For most startups, funding is expected to dry up during the COVID-19 crisis. Valuations are dropping and funds are reducing their commitments.
Nicko Widjaja, CEO of BRI Ventures, the investment arm of Indonesia’s biggest state-lender, however, told KrASIA that his fund won’t delay its investments. He sees advantages for funds with dry powder like his own—they can buy in at lower valuations.
Widjaja said that for funds like his own, it’s “buying time,” and that VCs should not rush for exits now, as payoffs will be slashed. As a sign of the times, KrASIA spoke with him via WhatsApp.
KrASIA (Kr): With the COVID-19 outbreak in Indonesia, will BRI Ventures delay investments in startups? How many startups do you plan to invest in this year?
Nicko Widjaja (NW): There will be no delay in our investments. We believe the ecosystem will recover down the road. Furthermore, the BVI fund was just created last year and we’ve closed several deals just before the COVID-19 chaos. BVI was never a spray-and-pray investor to begin with.
However, in this time of uncertainty, we will implement a more cautious stress test scenario as the growth trajectories of all startups—including unicorns—are hindered and projections will be delayed. We will continue to build businesses and connections. Personally, I believe this year will be the year of synergy, where startups and corporations work closer together to get back where we left off pre-COVID-19.
On the investment side, this condition is advantageous for funds with dry powder such as ourselves, as valuations are lower and there’s less competition for deals. But it is really bad for funds from the vintage year 2015/16 as they are now entering the harvesting period. These guys need to create liquidity. Otherwise, it would be hard to convince both existing and new limited partners.
Kr: What is your view on exits in general, particularly IPOs and M&As?
NW: In the exit markets, funding sizes and funding activities are going down. Most valuations are significantly reduced as targets are impacted for at least the next two quarters. Those who were raising Series D are now Series C2, Series C are now Series B2, and so on. Early-stage startups will be impacted the most as they have shorter runways, growth-stage startups will need to adjust their cash-burn to extend their runways, and late-stage startups’ liquidity plans, both IPOs and M&As, will be delayed.
Funds from the vintage year 2017/18—which are at the middle or end of their deployment period—are now entering a time of uncertainty, as they are adapting their initial theses to recent events, especially when they made big bets in the ASEAN region. I know a few funds who were committing to participate in some of the recent rounds. They are now only wiring one-third or one-fourth from their commitment due to the uncertainty.
No doubt that even our first fund at MDI Ventures (also vintage year 2016), which managed to get five exits last year and two exits before that—its last portfolio exit was ObserveIT, a US-Israeli cybersecurity company—will be facing a tougher exit environment this year, though liquidity is still intact from previous profit-taking.
Kr: What is the best strategy for VCs at this moment?
NW: For funds such as ourselves or Tanglin Venture Partners—according to the recent white paper titled “COVID-19 Challenges & Questions” by SEA Founders—it’s buying time, especially for those who just raised money and have enough dry powder to deploy.
For those who are seeking liquidity, what’s best for them is to get a secondary market, though it will be at bargain values at most, as liquidity is in such short supply. That’s especially true for funds with vintage year 2015/16, otherwise they won’t be able to raise the next round.
The sale of secondaries is never ideal for VC funds. It shows the lack of general partners’ maneuvers in turbulent times, as they are unable to achieve the most desired return of capital. If we consider the COVID-19 disaster as only temporary, why rush to sell secondaries in this time of uncertainty?
But we are entering a new normal right now, and the market ha been way too rich for some time. I believe they know this too.
If anything, truthfully, I personally believe that this market correction is something that we need in the region’s tech sector, separating the pretenders from the real players. I trust the VC ecosystem, and this is the time we continue to build businesses more than ever.
Kr: How many VCs entering their harvesting period are doomed now?
NW: Those who closed their fundraising in 2015/2016. MDI Ventures is included, but it has proven to be solid, having booked seven exits out of 30 portfolio companies in 2018 and 2019, with an average 300–700% return.
Funds from vintage year 2015/16 that haven’t been able to close a significant second round are pretty much doomed. When I was at the helm of MDI Ventures, we realized that liquidity is very important, even for corporate ventures such as ourselves.
We’ve lived in the world of fairy tales with unicorns and centaurs, but 20-fold money multiples are no longer feasible at this point of time.