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2020 - the Gale of Disruptive Transformation for Venture?

CHUA Kee Lock, CEO of Vertex Holdings posted on 26 Dec 2020

As the new year approaches, it is perhaps timely to reflect on 2020. The past year has indeed been a whirlwind. While some may call it disruptive, others deem it truly transformational.

What began as a contagious viral outbreak in Wuhan, China quickly morphed into a global pandemonium that upended carefully laid plans, driving seismic shifts in almost every stratum of society and business. Escalating trade tensions between China and the US, have also exacerbated the adverse impact wrought by COVID-19 on global trade and supply chains.

Despite this bleak backdrop, innovative startups with outstanding teams have transformed some these challenges and proliferated them into meaningful growth opportunities.

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The pandemic has certainly jolted the global economy, and very unevenly at best. Near term, startups had to rebalance by managing cash burn while rationalizing, non-essential expenditures. For those seeking to fundraise - a strong customer pipeline, positive unit economics and a clear path to profitability are key.

For most VCs, deal activity has slowed due to delays in the deal making process. According to a report by Startup Genome, global VC funding fell by approximately 20% in the first 3 months of 2020. The drop was even more pronounced in China with a decline of over 50% in funding relative to the rest of the world in January and February[i]. Post lockdown, the Asian Venture Capital Journal reported a significant rebound for venture capital funding in China. In March alone,[ii] Chinese startups and technology companies raised more than USD 2.5B during the month, marking a record sixfold rise vs. February.

While much has been discussed about the trade war between the US and China, the underlying dynamic may well be their keen sense in seeking global technology leadership, particularly in the deep tech and Artificial Intelligence (AI) sectors. To this end, both have taken extraordinary steps to get ahead or maintain their edge. A case in point would be the addition of over a dozen leading Chinese tech companies, including SMIC, DJI, Huawei[iii] to the US Department of Commerce's Entity List[iv]. Separately, China has also doubled down on technological self-reliance by investing and nurturing domestic tech startups as potential sources for core technologies including AI-optimized chipsets.

This rising strain in bilateral relations is likely to persist over the longer term, driving bifurcation in technology and innovation markets. The silver lining against this gloomy set is that technology flourishes where interconnectedness and interoperability prevail. While companies should expect significantly higher barriers when conducting cross-border business between both countries, startups that are relevant, resourceful and sensibly domiciled, may be well poised to seize these opportunities going forward.

That said, there is a chance companies may be forced to “take sides” and become single market focused. Some investors may also be restrained in either one of these two innovation markets, and may be driven to invest principally in their home turf or other startup hubs elsewhere in the world.

The crisis has fundamentally changed behaviors across the board, with consumer purchases switching from offline to online, and likely at a lower overall spend. Supply chain disruptions have also compelled economies and companies to restructure in a bid to reduce their dependence from single supply sources.

These are difficult times. To survive, many businesses have turned to laying off workers as they reduce costs. That being said, venture at its heart is a “people business”. In building great enterprises, top tier teams and talent are central to long term success. A case in point is NIUM[v] - a rising global, Fintech platform and Vertex portfolio company that chose salary cuts instead of layoffs at the outset of COVID-19 to protect their talent, teams and culture. Nium also promptly restored remuneration as conditions ameliorated.

The crisis underscored certain gaps in the market, such as healthtech, edtech and agritech where we now see an increase in entrepreneurial activity. It has also fueled the growth of sectors including media, e-Commerce and food delivery platforms. For instance, Japan based live streaming mobile app 17LIVE[vi], a Vertex portfolio company, quadrupled its year-on-year revenue growth in 2020 when social distancing made live streaming a viable income generator, significantly growing its niche in the online entertainment market.

Venture Capital & Valuations

Looking ahead, we expect the IPO market to continue being vibrant in 2021. At least 19 companies[vii] have gone on with their IPOs in the US, with more including Airbnb[viii] waiting in the wings.

Beyond IPOs, we have also seen the rise in Special Purpose Acquisition Companies (SPACs[ix]). The US currently leads much of this growth, with SPACs raising over USD 70B in proceeds and twice exceeding the 2019 whole-year total[x]. SPACs are publicly traded shell companies that are formed strictly to raise capital through an IPO for the purpose of acquiring an existing company. Ultimately, SPACs will need to find the right company to acquire before their respective expiration timelines, convincing SPAC investors to support the acquisition and refraining from making redemptions. Our portfolio company - Innoviz Technologies[xi] is a leading Israeli lidar startup backed by two of the world’s largest automotive suppliers. The company recently announced that it is working to go public in a USD 1.4B reverse merger with Collective Growth Corp[xii].

While these are indeed heady times, delivering consistent and outstanding investment performance requires top-tier VCs to maintain an even keel, and under all-weather conditions. Innovation is also a team sport. For startups to have the best chance at success, support from a leading global VC can make all the difference.

At its core, venture investing is really about building great businesses - the art of augmenting outstanding teams not only with patient, long-term capital but also with the operational capabilities to create value beyond capital. If we can get these and other basics right, I am confident we will continue to grow and back tomorrow’s global champions - the talent, teams and transformational technologies that can change the world for better, come what may.

References:


[i] https://venturebeat.com/2020/05/20/startup-genome-global-vc-funding-dropped-20-since-coronavirus-crisis-began-in-december/

[ii] China’s venture capital funding rallies after coronavirus lockdown – link.

[iii] https://www.straitstimes.com/world/united-states/us-blacklists-chinese-chip-giant-smic

[iv] https://www.capacitymedia.com/articles/3826179/huawei-and-affiliates-in-uk-europe-and-asia-added-to-us-entity-list

[v] https://www.vertexventures.sg/news/nium-launches-cross-border-payments-platform-in-id/

[vi] https://www.vertexventures.sg/news/live-streaming-platform-m17-raises-26-5m-in-series-d-round-led-by-vertex-growth/

[vii] https://news.crunchbase.com/news/heres-who-has-gone-public-in-2020-so-far/

[viii] https://www.cnbc.com/2020/12/10/airbnb-ipo-abnb-starts-trading-on-the-nasdaq.html

[ix] https://www.jumpstartmag.com/decoding-the-spac-boom/

[x] https://www.cnbc.com/2020/12/22/new-blank-check-firms-hunt-for-fast-growing-tech-unicorns-in-asia.html

[xi] https://www.vertexventures.co.il/news/innoviz-technologies-a-global-leader-in-lidar-sensors-and-perception-software-for-autonomous-driving-to-be-listed-on-nasdaq-through-business-combination-with-collective-growth-corporation/

[xii] https://www.bloomberg.com/news/articles/2020-12-11/lidar-startup-innoviz-to-go-public-in-1-4-billion-spac-deal

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