Information about the novel coronavirus is rapidly changing. As a result, some of the information or advice in this article may be out-of-date.
2019 was a good year for Vietnam’s startups. More still was expected from 2020. But the viral outbreak and the looming cash crunch mean the current prognosis is rendered in much more sombre tones.
Understandably, venture capital and angel investors are focusing on protecting their existing investments to help them sail through the next couple of quarters.
What does this mean for Vietnam’s startups looking for fresh capital? Who stands a higher chance of securing a seed round and later stage investments? What steps can a startup take to ensure business vitality, other than cutting operating costs?
We ask industry experts to weigh in and explain the current investor mindset, as well as sharing advice on how young businesses can stay afloat and come out stronger after the coronavirus pandemic.
Justin Nguyen, Partner at Monk’s Hill Ventures
What guidance are you offering to your portfolio companies?
Early-stage companies are almost by definition “default dead,” so founders and CEOs need to adapt swiftly to protect their companies in these trying times. Decisiveness is key to survival.
For most companies, this will mean immediately slashing costs and instituting a hiring freeze, except possibly for hires that will pay for themselves nearly from the get-go. Next, take a long hard look at what can be moved to variable costs and move them now. Then, throw away your 2020 plan and start over by preparing three plans: 3-month, 6-month, 12-month not-business-as-usual scenarios.
Hopefully, one of the three plans is a “default alive” plan, meaning you will be able to reach cash-flow positive on your existing cash. If not, have the hard conversation with your existing investors on who might be able to do an internal round.
As you’re thinking about the new plans:
- Take the time to challenge your underlying assumptions when it comes to revenues and operating models.
- Focus on underlying unit economics and be cautious with burn rates and cash positions while heightening your sense of urgency.
- Rethink your current capital spending strategy and re-weigh top-line growth compared to your path to profitability. Founders should instead look to refocus and shift their attention to optimizing their contribution margin and making their cash last.
- Systematically review account receivables and account payables. Look at where you can delay account payables while aggressively collecting on your account receivables.
- Renegotiate customer contracts where possible.
- Close any ongoing partnerships or sales conversations now (even if you may not get what you were shooting for originally).
- Take the opportunity to fix any structural problems with your business now. When the dust settles, no one will be asking why your revenues dipped or why clients churned or why employees left during this period, so use this get-out-of-jail-free card to fix any foundational issues with your business.
If you’re fortunate enough to be cash healthy, keep in mind that this crisis may lead to market consolidation with some of your competitors going out of business. Keep an eye out for acquisition opportunities (which may not need cash and can be done through share swaps).
What should founders know when approaching investors today for fundraising?
It’s a tough funding environment out there – no doubt about it.
Know that VCs are looking long and hard at their existing portfolio companies and making tough decisions on which investee company might live or die, so they’re extremely busy and might not have the time to look at new deals. This is especially true with firms that have a non-concentrated portfolio and/or are light on decision making partners.
Know that VCs are very uncomfortable with making new investments without meeting the founders face to face, so start with investors that you have an existing relationship with. If you’re notching up (e.g. going from Seed to Series A), perhaps lean towards VCs that have boots on the ground where you are. At Monk’s Hill Ventures, we have team members in five countries in Southeast Asia – two of us in Vietnam – and we continue to engage and support entrepreneurs on the ground (with the appropriate measures, of course!).
Know that most investors are usually funding growth, not survivability. If you need cash to survive, it will be costly – if this is an available option at all. It’s not that investors are bottom feeders, but they need to justify to their LPs (limited partners) the extraordinary risk of putting cash into an early-stage company with nothing but a bet on a strong rebound when some semblance of normalcy will return.
With the coronavirus creating opportunities and limiting others, how has your investment strategy adapted to the crisis? Are you looking for a different profile of company now as opposed to before?
We continue to be active in the market and continue to look for great founders to back. Our investment strategy remains the same where we invest in Series A across different tech industries and sectors.
At the end of the day, we will always take a long-term view, and will continue to back founders and companies that are solving big problems on sound economics. Timelines may take a bit longer than usual as we work with potential founders on how they plan to ride this downturn and position their companies to emerge even stronger post-coronavirus.
As a firm, we’ve always taken a first-principles approach to investing. Given COVID-19, we are taking a longer and harder look at various industries and sectors, examining which verticals will be the most impacted during these trying times. We’ve also looked at how various potential investments may play out through the lens of various COVID-19 scenarios – to stress test the company’s thesis in the downturn and anticipate which might emerge even stronger afterwards.
