Genesis Altenative Ventures Archives - Page 2 of 3

The technology industry has been one of the most dynamic and fastest-growing sectors of the global economy in recent years. 2022 was a tale of two halves. The first half of the year (and even into Q3) continued on a positive note and benefited greatly from the COVID-induced growth on the user and innovation front. Globally, startups benefitted from the preceding year of funding strength which saw investors plough $621 billion into startups globally, including $20+ billion record funding for Southeast Asia startups.

Towards the second quarter of 2022, we surveyed our portfolio founders on the fundraising environment and business outlook. A clear majority of them were optimistic about the future, observed business growth but were already noticing the slowdown in fundraising. Amidst these uncertainties, three of our portfolio companies Deliveree, Believe, and Trusting Social raised approximately $180 million of funding (April to June 2022).

Source: CB Insights State of Venture 2022 Report

As we rolled Into the second half of 2022, and certainly more towards Q4, a new reality set in for the tech industry clouded by an array of challenges ranging from economic uncertainty, market volatility, geopolitical tensions and reverberating ripples from the pandemic. Venture investors slowed their pace of investing, due diligence took longer, valuations retreated, and we started seeing signed term sheets being delayed or even revoked. Round sizes also began shrinking and later stage startups struggled to raise growth capital while holding on to lofty valuations set during their prior fundraising rounds. Funding for tech companies globally declined to $415 billion, -35% YoY but remained healthy compared to pre-pandemic levels.

According to Carta and as a benchmark on valuation, 22% of US venture-backed companies in the US, both private and public, reduced their valuations in Q3 2022, nearly tripling year-over-year. Meanwhile, as the maxim goes, “flat is the new up” with 34% of companies witnessing a rise in their valuations — the lowest increase in five years.

While the weakening fund raising environment became more evident as the year progressed, robust fundraising in the first half of the year more than compensated for the slowdown in the second half of the year with 887 funding rounds totaling US$28.8 billion in 2022 (compared to $25.7 billion raised in 2021), according to a TechinAsia report.

Referring to a joint DealstreetAsia and Enterprise Singapore report, Singapore-headquartered startups closed 517 deals in the first nine months of 2022 raising $8.11 billion, a little shy of the 487 deals and $8.28 billion raised in the same period of 2021, and with less dealmaking as the year prior.

VCs Prefer Early Stage, Late Stage Deals See Declining Investment Interest

Investment statistics from the earlier report also indicate VC preference towards early stage deals, which are defined as seed through Series B rounds. Late stage are attributed to Series C and above rounds. From the graph below extracted from the DealstreetAsia and EnterpriseSG report, investors have shifted their investment dollars into a larger number of smaller, earlier venture deals. The median size of seed rounds have doubled from $1.2-1.5 million in 2021 to $2.5-3.0 million in 2022. For later stage deals, the report also highlighted a contraction of deal value for Series D and E companies by 30-50%.

In the United States, startups seeking late-stage funding are failing to attract investors as dour sentiment in the public markets and dull exit conditions make it tougher to justify higher valuations. As valuations slip to reasonable levels and startups begin to trim operating expenses to get closer to cash or EBIDTA positive levels, they may once again start to look attractive to venture and PE investors who are keen to deploy their fund capital to work.

M&As & IPOs

We observed a notable rise in private-to-private mergers and acquisitions, as publicly-listed big tech companies saw a steep decline in their share price and valuation which in turn affected the SPAC and IPO listing opportunities. Completed venture-backed acquisitions in the first three quarters of 2022 totalled $81.7 billion, according to PitchBook data, down 40.7%, from $137.8 billion in the same period the year before. No significant venture-backed tech startups went public. In total, IPO deal proceeds plummeted 94% in 2022 — from $155.8 billion to $8.6 billion — according to Ernst & Young IPO report. Looking at 2023, there is an air of optimism that the IPO drought will “un-thaw” and favorable market conditions will return to allow the growing pipeline of IPO filings waiting to list – including Instacart (US), Vinfast (Vietnam), Tiktok (China), Stripe (US) and Epic Games (US).

On the M&A front, Microsoft reportedly acquired Fungible, a Santa Clara maker of data centre chips and storage device for $190m, about $134 million less than Fungible had raised in funding since its launch. Closer to home, according to a Tech in Asia report, Singapore-headquartered Amplify Health – a joint venture between AIA Group and Discovery Group – has announced its acquisition of AI-powered data analytics firm Aida Technologies. GoTo Group, the Indonesia-based tech giant, has acquired Swift Logistics Solutions for 583 billion rupiah (US$38 million).

Cryptopocalypse

A year in review would be incomplete without mention of the events that took place in the crypto space which was rocked by high-profile scandals through the year. Terra Luna for example, a cryptocurrency that was launched in 2019 as a stablecoin pegged to the U.S. dollar, witnessed a crash of its Terra (LUNA) crypto token in May 2022 from $120 to $0.02, a 99.9% correction. Forbes Digital Asset estimated that nearly $60 billion was wiped out of the digital currency space.

Three Arrows Capital (3AC), a crypto hedge fund founded in Singapore and believed to be managing around $10 billion in crypto assets, incurred significant losses due to its staked Luna position. 3AC has since filed for Chapter 15 bankruptcy proceedings in the US Bankruptcy Court for the Southern District of New York to protect its US assets from creditors. And this triggered a contagion of Chapter 11 bankruptcy involving Voyager, BlockFi, Genesis Global and Celsius who had dealings with 3AC. And just before the year ended, the crypto industry experienced a Black Swan event that saw crypto exchange FTX valued at $32 billion based on its most recent funding round declared bankrupt. FTX Exchange was the world’s third largest cryptocurrency exchange specializing in derivatives and leveraged products. News around FTX’s leverage and solvency involving FTX-affiliated trading firm Alameda Research triggered a liquidity crisis when FTX’s customers demanded withdrawals worth $6 billion. FTX Token (FTT) is a utility token that provides access to the FTX trading platform’s features and services. The value of FTT fell by more than 80% within two days. The crypto industry is still reeling from a brutal 2022, having lost over US$2 trillion of its value throughout the year. Crypto companies still managed to raise a total of US$21.3 billion in funding in 2022, down 42.5% from the previous year.

Recalibration in 2023

The general consensus is that 2023 will remain challenged but with green shoots on the horizon. Negative macro conditions are set to continue into 2023 – sustained inflation, raised interest rates, Russia v Ukraine, China-Covid slowdown etc. However, there has also been positive news flow on many of these fronts in the past weeks (e.g. inflation levelling off; China emerging quicker than expected from Covid-slowdown, China tech reawakening etc).

Taken together, and as it relates to the tech industry, it seems 2023 will provide the backdrop for a healthy recalibration period for startups globally. In Southeast Asia, for example, where most founders have not yet experienced a significant market downturn, this has been (and will continue to be) an opportunity for founders to adjust internal KPIs towards a more sustainable growth and fundraising future. Creativity loves constraint and we believe that great startups, with solid fundamentals, will emerge winners in a tight operating and funding environment.

