As startups shed fat, investors turn optimistic about deploying capital

VENTURE capitalists (VCs) are ending 2022 with plenty of capital, but they are in no rush to deploy it. With so many startups right-sizing their operations and adjusting their fundraising expectations, investors are now looking forward to quality opportunities in 2023.

“I will say this is a very good time to step up our due diligence, start seriously looking at some of the deals and be ready to deploy in the first half of the year,” said Chik Wai Chiew, chief executive at private equity and VC firm Heritas Capital.

A funding frenzy in 2021 gave way to a more sobering 2022. Globally, some US$369 billion was raised by startups in the first three quarters of 2022. This was slightly over half of the US$679.4 billion raised in 2021, according to data platform Crunchbase.

“(In) Q1 of this year, the lights went on in the club, and it was the last song, and people knew it was time to head home soon,” said Justin Hall, partner at VC firm Golden Gate Ventures.

With publicly listed tech stocks seeing massive readjustments from the highs of 2021, there has been a spillover effect into private markets. Investors were markedly less willing in 2022 to enter fundraising rounds at higher valuations.

Despite having plenty of dry powder, VCs say there hasn’t been pressure by limited partners (LPs) to deploy capital because macroeconomic uncertainty is making investing less than ideal.

“Our LPs also understand we remain opportunistic to find the next potential startups and continue investing,” said Jefrey Joe, co-founder and partner at Indonesia-based Alpha JWC Ventures. (*see amendment note)

Many VCs instead shifted their priorities from making new investments to looking after portfolio companies, ensuring they would survive. And startups were forced to focus on their financials, with investors keeping a steely eye out for unit economics and paths to profitability.

“Those were elements that have never been ignored in the past, but have been deprioritised in preference to growth at all costs. That’s why many companies possibly over-invested in things and investors invested in things where the economics and path to scale were murkier,” said Tushar Roy, partner at Square Peg.

The most visible impact of this shift in priorities has been the layoffs. On-demand services provider GoTo cut 1,300 jobs, or 12 per cent of its workforce. E-commerce and gaming group Sea has done three rounds of layoffs. Classifieds platform Carousell has cut 110 jobs.

“A lot of these layoffs are right-sizing the ship; I think many people are under-appreciating that (founders) are doing this because they need to extend their runway through what is expected to be a fundraise cycle that will take longer to conclude,” said Golden Gate’s Hall.

Quality over quantity

In 2023, the power dynamic in startup funding is expected to skew towards investors rather than founders. Observers said this should mean prices come back closer to earth, from the stratospheric heights of 2021. Investors are also going to place a greater emphasis on evaluating risks.

“I think when investors start going back out in earnest, it’ll be a very different conversation with founders,” said Golden Gate’s Hall.

It is unlikely that funding will return to the levels of 2020 and 2021, which now look likely to be anomalies in the bigger funding picture. But investors who spoke to The Business Times sounded optimistic.

“We see a real uptick in activity and investment opportunities, and the quality is getting really good. If that continues, we will have a really great Q1,” said Square Peg’s Roy.

Alpha JWC’s Joe is bullish about the prospects for Indonesian startups in particular. Citing the archipelago’s unique position as a net beneficiary of capital flows, he believes its startups can come out on top in 2023.

“We have strong market fundamentals, political stability, and strong economic growth, even more so compared with other regions in the world that may be dealing with war or trade tension. Because of this, we are confident in our ability to navigate any challenges that may arise,” he said.

Heritas’ Chik, however, believes the startup space may yet take some hits from the macroeconomic slowdown next year. This would be less of a shock to the ecosystem, but will still be as painful.

“The excesses built in the past will have to be ground out, then it might be an attractive market in the first half of the year,” he said.

*Amendment note: A previous version of this story incorrectly stated Alpha JWC’s partner name as Jeffrey.