The bottom line – we believe in backing founders in the region with great ambitions to build and scale tech-enabled companies that will impact millions of lives.
James Vuong, tekAngels Founder and CEO
What guidance are you offering to your portfolio companies?
A startup CEO or founding team has three important responsibilities: build/offer something people want, hire the best people to execute, and ensure there is enough money in the bank. My advice to portfolio companies that tekAngels have invested in revolve around these three key pillars.
The first is to make sure what we are building/offering continues to be something people want, even during the downturn. If this is no longer the case, if the existing value proposition ceases to be valuable, changes would be needed. If there were not even any product-market fit to speak of yet, it might be time to pivot.
Second, hire the best people that can help you execute, but use equity and minimal cash. The need to preserve cash might mean a hiring freeze but founders should consider hiring those critical to executing well. A downturn is a good time to recruit as more talent are available while competition for them is greatly reduced. Of course, some talent are risk averse and choose to hide out in large stable companies, but they are not a good fit for startups anyway. If good people can be attracted with more equity and less cash, we should consider it. The talent a startup wants should be one who prefers equity over cash because it means he/she believes in the startup’s potential and also has skin in the game.
Finally, make sure we have money to survive for 18 to 24 months. However, spending should not be kept to an absolute minimum, to the point where no progress can be made. Einstein said “Everything should be made as simple as possible, but no simpler.” The same advice applies to startup spending. Spend as little as possible but not less. We need to spend wisely to gain as much traction as possible so that when the sense of normalcy returns, we’d be in a great position to fundraise and win.
What should founders know when approaching investors today for fundraising?
Founders should know that all investors, across the board, are much more conservative about deploying capital now, when there is so much uncertainty as to the impact of the pandemic. Corporate VC investing out of a company’s balance sheet will most likely stop investing because even the company itself might be hurting financially. Overseas investors, those without any person “on the ground”, would be harder to win over due to travel restrictions as most would not invest without at least a few in-person meetings. Angels might actually be an easier group to approach, assuming their businesses and investments haven’t been completely clobbered. Since angels invest with their own money, they can take more risks, and when other funding options are gone, there is much less competition for the good startups. The angels that are still able to invest would be “greedy when others are afraid”. TekAngels has many of those in our network.
The following types of startups would have a harder time raising funds: those that have not found a product market fit, those that have bad unit economics, those with high capital requirements (marketing or working capital), low margin businesses that require large scale to be profitable, and any type of business model that depends on good economy to do well. These startups should consider not raising for a while or shift to a different model. For example, if you were a “full-stack startup” before, you might want to tackle just one layer in the stack for now.
It’s still possible to get an investment, but expect the valuation and terms to be much less favorable compared to before.
With the coronavirus creating opportunities and limiting others, how has your investment strategy adapted to the crisis? Are you looking for a different profile of company now as opposed to before?
For the past couple of years, there have been talks that we are due for a recession, and even though it turns out that the cause (COVID-19) was a complete “black swan”, tekAngels’ investment thesis was always built on backing startups that are capital efficient. We have always looked for great teams building/offering something people want, that doesn’t change whether we are in a bull or bear market. Now, we would add one more profile to look for, which is startups that have weathered the storm and came out of the pandemic in one piece, perhaps even stronger. We look for founders who have been lean, radically realistic, and adaptive to a new reality.
Tung Tran, VIC Partners Managing Director
What guidance are you offering to your portfolio companies?
To deal with the negative influences of COVID-19, we encourage founders in our portfolio to survive and optimize. Revise your business plan to make sure you have cash runway to survive through the winter of 2020. Expect huge drops in revenue for at least six more months; providing promotions for clients to pre-purchase is a good idea; find a new and short-term revenue stream: one-off IT projects, for example.
Cut unessential costs, refrain from business expansion and capital expenditure and reduce fixed salaries (can switch a portion to equity for managerial positions). Increase the use of technology and efficiency in the online workplace. Remote.vn is a non-profit campaign that provides you with free tools and guidance to increase efficiency while working from home.
Seize the opportunity. The coronavirus crisis could force changes in culture, employment status, and working habits onto many people in different regions of the world. Online communication is more essential than ever, now that people are isolated in their homes. Many people are finding themselves out of a job for the foreseeable future. What can we do together to solve the issues facing our community?