Cash is king. VCs are encouraging their portfolio companies to conserve cash and extend their cash runway into 2024 so as to be able to operate through some of these macro headwinds. To that end, it’s worth noting that the companies in Genesis Fund I Portfolio have a weighted average cash runway of approximately 17 months this quarter (up from 13.5 months in Q3 2022).

Profit before growth. Founders are expected to be more disciplined around spending and investors are edging these startups to turn “profitable”, the definition of which is wide, but in these times has come to prioritise a meaningful and sustainable business model.

Talent stocking. Hiring exceptional talent used to come at a premium but with many startups downsizing, startup founders can now hire more prudently with less pressure on the P&L. In Southeast Asia, it’s been reported that retrenched executives from tech companies (and new job seekers) are actively in the market looking for opportunities but with more modest salary expectations.

Dry powder. Venture firms have continued to raise record capital, even as startups received far less money than they did in 2022. Dry powder was estimated to be as high as $1.3 trillion globally for private equity and $580 billion globally for VC. While we do not expect VCs to invest at a pace comparable to 2021, there is pressure stemming from fund size, duration to deploy and the need to put capital to use. As previous downturns have clearly shown, investors with dry powder will find it a rewarding time to deploy capital, amidst more reasonable valuations and the ability to set better deal terms.

2023 Hot VC Target Sectors

January is a hotbed for new tech innovation unveiled to consumers through the annual Consumer Electronics Show held in Las Vegas USA. The 2023 show is focused on a number of areas, including the metaverse and Web3, digital health, sustainability, automotive and mobility, and human security for all. There was strong participation from Asia which include those from South Korea, which number more than 500 and include the likes of Samsung, SK, Hyundai Motor and LG, while just under 150 exhibitors hail from Taiwan. We highlight some interesting technology showcased at CES:

- Sony teamed up with Honda to exhibit a new brand of electric vehicle called the Afeela. The Afeela logo appears on a narrow screen, or “media bar,” on the vehicle’s front bumper. This can also interact with people outside the vehicle and share information such as the weather or the car’s state of charge. Unlike the car Sony showed off at CES 2020, this car is expected to hit the North American roads in 2026. Japan and Europe will follow.
- The battery-operated WasteShark by the Dutch firm RanMarine Technology is an autonomous surface vessel designed to remove algae, biomass, and floating pollution such as plastics from lakes, ponds, and other coastal waterways. At least 14 million tons of plastic end up in the ocean every year, and plastic makes up 80% of all marine debris found from surface waters to deep-sea sediments. Marine species ingest or are entangled by plastic debris, which causes severe injuries and death.
- Canadian-based eSight Eyewear plans to display a headset designed to help people with visual impairments such as age-related macular degeneration (AMD). AMD is an eye disease that can blur your central vision. It happens when aging causes damage to the macula — the part of the eye that controls sharp, straight-ahead vision. The macula is part of the retina (the light-sensitive tissue at the back of the eye). AMD happens very slowly in some people and faster in others. If you have early AMD, you may not notice vision loss for a long time; hence the importance of regular eye exams. Once the user puts on the device, they will be able to see distinct features such eyebrows, mouth and eyes.
- Singapore-based Igloo Company will show off its second generation of smart padlocks at CES, including a slimmed-down fingerprint-based model and another featuring enterprise-grade security. The latest smart padlocks will ship in the spring. The keypad-based Padlock 2 builds on the company’s original Bluetooth-enabled smart lock by manufacturing it to military standards, including a hardened steel case. The Padlock 2 gets eight months out of a single charge of its lithium battery (the original relied on disposable batteries), and its shackle can withstand up to 15kN of cutting force, 5kN of pulling force, and 100Nm twisting force.
- And last but not least, there has been immense interest in generative AI since ChatGPT came online and mesmerised consumers with its ability to provide real-time chat responses (see below). In 2019, Microsoft invested $1 billion in OpenAI, the tiny San Francisco company that designed ChatGPT. Microsoft is now poised to challenge Big Tech competitors like Google, Amazon and Apple with a technological advantage as it is rumoured to be in talks to invest another $10 billion in OpenAI. See the picture below (right column) where we tested Open AI’s ability to write a short paragraph on electric vehicles. Try it at https://chat.openai.com/chat

The ambition of any startup was to become a unicorn. However, with the recent battering of the financial markets and the looming threat of a 2023 global recession, the pendulum of venture financing has swung from feast to famine.

Startups in Southeast Asia have not been spared from the “perfect storm”. Gone are the days when venture funding was readily available for “growth at all costs.” Instead, investors have been tightening their purse strings and prioritizing strong unit economics, sustainable growth, and conserving cash. Therefore it is not surprising that Founders are feeling anxious and looking for alternative sources of financing.

To explore the ecosystem’s perceptions of such an alternative financing instrument, venture debt, INSEAD GPEI collaborated with Genesis Alternative Ventures to survey founders, venture capital firms, and investors.

Read our whitepaper here: Click to download

Genesis welcomes our latest Limited Partner, OurCrowd, is a global venture investing platform that empowers institutions and individuals to invest and engage in emerging companies. OurCrowd manages more than $1.9B in committed funds for its 300+ portfolio companies and venture funds.

We sat down with Jon Medved (JM), Founder & CEO of OurCrowd. John is a serial entrepreneur and investor, who has been named by the Washington Post as “one of Israel’s leading high tech venture capitalists” and by the New York Times among the “top 10 most influential Americans who have impacted Israel.

Q1: You’ve been in the startup industry for a very long time. What is it that excites you about the industry?

JM: Startups are the lifeblood of technological innovation and progress. Decades ago, Lockheed Martin invented Skunk Works, and Xerox created Xerox Park, where the brightest minds could dream up big ideas unhindered by stultifying corporate red tape.

Today, the smartest companies in the world – including all the tech giants – realize that the only way to bring innovation into their products is to scout for startups developing relevant tech, invest in them, and snap them up. Today’s entrepreneurs have become Rockstars who are often celebrated and admired. They are responsible for building the world’s largest companies who have completely transformed our lives. Startups are developing the tech we need for computing, communication, and commerce, not just for the tech industry alone, but to address the critical issues of our time: food production, healthcare, clean water, sustainable energy and much, much more.

As a venture capitalist, I have the privilege of enabling visionary founders and innovators by connecting them with the investors who can fuel their startups and transform their dreams into commercial reality. Our companies literally save lives, heal the sick, and provide fresh food, water and clean energy where it’s most needed. They protect critical infrastructure from cyber-attacks. They provide the digital tools that help businesses grow. They entertain and they create employment. And when they succeed, they repay their investors many times over. It’s the best job in the world.

Q2: OurCrowd is a well-known equity investor and you’ve now launched a venture debt strategy. Can you tell us your rationale? What has been the reaction from your investors and startups?

JM: OurCrowd’s mission was always to democratize access to private markets, so in that sense it’s just a natural continuation of our journey. This initiative also came at a perfect time. Demand for venture debt is at an all-time high as entrepreneurs and investors alike realize its critical importance in the market.

