Startup funding drought during pandemic

Startup funding drought during pandemic

More than 40% in seed round could disappear

The coronavirus pandemic is taking a heavy toll on numerous startups as they struggle to gain customers and funding prospects dry up.

Some investment pundits even project up to half of startups in pre-Series A funding are likely to disappear following the Covid-19 era.

The pandemic is expected to shed at least 20% of venture capital (VC) fund flow in the country.

Post-Covid-19, remaining startups are expected to get significant attention from investors because they proved their ability during the hard times.

500 TukTuks, the local operating unit of US VC firm 500 Startups, indicated it would revisit its portfolio and find ways to assist its startups to survive the crisis.

"We will facilitate bridge funding for those affected by Covid-19," said Natavudh Pungcharoenpong, a venture partner at 500 TukTuks.

Many of the startups, particularly in the travel and event organising business, are struggling for earnings, forcing them to cut salaries or lay off staff.

He estimates at least 30% of the local startups in the seed funding round may disappear if they do not adjust their business plans. About 10% of 500 TukTuks's portfolio run travel tech businesses.

"We will prioritise the education, food, logistics and health sectors as they have a high growth potential, as well as deep tech and business-to-business [B2B] operators," said Mr Natavudh.

The global recession is likely to make investors more cautious about their investment, he said. A lesson can be learned from Japan's SoftBank Group Corp, whose investment in office space sharing startup WeWork failed to yield favourable results.

HALF TO DISAPPEAR

Sompoat Chansomboon, chief executive of KT Venture Capital, an investment arm under Krungthai Bank, said at the global level, 41% of startups are likely to fade out if they fail to adjust their business models in time during the pandemic, particularly those in the seed funding round.

One-third of those in Series A and B funding rounds are likely to have only six months in runway, a term that describes the amount of time a startup has before it runs out of cash.

"We believe Thailand's local startup investment in 2020 will fall more than 30% in terms of investment sum, on par with China, as investors put off their investment by 6-12 months, causing the fund flow to decline by 28%," said Mr Sompoat.

"In the post-Covid-19 world, 40-50% of the local startups might disappear in Thailand."

VC funds normally go after high-risk investment, but now they are tending to be more cautious during the crisis. Corporate VC funds on the other hand focus on investing in startups that can establish synergy with their business, he said.

Travel tech startups have been heavily hit by the pandemic and it could take a long time before they bounce back. Up to 80% of the staff in travel tech startups have been laid off due to the crisis, Mr Sompoat said.

In the post-Covid era, tech startups that leverage 5G and artificial intelligence or engage in e-commerce, medical tech, food tech, financial tech as well as smart city concepts could draw interest from investors, he said.

Telemedicine and education tech are also expected to gain steam and startups running these businesses could become the next unicorns, said Mr Sompoat.

"In the next two years, Thailand will lack Series A startups as seed startups are disappearing," he said.

"Those that can survive this period should be attractive to investors as they have proved their strength, agility and ability to thrive. This is similar to the subprime crisis when those that survived the crisis have now become unicorn firms."

WAIT AND SEE

Narusan Dhanvarjor, head of investment of InnoSpace (Thailand), a venture capital firm that raised 700 million baht from 15 large corporations, said during Covid-19, most investors have opted to put their investment on hold.

Some are waiting to see if those in their portfolio recover before deciding the next move, he said.

Investment has slowed from the past few years, said Mr Narusan, as investors scrutinise startups' business models to determine whether they are sustainable and competitive.

Corporate VC funds will look at startups' investment models, taking into account synergy and digital solutions that can improve their business, he said.

Regular VC funds are likely to rearrange their investment portfolios, said Mr Narusan. For example, health tech should see more emphasis, he said.

InnoSpace set up a 50-million-baht bridge fund to offer liquidity for at least 20 potential startups during the crisis.

Startups can seek funding through convertible bonds with an annual interest rate of 2%.

According to Mr Narusan, startups that can survive through this crisis will be stronger and highly competitive.

InnoSpace, he said, has a long-term mission to support the startup ecosystem, aiming to turn them into new economic drivers and crafting their business models to be more efficient and practical.

"The world after Covid-19 will change drastically. It depends on whether products or services will answer customers' needs and how fast startups can adjust after the 'restart button' is pressed," said Mr Narusan.

Mukaya Panich, chief venture and investment officer of SCB 10X Co, a tech investment arm of Siam Commercial Bank, said there would be fewer startups in the post-Covid era because of the shortfall of cash runway.

More startups will opt to embark on businesses receiving a boost from the pandemic, such as online delivery, online education and entertainment as well as healthcare tech, she said.

B2B startups that do not have quick returns on investment will struggle to be supported by corporations, said Ms Mukaya.

Likewise, deeptech startups that normally require a lot of funding and time to develop their technologies will face a cash crunch and many of them may not be able to survive during the downturn, she said.

LOCAL UNICORNS

Rungsun Promprasith, chief executive of QueQ, a queue management mobile application, said startups need to take into account cost savings and revenue creation rather than burning cash to catch customers.

Their core principles should be to "solve pain points" and create value, making their products different from others and allowing them to be part of people's daily life.

He said healthtech would become a promising segment for startups.

Thailand still needs local champions that can turn into unicorn companies as such a story would draw interest from VC funds and angel investors, inspiring many other talents to establish their own startups, said Mr Rungsun.

"Thailand has plenty of talent, but they don't work in startups as there is still a lack of opportunity," said Mr Rungsun.


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