Finally, stay in touch. We are here to provide support, advice, and capital through this hard time.
What should founders know when approaching investors today for fundraising?
Most investors I know are still active, some more than others. New funding is certainly harder to find this year. Valuation could be less than what you would expect to reflect the risks investors are taking this year. Also, the valuation you are asking should be benchmarked with market comparables and your own traction. Be prepared to offer advisory shares to investors who can bring real values to you. A well-prepared data room can help build trust and develop a professional image of your firm. Find online guidance about VC investment memorandums to see which key elements they usually look for and tailor your pitch deck accordingly to save time for everybody.
And also, credited to Vinnie Lauria (GGV): sometimes, to avoid downrounds, you can offer convertible notes with a valuation cap below last round’s value; mix of primary and secondary shares (early exits for angels, early stage VCs at a discount); warrants: give investors the right to purchase more shares at a discount later.
With the coronavirus creating opportunities and limiting others, how has your investment strategy adapted to the crisis? Are you looking for a different profile of company now as opposed to before?
An ideal profile would be: first, a startup that provides an efficient way to solve a single big pain point, especially ones caused by COVID-19. Secondly, founders with impressive backgrounds and thorough understanding of the market. Third, a scalable and sustainable business model with good unit economics and road to profitability. Good synergies with our network of local CEOs and serial entrepreneurs. And a reasonable valuation.
We are also looking to find good businesses in education and hospitality who got hit hard by COVID-19 to invest in them, help them survive through this crisis, and bounce back stronger.
Dung Hoang, Head of Genesia Ventures Representative Office in Vietnam
What guidance are you offering to your portfolio companies?
Genesia Ventures has invested in more than 70 different startups around the world so far, focusing primarily on Japan and Southeast Asia, with seven startup portfolios in Vietnam.
General advice we give startups in the context of COVID-19, which especially affected industries such as tourism, food and real estate, is that they needed to secure cash to stay alive for as long as possible. The founders need to encourage their teams, spend time on improving products and services and optimizing organizational structure.
This is an extremely difficult period, with people working from home and inundated with negative news. It’s easy to feel insecure, discouraged. So the founders should check in with the team regularly, boosting morale and providing motivation. Be strong, have faith in your business and keep it alive!
What should founders know when approaching investors today for fundraising?
This is a difficult time not only for startups but also for VCs, because LPs (Limited Partners — big companies investing in VCs ) are also struggling. VC funds are being more cautious and “thrifty” with their capital flows right now. In general, startups will have a harder time raising capital during this period.
Founders might face difficulties getting a fast investment decision because investment funds and startups are currently only meeting online due to travel restrictions and social distancing. Face-to-face meetings are extremely important in building trust between the two parties before making a final decision.
In the current climate, if the founders want to accelerate the decision-making process, they should “re-approach” the existing investors or contact VCs they have met before. Keep them updated about your situation until you have built a sufficient level of mutual trust.
Other possible difficulty is not getting the full amount of investment and valuing the company lower than initially expected due to VCs being more careful with capital flows. If such a situation arises, founders need to be flexible but assertive in raising capital. Be prepared to make sacrifices in exchange for the survival of the business.
The good news for seed-stage startups is that investors will look beyond the current pandemic situation, seeing the market potential of the “post corona shock”. So funds focusing on seed-stage funding who have maintained robust financial resources will still be determined to find and invest in strong startups.
With the coronavirus creating opportunities and limiting others, how has your investment strategy adapted to the crisis? Are you looking for a different profile of company now as opposed to before?
Threats come with opportunities. While offline businesses such as restaurants, hotels, airlines are suffering heavy losses due to social distancing and travel restrictions, the “stay-at-home economy” is thriving: everything from online business meetings and online dating to gaming .
Our portfolio companies in Vietnam have changed flexibly to suit the current situation. For example, Kamereo offers KameMart service to help your family order and receive fresh produce. eDoctor provides remote medical consultations and home health check-ups. BuyMed supplies medicine and medical products.
Manabie provides schools and students with online learning tools. Homedy has built a community for brokers, including brokers who lost their jobs when brokerage firms have shut down, so they can work online. Luxstay makes an effort to remind us of the time when we were free to travel the world and helps to plan the next trip.
“The strong are the ones who change to survive” should be the guiding principle of any strong founder. And our fund’s investment motto, under all circumstances, is to believe and invest in those strong founders.
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