This new debt product serves us in two ways. It allows us to further support our portfolio companies by offering them non-dilutive financing, which is highly relevant given the decline in valuations and the desire to avoid serious dilution from a down round. It also expands our value proposition to our investors with a cash-generating facility that provides steady income and much shorter duration than the equity investments. We are getting great feedback from both portfolio companies and investors for adding this new asset class, as evidenced by the oversubscribed Genesis first close.

Q3: Why did you choose to partner with Genesis?

JM: We decided to partner with Genesis because of the Genesis team’s strong domain expertise, with 40 years of VD/VC/PE experience and $100m+ venture debt deals executed. They are probably the most experienced venture debt team in Southeast Asia. The team’s performance speaks for itself in the early results from Fund I.

Genesis also gives us access to a unique market opportunity. Venture debt is growing strongly across Southeast Asia and high-growth companies that raise venture debt typically do so concurrently with an equity fund raise. In 2021, a record $621B was invested into global startups with $25B injected into companies in Southeast Asia. This represents a 3x increase over equity raised in 2020.

OurCrowd also likes to invest alongside strong LPs, like the Fund I investors who also decided to invest in Fund II and include some of the strongest institutional investors in the region. Moreover, we know many of the key members of the funds management for many years, and not only like them and appreciate them as fine human beings, but we continually are amazed by their talent and high ethical standards. When a great team addresses a huge and fast-growing market opportunity at the right timing, this is a good time to invest.

Q4: Where do you see the venture capital industry, especially venture debt, going in the next 5 years in SEA and Israel?

JM: A typical benchmark used by research analysts is to estimate the total size of the venture debt market as a percentage of total venture capital invested during a given year. Estimates are that the venture debt market in SEA represents ~2-5% and in Israel ~5-10% compared to 15-20% in the US. These two markets achieved fundraising records in 2021. Israeli startups raised $25.4b, a 136% increase on the previous year, while SEA startups raised $25.7b, a 167% YOY increase. We believe that the record VC money raised in 2021, maturing of the market and strong demand for venture debt amid the current global slowdown will continue to be the main drivers pushing the growth of this market.

Q5: How and where can startups in SEA and Israel collaborate together?

JM: Startups are shrinking the world. Cross-cultural collaboration is essential for innovation, because it breaks boundaries of thinking and attitude. Just look at how many of the top tech executives in the US are immigrants. One of Israel’s great strengths that has helped make our tiny country a global tech powerhouse is the fact that our population comes from more than 100 different countries, creating a rich cultural diversity that expands knowledge and thinking. Every time an Israeli startup begins a collaboration with a partner or customer from another country, it adds to its experience and effectiveness.

We are now seeing the same phenomenon in our new relationship with the Gulf states following the signing of the Abraham Accords, where Emiratis and Israelis are bringing different and complementary skills and experience to bear on a wide variety of issues and creating something brand new and even more exciting. In the same way, collaboration between startups in SEA and Israel can only enrich everyone involved and expand their horizons. Israeli companies can benefit from SEA skills in scale up and manufacturing, SEA companies can benefit from Israeli R&D prowess and deep tech innovation.

Q6: What do you look for in a founder or founding team?

JM: OurCrowd vets hundreds of startups every month and chooses perhaps one or two percent to add to our platform. Our founders must display technological excellence, relevant experience, original proprietary technology, good management skills and commercial sensibility. It is very rare for one person to have all those skills, so we tend to invest in teams of founders whose skills and experience combine to create the right group to establish, lead and build a company with a potentially commercial product. Moreover, we want to work closely with our teams, so it helps to like them!

Q7: What are the challenges and opportunities that you are seeing in the tech industry?

JM: The world is in crisis. We need answers to the critical issues facing our planet and its people. Startups can create the technology we need to fix the world. Just look at BioNTech, a startup founded by Turkish immigrants in Germany that created the vaccine marketed by Pfizer. Startups that tinker with problems that no-one needs to solve will not survive. But founders who identify a real problem, develop a practical, commercial solution and find a way to market will continue to succeed.

Q8: Any advice to founders on weathering the current downturn?

JM: This market correction was almost mandatory if you look at the soaring valuations of the past few years. Founders can no longer expect to enjoy the soaring double-digit price/revenue ratios that we have seen. There is still a lot of venture capital waiting to be deployed, but investors will want to see realistic business models and more modest spending. Founders should trim costs, extend their runway, and turn to alternative financing like venture debt instead of dreaming of huge cash injections from selling off tiny parcels of equity at high valuations.

Q9: What is your favourite movie and why?

JM: It’s A Wonderful Life. No explanation necessary.

Q10: What’s next for you?

JM: I have the greatest job and the cutest grandchildren in the world. I’m staying right here with them in Jerusalem, the most beautiful city on Earth.

Tech has been through a rocky patch so far this year, what with the gyrations of the stock market, delayed IPOs, depressed valuations, renegotiated term sheets, and layoffs. How does this align with what we’re seeing on the ground in the tech and venture ecosystem in Southeast Asia?

Our observations in the first half of the year are that investors continued to bankroll their fundraising activities and pressed on with new and follow-on investments into Southeast Asian startups despite current market conditions. Surprisingly, as at the date of this report, the pace of investments coupled with ever-growing deal sizes suggest an inverse correlation to the market correction.

For example, three Genesis portfolio companies announced strong follow-on Series C rounds in the first half of 2022, registering between a 1.78x to 2.92x increase in their enterprise value. In April, Sequoia-backed Trusting Social, an impact-driven Fintech focused on creating unique, personalised financial credit scores for the unbanked and underbanked individuals, announced its initial close of $65 million led by Vietnam’s consumer-focused conglomerate Masan Group.

A month later, Believe, a direct-to-consumer (D2C) startup specialising in consumer beauty products and backed by Accel India, raised a $55 million Series C financing led by Venturi Partners. In June, Deliveree closed its $70 million Series C led by Gobi Partners and SPIL Ventures (the CVC arm of Salam Pacific Indonesia Lines). Deliveree has been focused on creating a dynamic marketplace for the trucking industry across Indonesia, Vietnam and Philippines, matching independent truck drivers and customers with cargo.

And this was on the back of various other deals announced publicly. Indonesia’s Fintech Flip raised $100 million Series B (Tencent, Block, Insight); eFishery $100 million Series C (Temasek, Softbank, Sequoia);, Bibit $80 million (GIC); Astro $60 million Series B (Accel, Tiger Global); Singapore’s ShopBack $80 million Series C (Asia Partners); BioFourmis $300 million Series D achieving unicorn status (General Atlantic); Neobank Stashfin $270 million equity/debt Series C (Uncorrelated Ventures); Neuron Mobility $43 million Series B (GSR Ventures, Square Peg); Multiplier $60 million Series B (Tiger Global, Sequoia); Thailand’s Fresket Series B $23 million (PTT Oil, Openspace) and many more.

We also observed a continuation of Seed and Series A funding closes for startups across Southeast Asia. For example, Eratani, an Indonesia-based agritech startup raised a $1.6 million Seed round while Li Ka-Shing’s Horizons Ventures co-invested $7.5 million into Ilectra Motor Group, a 2-wheeler EV targeting the Indonesian market.

