms ready to be released and updated as and when potential investors are keen to review. This instils confidence within the investors and helps establish a good rapport with the founders from the get-go.”
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Toh also stressed the importance of having organised data rooms. “As a startup’s traction changes very quickly, a good practice would be to segment your data rooms for each investor so you know what you provided to each and at which dates. A quick video conference call after can help address any concerns and questions the investor may have on the data.”
There are tools that help startups do this. For startups that need to quickly organise hundreds of documents for potential and even multiple investors, a data room with AI-enabled document categorisation and integrated redaction features will allow them to be ready in less than a day.
Organised data rooms are also helpful when it comes to customising your approach, which is another important thing startups should do, according to Toh. Startups should not just simply fire off information to a large number of investors, but should take time to research each investor before reaching out and provide a customised introduction or pitch deck. “While it is tempting to do a ‘spray and pray’ outreach to all VCs as more investors are willing to speak over a video conference, a customised note still differentiates your company.”
What will VCs be looking at in the new normal: Why due diligence is key
Moving forward, startup founders need to be as transparent as possible. Hiding any material information about the company and their backgrounds are never a good idea, and transparency is going to be more crucial in a post-pandemic world where the economic climate is still volatile and unstable.
“Founders also need to remember that integrity is vital in the startup journey. TRIVE has rejected startups before after receiving negative feedback on the founders from external sources,” Quek shared.
Speaking on key areas that businesses need to focus more on in the new normal, Joe Zhang of TNB Aura, Singapore-based VC company focused on tech startups, shared, “A lot of investors are now looking at unit economics and profitability more extensively, so that is crucial. Founders also need to address the “elephant in the room” as in have a few COVID points in the pitch — how did they adjust, how did they transform the economy of their business, how are they better and safer today? Investors are more inclined towards founders who learnt their lessons, adapted and have come out with a better plan prepping for the post-pandemic world.”
Paolo Limcaoco, the Southeast Asia Investment Officer for Accion Venture Lab, Accion’s seed-stage investment initiative, shared that due diligence is key to making any investment. Amidst the global shift due to the pandemic, Accion Venture Lab has had to shift its ways of doing diligence, moving it mostly digital and remote.
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“Now, when looking to invest, while we look to understand the product-market fit and financial inclusion aspect of the business, as early-stage investors, an integral part of our diligence is evaluating the founders and the rest of the team, making sure that they are thoughtful, mission-aligned, and dedicated. With the pandemic, face-to-face settings are not possible anymore. So, the focus on digital meetups with the team in both formal, as well as informal settings, has become even more crucial for due diligence.”
Limcaoco further added that while scalability remains important, sustainability has become just as crucial. He believes that highlighting the viability of the business model and operations in the future will be key for founders in the new normal.
“Investors will want to know how your business was affected, how you survived, and what are the steps you have taken to be a company that will thrive moving forward, so startups need to be prepared to answer these questions,” he said.
One of the most important things startups should do is to research — who the investors are, how their investment portfolio looks, are they a good fit — even before reaching out. And when those questions are answered, it’s best to include that in their pitch or introduction.
“We are strategic investors and it is very helpful to know how you can or are providing strategic value to the bank even before we start diving in on financial returns,” said Toh. “Do they know how we can help? For example, SC has a strong presence in Asia, Africa and the Middle East and if your future growth market is there, it would be a very strong alignment and we see this with most of the investments we have made.”
Leveraging technology for better due diligence
Startups need to understand that moving forward, there are a few fundamental changes that have reshaped the current climate and will have impacts on the near future as well:
- How businesses communicate has changed. Businesses across Southeast Asia are unable to meet or interact physically and this has made the entire process of due diligence more time consuming and challenging
- VC sentiment has also shifted. VCs have become more cautious of their existing portfolios. They are not as keen to make new investments as before, hence the drop in fundraising across the region in Q2 and Q3; they would rather focus on maintaining existing startup cohorts.
- The new scope within different sectors. While sectors such as edtech, online entertainment, and eCommerce are thriving, travel, and hospitality are among those that were the worst hit. However, investors are more conservative in general, so not necessarily an increase or decrease in each of these sectors can be seen.
- Initial approach is just the hand that knocks and not a foot through the door. Depending on how prepared you are and how open you are to sharing information, VCs may choose to open the door or keep it shut.
- A structured and well-kept data room is very telling. It speaks volumes about how prepared you are to not only share important information but also to keep the fundraising process going by making it easy for investors to see all the necessary information needed to determine what your long-term growth plans are.
Due diligence is the very foundation of the marriage between startup founders and VCs. An investment is at least a three to five-year-old relationship and it can be very painful to dissolve that relationship if things go wrong. This is what due diligence eliminates — it helps establish trust, transparency, and a two-way communication channel between involved parties.
Moving forward in the new normal, startups need to understand the changing VC sentiment and be prepared, organised, and ready to share information and documents with potential investors instantly for conducting due diligence and raising funds for business growth and scalability.
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This article is produced by the e27 team, sponsored by Datasite.
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