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2023 Venture Capital Outlook: Stay the Course

CHUA Kee Lock15 Feb 2023

As the tech industry adjusts to the tight funding conditions and market corrections, I pondered on what it takes to withstand the current challenges and build an enduring Venture Capital (VC) business that can weather the multiple boom and bust cycles.

Lesson 1: Markets are cyclical – What goes up….

This cycle is synonymous to previous market cycles in 2000 and 2008. Technology sector FOMO (Fear Of Missing Out) investments were rife initially. This FOMO syndrome was largely driven by those who missed out on past opportunities which saw the birth of today’s tech titans including Amazon, Facebook and YouTube post dot-com era. For much of 2020 and 2021, we witnessed historic funding rounds and inflated valuations across sectors such as DeepTech, Artificial Intelligence and Software as a Service (Saas).

Lesson 2: Appreciate the Joy of Missing Out

Public markets slowed in late 2021, spillover into the private markets and exacerbated in 2022 with the Ukraine-Russia conflict. Market uncertainty compounded as global economies struggled to adjust to a post pandemic world which saw sustained supply chain disruptions, semiconductor chip shortages and inflationary cost pressures. Private market investors took heed, adopting especial care to capital deployment, marking a shift in investor sentiment from “FOMO” to “JOMO” - Joy of Missing Out.

While there are talks about record levels of dry powder, some venture capital firms may have overinvested. While capital will be deployed in existing portfolios, the longer term performance concern is the triaging, nursing and bridging of bad investments instead of backing good companies during the downturn. Given the attractive valuations and operational strength of startup teams, these usually turn out to be outstanding vintages when the cycle turns.

How long will this downcycle be? Who knows? Based on historical trends, I expect this trend to continue for the next 12 – 18 months before the market eventually recovers and investor confidence begins to return.

Lesson 3: Focus on Startup Fundamentals

As an all-weather VC, good companies will emerge in good and bad times. Despite the gloomy market outlook and valuation impact, resilient entrepreneurs will emerge and weather the storm ahead. Staying focused on fundamentals including unique positioning, technology, business models, competitive advantage would be critical areas an entrepreneur should continue developing.

Beyond fundamentals, capital runway and clear paths to profitability are critical to ensure their business is operational to ride the downturn. By demonstrating strong, sustainable performance, investors would be more willing to invest in a company. Strong leadership and execution capabilities will be critical success factors in growing a robust, resilient and talented workforce in the next phase of growth.

Lesson 4: Seeking Opportunities in a Downturn

Churchill once said “Never let a good crisis go to waste.”

History has showed that VC funds who actively invest during “all-time low” periods have turned out to be superior vintages and better performing VCs – a similar situation to what we are observing today. Although some younger venture capitalists in Southeast Asia could be experiencing their first harsh winter, I believe that VC funds who actively invest wisely in the next couple of years will likely emerge among the top funds on the road ahead.

Paving our Investment pathways

With the market adjustment and normalization, VCs are presented with more opportunities to evaluate investments at sensible valuations. As with previous market cycles, we believe companies with strong founding teams, differentiated offerings or business model will emerge and thrive as the next global champions.

Amidst this challenging backdrop, our Vertex Ventures Southeast Asia and India fund still maintains its pace of investments in the region. We remain committed to uncovering new gems - daring and disciplined.

Unlike the Wild West investors – investing based on the fastest draw (in this case the deployment of capital), we believe good VC investments is more akin to the steadfast and patient marksmanship of a sniper. An experienced and calculated sharpshooter who reads the wind, awaits the target and opportunity to effect a transformational investment impact.

As a global network of leading VC operator-investors, we aim to be strategic partners to our portfolio companies in their growth journey, in good times and in bad.

Come what may.
Watch the interview with Chua Kee Lock:

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