A Return to Profitability With Leaner Companies

Growth, especially growth at all costs, requires significant capital to take market share now and worry about profitability later. More often than not, customers and revenue acquired in such fashion are far from ideal, leading to higher churn rates, lower retention rates, and driving up costs even further. Raising too much capital at early stages can result in undisciplined spending leading to layoffs and other painful reactions when the burn rate skyrockets and future funding becomes scarce.

It is sobering to see news on startup layoffs across US and Asia including Southeast Asia (here are some dedicated websites tracking these statistics) and casualties such as Kaodim, an 8-year-old startup in Malaysia, which means “take care of it”, that shuttered its services as Covid halted the home-services industry. Softbank Asia’s Propzy, which bagged a $25 million Series A in 2020, dissolved a major part ofits business and reportedly laid off 50% of its employees.

On the flipside, good founders understand the value of a long-term mindset and the importance of building startups with the right values and structure so they can grow into lasting companies. The “exuberant climate” for start-ups has turned and investors are demanding to see financial metrics that are in line with the company’s stage of development. Therefore, it is prudent for start-up leaders to make adjustments in order to enhance operational efficiency and to focus funding resources to achieve important key performance indicators so as to reach the next funding round.

And there are certainly opportunities for resilient founders and companies in a market correction. As with prior downturns, we believe there is a correlation between economic cycles and the formation of category-defining companies. Companies such as Uber, Airbnb, Square, WhatsApp, MailChimp, and Adobe were all founded during recessionary periods. Moreover, today’s founders have an arsenal of tools ready for them to launch their disruptive companies in a cloud-based world with less capital required for growth and the ability to operate with no hard assets. And venture capitalists are still hunting for startups that could well become tomorrow’s category-defining companies.

A great example is Deliveree. Genesis visited Deliveree at its South Jakarta office in June to catch-up with Tom Kim, Deliveree’s Chief Executive. Tom was wrapping up Deliveree’s Series C fund raise and shared how Deliveree had been keeping a tight rein on hiring and marketing expenses which is why the company was able to garner an industry-leading gross margin in the mid-teens, compared to better-funded competitors, some of whom have low, single-digit to negative gross margins.

Brisk Pace of M&A Transactions

A “buyer’s market” has emerged as deep-pocketed acquirers pick up targets of good value. Acquiring targets in order to bulk up seems to be more attractive as the IPO window remains closed, keeping exit valuations depressed.

For example, India’s Pine Labs acquired Southeast Asian startup Fave for up to $45 million. Singapore’s Funding Societies announced it is acquiring digital payment provider Cardup to expand its payments offering.

In fact, Genesis has been receiving requests from founders who want to strengthen their balance sheet with venture debt for the sole purpose of acquisitions – a smart way to raise lower dilutive capital and add breadth and depth to their business.

We expect the pace of M&As to gather further in coming quarters given the conversations we have been having with founders who want to leverage on venture debt to buy up smaller competitors.

Abundant Dry Powder Globally For Venture Capital Investments

Preqin estimates there is more than $497 billion of global venture capital dry powder as at May 2022 (dry powder being the amount of capital that has been committed to funds minus the amount that has been called by general partners for investments).

Quarterly funding levels in 2022 remain above quarterly funding levels in 2020 and prior, according to CB Insights (July 2022) with $108.5 billion raised across 7,651 deals. This is despite the fact that quarterly funding has slowed in 2022 amidst tightening liquidity and a global meltdown in technology stocks.

US VC fundraising tops $120 billion for the second consecutive year, according to Pitchbook. A strong showing from established managers in the first half of the year has pushed capital raised to a record pace. These managers have closed 203 funds worth $94.7 billion through the first six months of the year. Already, 30 funds have closed on at least $1 billion in commitments, eight more than the previous full-year high of 22 recorded last year. While this activity is most likely a continuation of momentum from 2021, it’s still an encouraging sign around the level of capital availability through the uncertainty that the next few years may bring.

In Southeast Asia, fund investors have increased allocations to the Southeast Asia venture corridor. Southeast Asia and India-focused VC funds have raised $3.1 billion in the first 5 months of 2022, eclipsing the $3.5 billion these funds raised in all of 2021, according to a Nikkei Asia report in May 2022.

Established Southeast Asia players like Sequoia, Accel, Jungle and Mass Mutual have raised larger, multi-stage funds. Sequoia raised $2.85 billion, which includes its first dedicated fund for Southeast Asia with a pool of $850 million. And despite the shaky short-term outlook in tech, Sequoia remains optimistic about Southeast Asia’s start-ups, as do new entrants White Star, Antler, and Altara. From our conversations within our network of General Partners (GPs), it is evident that companies that can demonstrate financial discipline and prioritise healthy topline growth with manageable bottom-line expenses will be rewarded in this investment climate.

While GPs believe that the pace of investment may slow compared to 2021, this does not also mean that investing into new deals will come to a halt; rather the deal selection and diligence process will take longer as GPs will now insist on observing certain metrics and may choose to sit on the sidelines while monitoring progress.

On the topic of valuation, we also notice that GPs have already lowered their WTP (willingness to pay) and this is a common theme across funds globally. Seed and pre-A startups are likely most impacted and may see as much as 50 – 75% reduction in valuation as investors prefer not to take very early-stage risk. Series B, C and D startups remain attractive for GPs to continue investing in given their life-cycle and more reasonable enterprise values, and as highlighted above, there remains a barrage of early growth startups that have raised $50-200 million in a single round of financing with little to no discount to valuations. It also appears that funding has shifted away from late-stage pre-IPO mega deals which has resulted in the declining minting of new unicorns into the tech sector (which mirrors the global phenomenon).

Summary

While we recognise this will be a tough period for investors and companies alike, we equally believe that this will be a rewarding time for investors and GPs who have stuck to their investment thesis of backing mission-driven founders who are building sustainable businesses and aiming for market leadership positions.

The medium to long-term outlook of venture capital investing will improve as valuations and investment pacing return to more sustainable levels. And not forgetting the abundant VC dry powder waiting to pounce on attractive deals in the shorter term.

All of this should also lead to more robust dealflow for venture lenders like Genesis. Investors are now more focused on more sustainable companies with a path to profitability, healthy gross margins, lower burn, more reasonable valuation ascents etc. These are the very companies that Genesis has always invested in. In fact, in the last 2 quarters, Genesis reviewed more than $100 million of deals, and since inception, our total dealflow has crossed the $1 billion mark, which is a significant milestone.

Words cannot express how delighted we were to meet our investors, partners, and portfolio companies at Genesis’ first-ever, physical event.

Held on 12 May 2022 in the charming Grace Hall of the Jacob Ballas Centre, we welcomed our guests, some of whom have travelled from Korea, Japan, and USA to join us. We are also grateful to those who joined us via Zoom from Indonesia, Israel, Malaysia, UK and USA.

In addition to sharing the progress of our Fund, our guests were treated to a packed agenda full of insights:

AI driven consumer research and analytics by Stephen Tracey, COO, Milieu Insight (portfolio company)
Advanced 3D technology for the fashion e-commerce industry by Harindar Keer, Flixstock (portfolio company)
South-east Asia investment landscape by Jeff Benjamin, CEO, Bank J Safra Sarasin
Panel: Due South – Why SEA Continues To Be A Magnet For Investments
- Tony Huang, Managing Partner, KISO Capital (moderator)
- Yasuhiko Hashimoto, Managing Executive Officer, Mizuho Leasing
- Chang Ha Park, Deputy General Manager, Korean Development Bank
- Kayo Sengoku, Deputy General Manager, Aozora Bank
Perspectives of Asia and US Venture Debt by Tony Huang, Managing Partner, KISO Capital, K2 Venture Finance

The afternoon ended a guided wine and cheese tasting session led by master wine-maker, Eddie Gandler and a tour of the Jews of Singapore museum.

We would not have made it this far in our venture debt journey without the support, encouragement, and belief of our stakeholders. Thank you and see you in 2023!

Special thanks also to Teabox for their exclusive selection of Darjeeling teas for all our guests to enjoy.

Relive the afternoon’s highlights with the recap video

A bull run for venture capital funding in 2021

Global technology startup funding clocked in at a record $621 billion in 2021. Southeast Asia startups raised almost $25 billion marking its coming of age as an important, albeit young, tech corridor. In the first quarter of 2022, as macroeconomic and geopolitical conditions continue to evolve in a melting pot of spiralling energy costs, inflation, and interest rates coupled with a war in Europe, how will the rest of the year play out?

Data from Crunchbase seems to indicate continued strength as global startups raked in $61 billion, the 4th month above the $60 billion mark in the last 12 months. Close to $3 billion was invested globally at seed stage. Startup investors deployed another $18 billion at the early stage and just over $40 billion at the later stage and technology-growth stage. This is amidst a changing landscape where global VC funds are raising record mega funds. Andreessen Horowitz closed on a host of new funds this year, with its eighth fund at $2.5 billion, its fourth bio-related at $1.5 billion, and a third growth fund at $5 billion. Fintech specialist Ribbit Capital closed its seventh fund at just under $1.2 billion, marking its first billion-dollar fund.

While the figures for Q1 2022 Southeast Asia funding are yet to be released, funding news throughout the first three months of the year seems to suggest a good quarter for the region, especially with regard to smaller deal sizes of below $50 million.

Sequoia-backed Multiplier, a startup that enables companies to hire and pay remote workers while complying with local laws, raised $60 million at a $400 million Series B valuation with New York-based Growth Equity Tiger Global as its lead. This came barely 3 months after the company’s Series A of $13.2 million. Tiger Global, together with Cathay Innovation and Sequoia, wrote a cheque to Singapore-based AI Rudder, the leading voice artificial intelligence start-up, leading the $50 million Series B funding – less than 6 months after the company wrapped up its US$10 million Series A in November 2021. Tonik Digital Bank targeting Philippines unbanked consumers closed a $131 million round of Series B equity funding in February 2022 led by Japan’s Mizuho Bank. A VC syndicate led by Vertex and includes Prosus Ventures, AC Ventures, and East Ventures injected $30 million in Series A funding into Indonesia-based fishery and marine platform Aruna. Who would have imagined a Southeast Asia Series A round ballooning to $30 million 12 to 24 months ago!

In parallel, investors have raised concerns about the rapid pace of deals and high valuations. Having said that, it could take time for a correction to reveal itself on a market-wide scale. VC and private equity firms are sitting on immense piles of cash earmarked for startups, and competition for deals remains high. The deal-making pace of Q2 2022 will dictate the direction of venture funding for the rest of the year.

Geopolitical risk threatens to trip up venture capital’s global stride

The venture capital model is predicated upon fast growth and rapid scaling. Adding to the lingering pandemic woes is a crucible of geopolitical risk involving the world’s largest nations US, China, and Russia. For VCs, these geopolitical risks can make it more difficult to raise capital from LPs from sanctioned countries. Increased and enhanced due diligence will be necessary to avoid raising capital from sanctioned sources. Speaking to entrepreneurs in Singapore, Indonesia, and Malaysia, we observe that Southeast Asia startups have little to no dealings with Russian investors. However, some startups we spoke to have reported various delays in their supply chains, especially for parts that originate from Europe.

A Reuters report in March 2022 highlighted that global investors have pursued a re-allocation strategy into crypto and blockchain and away from real estate and bond funds, seeking exposure to a sector they believe could withstand the fallout from the Russia-Ukraine conflict. Venture capitalists invested around $4 billion in the crypto space in the last three weeks of February 2022. Bain Capital Ventures, a unit of private equity firm Bain Capital, for instance, announced in March 2022 that it is launching a $560 million fund focused exclusively on crypto-related investment.

Rising Inflation, Rising Interest Rates: A Threat To Venture Capital And Entrepreneurship?

For the first time since 2018, the Federal Reserve lifted the target for its federal funds rate by a quarter of a point, in order to battle rising inflation, thus signalling the end of a long-lasting pool of cheap capital for companies. Based on historical rate hikes globally, interest rates when they do change are expected to do so gradually. Three or four rate increases by the end of this year could add up to 1% or more to base interest rates in the US.

While higher interest rates will likely lead to a pullback in liquidity, this might have a balancing effect in that it may prevent market pricing and valuations from being driven up to unsustainable levels over the next few years.

The reduction in liquidity may also push VCs and founders to seek alternative forms of capital financing, including venture debt, which will in turn come at higher borrowing costs with venture lenders mirroring (or at least partly mirroring) any interest rate increases in the market at large.

There are two types of companies that need to be careful: companies that are “all tech and no revenue” or “all revenue and no tech”. The critical question is whether these companies are indeed solving real problems for people in a sustainable manner.

Further, such a liquidity pullback may have a disproportionate impact on later-stage technology companies that are pre-IPO (as we witnessed in Q1 2022 in the US). In this scenario, founders and investors will likely delay major liquidity events in order to prevent valuation discounts, given the recent poor performance of many newly listed technology companies.

It’s not all doom and gloom, however. Many technology companies that had a funding event in the past 12 months have likely raised more cash than needed. These companies will likely have to cut expenditures with the aim of extending their cash runways.

Companies can also raise extension rounds, offering shares at the same price as the most recent funding round. Extension rounds were common at the start of the COVID-19 pandemic as they allowed investors to double down on promising companies without having to face steep valuation uplifts amidst an uncertain trading environment.

Many companies with healthy cash flow turn to venture debt and growth debt to shore up balance sheets. A prime example in 2020 was AirBnB which turned away from equity in favour of $2 billion debt at a 10% interest rate from Silver Lake, shoring up its balance sheet despite having close to $4 billion in cash reserves already.

And not to forget that such moments can offer a silver lining for strong founders; market share can be hard to grow when times are good and competition fierce, and perhaps more easily gained during a downturn provided the company is well-financed with a strong team in place.

John Chambers, Chairman Emeritus of Cisco and founder and CEO of Palo Alto’s JC2 Ventures, shared his views that startups are nimble and flexible which works in their favour, highlighting examples of how Cisco and Amazon had trod on similar paths to becoming industry leaders.

Tight Labour Market

It is likely that the Southeast Asian tech ecosystem is entering a golden phase as the tech market continues to grow strongly over the years, speedbumps notwithstanding. Global and pan-Asian tech giants have recognised the region as a strong potential growth engine as part of their global ambitions. As these giants expand in Southeast Asia, the competition to attract and retain talent is becoming a challenge among startups and their larger counterparts. Startups are finding it tough to hire new and replacement employees and expensive to compete with their better-funded, larger, global competitors.

Speaking to regional startup founders and CFOs, we observed a few notable trends. Product, Technology, and Sales are the most challenging positions to fill. There is a growing trend of candidates who accept job offers but do not turn up for work on Day 1. Their reason: they have been offered up to 50% or even 100% more in salary to jump ship. Candidates are also asking for sky-high salaries and are attracted to “frontier” tech like crypto and Metaverse companies.

Startup CFOs tell us that they try to counter these trends with strong and regular internal communications and frequent external initiatives aimed at potential new applicants. Social media, such as LinkedIn, is a valuable tool to grow the employer brand influence of a company. A startup we surveyed is launching what it calls a “Craftsmen Program” to retain team members who have strong coding skills by providing them with visible career path progressions. Last but not least, the delayed nature of the ESOP (employee stock option plan) vesting schedule does also help with retention.

The role of debt financin

2008 (GFC), 2020 (COVID-19) and now 2022. Bumpy years where prudent leadership teams were/are eager to hold on to more cash and shore up balance sheets.

Debt financing can help companies prolong the life of expensive equity already raised. Having an extra 20% or 30% cash cushion gives leadership teams more options by extending the company’s runway, accelerating growth, and staying ahead of the competition.

As for rising interest rates, venture lenders will continue to price in risk and mirror market movements. Where bank rates edge upwards venture lenders are expected to generally mirror that movement by way of interest rate adjustments and even adjustments to warrant option coverage, all with the objective of risk-adjusted pricing. In fact, increased interest rates notwithstanding, our conversations with other regional venture debt operators point to strong deal flow in H1 2022. From Europe to India, and in Southeast Asia considering our own deal flow pipeline, indications are positive that a strong lending pace will continue into the rest of the year. However, lenders are also more cautious of who they lend to and will necessarily tighten the qualification requirements and their credit lens.

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Genesis is exploring various deeptech startups in healthcare, energy storage, sustainable energy, and smart mobility. We believe that beyond the first wave of Southeast Asia startups that are disrupting retail, commerce, and finance for consumers and businesses, the next wave of disruptive startups is already in their early growth phases. For instance, plant-based to lab-grown food companies; sustainable farming and energy; and healthcare technologies are leveraging cheaper, faster processing chips to develop home-based devices that can monitor individuals outside the clinical environment.

Battery Technologies That Could Power The Future

Cheaper, denser, lighter, and more powerful. These are the attributes of a futuristic battery pack that every device maker wants. From iPhones to laptops and electric vehicles (EVs), a battery that can store energy for use continuously without having to charge for at least 24 hours would be a breakthrough.

At CES 2022, HyperX showcased the Cloud Alpha Wireless, claiming the wireless headset can operate for 300 hours, (or more than 12 days of use.) Avid gamers would be thrilled to have this device. Range anxiety is an issue that all car manufacturers are working hard to resolve; and the Mercedes-Benz Vision EQXX concept EV was unveiled with a claimed range of 1,000 km, packed with a 100kWh battery that is 50% smaller and 30% lighter. Current Tesla EV models can push the 600km range with additional specifications. With more EV models launching into mass production, would 2022 be the year that the EV tsunami comes ashore?

Entering The Metaverse Will Become A Necessity For Brands

For the uninitiated, the metaverse is an immersive virtual world that will serve as a form of the embodied internet. It is a general term most commonly associated with Mark Zuckerberg’s dream of migrating social media platforms into virtual and augmented realities.

Bloomberg shares that fashion and beauty companies are selling visions of metaverse makeovers, in which avatars get dressed and dolled up. Luxury brands like Gucci, Balenciaga and Burberry have been sketching and planning digital fits to adorn digital users. Louis Vuitton released an exclusive capsule collection that featured the League of Legends gaming universe, including special Prestige skins for the League of Legends Champion, Qiyana. PulpoAR will offer virtual makeovers. Other companies, like Procter & Gamble, are adding more subtle beauty experiences like BeautySPHERE, which walks users through the ingredients and processes used to make their cosmetic products.

Digital Twins in Healthcare

Digital twins of human organs and systems are a closer prospect, according to a Forbes article on The Five Biggest Healthcare Tech Trends In 2022, and these allow doctors to explore different pathologies and experiment with treatments without risking harm to individual patients while reducing the need for expensive human or animal trials. A great example is the Living Heart Project, launched in 2014 with the aim of leveraging crowdsourcing to create an open-source digital twin of the human heart. Similarly, the Neurotwin project – a European Union Pathfinder project – models the interaction of electrical fields in the brain, which it is hoped will lead to new treatments for Alzheimer’s disease

TeleHealth Could Be A Quarter of Trillion Dollar Industry

According to the HIMSS Future of Healthcare Report, remote healthcare and telemedicine have gone mainstream with the pandemic restricting people from going out. During the first months of the pandemic, the percentage of healthcare consultations that were carried out remotely shot up from 0.1% to 43.5%. Analysts at Deloitte say that many doctors and patients have shed their discomfort with video visits, setting the stage for their continued use post-pandemic. McKinsey is of the view that Telehealth could be worth $250 billion with the acceleration of consumer and provider adoption of telehealth and extension of telehealth beyond virtual urgent care in the US.

In line with the envisaged growth in remote healthcare and aging population demographics, new generation wearable technologies equipped with heart rate, stress, and blood oxygen detectors are needed to enable healthcare professionals to accurately monitor vital signs in real time at home. GE Healthcare is creating the next generation of patient monitoring with wearable sensors. In the future, light-weight, even printable technology could help in ensuring patients’ safety in recovery after medical operations. Monitoring technologies offering precision in performance could give healthcare officials new possibilities to monitor patients from afar.

Some of these technology trends may be available very soon and others will be very important in the future as they begin graduating from R&D labs and enter the marketplace. We hope to see more great tech become commercially ready as these will impact our lives and make us healthier people. Until 2023!

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Southeast Asian ride-hailing and food delivery giant Grab raised $2 billion in debt [1] in Q1’2021 in what it said was the largest institutional debt in Asia’s technology sector, as the company expands its regional services. The five-year senior secured loan was upsized from the initial $750 million after the company secured commitments from international institutional investors. Just a year earlier, Grab raised $4 billion of equity from SoftBank and Toyota and added $500 million of debt [2] from debt investors.

While it may not be apparent at first, experts will suggest that debt becomes an increasingly important part of a startup’s capital structure as it grows. In many cases with late-stage companies, part of the reason is that the cost of debt is less expensive and dilutive than equity. Debt providers play a crucial role in providing startups’ first credit lines helping them to build their credit track record over time. Debt investors, including large growth debt fund and traditional financial institutions, begin to take comfort in a 10-year-old (or more) startup that now has historical financials and a level of credit-worthiness that these lenders can fall back on.

Grab was founded in 2012 and raised its first clip of debt financing in 2017. The company sought $2.5 billion of equity to fund growth of its ride-hailing service in Southeast Asia and tapped on $700 million in debt facilities from leading global and regional banks to expand its car rental fleet in Singapore and Indonesia, two of its key markets. In this period of time, venture debt had just emerged as a debt financing opportunity for early growth startups but the enormous debt quantum was out of reach for Southeast Asia venture debt players then.

Is this a one-off situation unique to Grab or are startups in Southeast Asia following the footsteps of raising larger rounds of debt financing as they grow? Let’s take a look at a few more examples.

Last year, Kredivo (an Indonesian digital lending and credit scoring platform) secured $100 million of debt facility, taking its total debt raise to $200 million in all. UnaBrands, a specialist that consolidates smaller e-commerce brands, raised $40 million in an equity and debt round that closed in May 2021. In Genesis’ portfolio, Matterport had chosen to go with venture debt to grow its business in Southeast Asia instead of taking equity dollars that would have meant further dilution for existing shareholders. Apart from the fundamentals and the fit, it certainly helped that Matterport’s Chief Financial Officer, J.D. Fay, was a seasoned executive who has leaned on venture debt throughout his career.

Expanding The Spectrum of Debt Financing: Early Startups to Growth Stage

In the US, three key private debt providers, Silicon Valley Bank, Hercules Capital and Triplepoint Capital have provided more than 30,000 [4] startups with debt at seed stage (debt size of $25K to $5m) to early stage ($1m to $25m) and later-stage companies ($1 to $50m). To give the reader a sense of the size of the market, Hercules Capital originated a record $1.5 billion worth of deals year-to-date (as at September 2021) annual total gross debt (including equity commitments). This sets a clear path for the “venture to growth debt” journey that a private debt provider like Hercules Capital has undertaken since it started venture lending in 2003.

Turning to Southeast Asia, the venture equity landscape only took off in 2015 with the early cohort of funds investing largely in Seed and Series A companies. Today some of these funds including Vertex [5] and Openspace [6] are already managing both early and later-stage investment vehicles, a natural investment progression given that their own portfolio companies and the rest of Southeast Asia startups continue to move up the development curve.

We believe this phenomenon will continue to play out in the private debt space in Southeast Asia. With SME loans and venture debt covering the early growth debt requirements of startups in the region, we are beginning to see growth debt players moving to cover the gap in the later growth stage. New entrants such as EvolutionX announced a $500 million fund that will write debt cheques of between $20 to $30 million per investment. As more startups graduate from early growth and prepare for pre-IPO funding, there will be more opportunities to inject growth debt into these companies.

The beginnings of this ecosystem maturation bodes well for lenders. Whether at the venture or growth end of the spectrum, an increased rate of lending opportunities (and with additional lenders) will lead to a more sophisticated marketplace of borrowers that better understand the merits of debt (venture and growth). Genesis will be well-placed to continue building on its strong position in the regional venture debt space while selectively looking at growth debt opportunities together with aligned co-lenders.

References

Grab upsizes debut term loan to $2 billion on strong investor demand [link]
Grab secures $500m syndicated facility for vehicle fleet financing [link]
Kredivo Lands $100 Million For BNPL In Indonesia [link]
Bloomberg: Meet Venture Capital’s Baby Cousin, Venture Debt [link]
Vertex Growth to hit $330 million 2nd fund close [link]
Openspace Ventures Closes Third Fund at Hard Cap of US$200M [link]
Temasek, DBS launch $677m debt financing platform for tech firms in Asia [link]

First, FAANG (Facebook, Apple, Amazon, Netflix, Google) in the US. Then BATX (Baidu, Alibaba, Tencent, Xiaomi and now possibly ByteDance) in China. And now GSG (Grab, Sea and GoTo) in Southeast Asia.

These colossal technology companies generally followed similar growth patterns. First, they became dominant in their original businesses, such as e-commerce for Amazon and internet search for Google. Then they grew their tentacles, making acquisitions in new sectors to add revenue streams and outflank competitors. Take Amazon as an example. Once an online bookstore, Amazon quickly grew to become an “everything store.” But the company moved beyond its e-commerce roots, due, in part, to acquisitions. To enter the grocery arena,

Amazon acquired Whole Foods Market and its distribution channels and retail locations in one $13.7 billion-dollar gulp. Amazon wanted to be a bigger player in the “Internet of Things,” so it swallowed up several home security companies including the $1 billion acquisition of doorbell-camera startup Ring. And as Amazon dived into the autonomous vehicle industry, it chose start-ups in that space, too. Amazon acquired 13 cloud computing companies between 2012 and 2020 to form what is today known as Amazon Web Services (AWS). AWS today represents 59% of Amazon’s operating income.

Apple could possibly be the pioneer of this Big Tech growth pattern with their first acquisition as early as 1988. In the span of the last 10 years, Apple has completed nearly 100 acquisitions, the most prominent ones were aimed at competing with Google Maps and more recently the $3 billion acquisition of Beats Electronics as a bet big on the future of headphones.

With a combined $1 trillion market cap, China’s BATX has a formidable influence over the Chinese digital economy. BATX has gone on a buying spree with 14 billion-dollar acquisitions. Alibaba led the pack with its $20 billion acquisition of logistics giant Cainiao and also spread its business reach tangentially by acquiring Ele.me (food), Koubei (lifestyle) and merging these two entities to take on rival Tencent’s Meituan. Chinese Big Tech has long seen Southeast Asia as a natural geography for expansion outside of their competitive home ground and tends to take a more aggressive buy-and-build strategy. This sometimes comes with dominant stakes in target startups, as in the case of Alibaba in Lazada, and Tencent in Shopee-owner Sea. In 2020, Southeast Asia tech companies saw heightened interest from US Big Tech.Facebook now owns a 2.4% stake in Gojek’s GoPay fintech arm, while PayPal owns 0.6% of GoPay. The move is expected to help Facebook and WhatsApp, which have more than 100 million users in Indonesia.

Many of them are now looking at Southeast Asian tech firms and expect a strong pipeline of deals in series B- and C-stage startups. The spike in the number of late-stage investors, secondary buyers, and special purpose acquisition companies (SPACs) has led to a positive outlook on the exit landscape for investors in Southeast Asian startups in the coming years.

A few more such deals are also in the works. Indonesia’s Tiket.com is exploring a SPAC listing while its local rival Traveloka is in advanced talks to go public through merging with Bridgetown Holdings, a blank-check firm backed by billionaires Richard Li and Peter Thiel. Even though the pandemic slowed the pace of exits in 2020, the rise of SPACs has piqued the interest of institutional investors.

In June 2021, Indonesia saw two of its unicorns, GoJek and Tokopedia (that contribute a combined 2% of Indonesia’s $1 trillion GDP) complete an unimaginable merger of a ride-hailing and eCommerce business over a Zoom call. The resulting GoTo Group has been hailed as an equivalent marriage of Amazon, Uber, Paypal, and Stripe. GoTo is planning a pre-IPO fundraiser before a purported dual public listing, likely in Jakarta and the US. Prior to the merger, GoJek also made some big bets acquiring mobile point-of-sales Moka for $130 million while Tokopedia bought wedding services marketplace Bridestory and child activities marketplace Parentstory for an undisclosed amount. We hope to see more active M&A in the works as GoTo stamps its authority to dominate its Indonesian market leader position and spread its business across Southeast Asia.

The Land Of The Unicorns

The tech ecosystem in Southeast Asia is maturing at an accelerating pace. There were only 7 Southeast Asia tech unicorns in 2016 and as of June 2021, Thailand-based eCommerce logistics Flash Group and newcomer Carro joined the 19-strong unicorn club.

M&A activity is expected to increase based on a recent report launched by INSEAD and Golden Gate Ventures which cited that startups in Southeast Asia would actively pursue M&A in the ensuing 12 months.

Reputed global VCs like A16z, Hedosophia, Valar along with Tiger Global are now busy looking for the next Sea, Grab, or Gojek in Southeast Asia. With deeper pockets to dip into, the emerging Big Tech companies will invest and acquire to expand their business empire. Looking back, 2019 was a good year for tech M&A in Southeast Asia. The region clocked in 60 deals, including Bigo ($1.45 billion), Wavecell ($125 million), Coins.ph ($72 million), and Red Dot Payment ($65 million).

Unicorns of Southeast Asia

This does not take into account the acquisition activities undertaken by other companies like Intuit QuickBooks which bought TradeGecko for a reported $80 million in 2020. And one of Genesis’ portfolio companies GoWork is currently undergoing final diligence which could see a merger with one of Europe’s leading flexible workspace and service office providers.

Singapore-based TPG-Backed PropertyGuru is also eyeing a $2 Billion Thiel SPAC listing and already on an acquisition spree to acquire all shares in Australia’s REA Group operating entities in Malaysia and Thailand, which include iProperty.com.my and Brickz.my in Malaysia; and thinkofliving.com and Prakard.com in Thailand.

We are entering an exciting era for technology and venture across Southeast Asia. With these M&A and SPAC opportunities, downstream benefits would be the emergence of more serial entrepreneurs with a demonstrated track record of starting, operating, and exiting a startup. The founders of successful companies would have new liquidity to invest in the ecosystem, either aggressively or as angel investors investing in early-stage businesses. And we may see a blossoming of the startup engine as ex-employees of these exits are likely to set up their own startups. So, Southeast Asia as the Silicon Valley of the East? Watch this space.

References

How Big Tech got so big: Hundreds of acquisitions [link]
Visualizing Chinese Tech Giants’ Billion-Dollar Acquisitions [link]
How these millennial tech founders pulled off Indonesia’s biggest-ever business deal [link]
M&A deals to drive increase in exit events in next 2 years for SEA startups [link]
Gojek and Tokopedia’s holding group GoTo plans fundraising ahead of blockbuster IPO [link]
The rise and rise of Southeast Asia’s tech M&A [link]
How SE Asia finally caught the eye of A16z and other western tech VCs [link]
Southeast Asia Exit Landscape: A New Frontier [link]

What is a SPAC?

A Special Purpose Acquisition Company (SPAC) makes no products and does not sell anything. In fact, the SPAC’s only assets are typically the money raised in its own IPO. Generally, a SPAC is formed by an experienced management team or a sponsor with nominal invested capital, typically translating into a ~20% interest in the SPAC (commonly known as founder shares). The remaining ~80% interest of the SPAC’s shares is held by public shareholders through “units” offered in an IPO.

Some well-known names in the SPAC industry include buyout specialist Alec Gores, venture capitalist Chamath Palihapitiya, and former Citigroup Inc. banker Michael Klein, while in Malaysia, internet entrepreneur Patrick Grove also filed for a $250 million SPAC.

A shareholder that prefers to exit prior to the initial business combination can sell its units in the market or choose to have its shares redeemed for its pro rata portion of cash from the IPO that is being held in the trust. At this stage, the SPAC typically does not have a target company to merge with.

In its IPO, a SPAC typically offers units, consisting of a share of common stock and a fraction of a warrant, at $10 per share.

The money raised then goes into an interest-bearing trust account until the SPAC’s founders or management team identifies a private company looking to go public through an acquisition.

From a SPAC to De-SPAC

The SPAC is required by its charter to complete that initial business combination — or “de-SPAC” transaction — typically within 24 months, or liquidate and return the gross proceeds raised in the IPO to the public shareholders.

Once an appropriate target company has been identified, the SPAC and the target undertake a merger, acquisition, or other transaction that results, in most cases, in the operating business becoming a publicly traded company that effectively “takes over” the public company status of the SPAC. As a result of this process, the SPAC is “De-SPAC” and continues its life as a public company.

The De-SPAC process is similar to a public company merger, except that the buyer (the SPAC) is typically required to obtain shareholder approval, which must be obtained in accordance with SEC proxy rules, while the target business (usually a private company) does not require an SEC-compliant proxy process.

Source: Harvard Law School Forum on Corporate Governance

Complementary PIPE Financings

A SPAC can seek a PIPE (private investment in public equity) deal if it needs to raise additional capital to close a merger transaction with a target company. A PIPE arrangement may become necessary where the cost of acquiring a target company exceeds the funds that a SPAC has in its trust account. For example, Singapore’s sovereign wealth investor GIC announced a $200 million PIPE into SPAC-backed View Inc. Tiger Global, along with others, will inject $295 million via a PIPE into the Matterport-Gores SPAC.

Besides providing capital, PIPE investors can also validate the valuation of the target company. Raising a PIPE is quite similar to a normal fundraising round where the PIPE investors will value the target. PIPEs prove that there is investor demand for the company at a certain price. Once the PIPE is closed and the SPAC merger announced, and if the PIPE is oversubscribed, investors who could not gain access during the PIPE would be able to purchase in the public markets instead. There are short-term arbitrage SPACs with investors who have no interest in actually owning the company being taken public.

SPACs in Asia

Asia’s representation in the global pie has been small so far – about 11 out of 2021’s 304 SPAC IPOs, and just US$4.7 billion in SPAC mergers. Given the region’s large pool of new-economy companies, bankers are now plugging it as a hot spot for merger targets.

It was reported that SoftBank-backed Grab will go public through a merger with a SPAC that could value the ride-hailing giant at nearly US$40 billion (S$53.6 billion). This would make the Grab SPAC the largest-ever, blank-cheque deal.

Singapore’s SGX is the first major Asian bourse to consider the listing of SPACs. The Exchange is proposing regulations to allow SPACs with a minimum market value of S$300 million (US$223 million). Hong Kong, Indonesia, and other markets are stepping up efforts for SPAC listings.

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Reflecting on 2022 and Looking Ahead Into 2023

Venture debt in Southeast Asia: Unlocking growth in uncertain times

Fireside Chat with Jon Medved

The Bulls & Bears of Venture Capital Investing

Genesis Hosts LP Day 2022 in Singapore

The Impact Of Global Headwinds And Tailwinds On Southeast Asia’s Venture And Tech Ecosystem

A Peek into Some of 2022’s Hottest Technology Trends

Debt Financing For Southeast Asia Tech Companies

Rise of Southeast Asia’s Very Own Big Tech

Public Listing via SPACs