When a “black swan” event like the Covid-19 pandemic hits, founders of start-ups often take one of two approaches. Some adopt a wait-and-see attitude, hoping things will pass. Others jump into action and start putting contingency plans in place.
It is the latter group of “quick reacting” founders that Jenny Lee, a Singapore-based managing partner of GGV Capital says emerges as a key differentiator in such a crisis. The global VC firm manages $9.2 billion with investments in the US, Canada, China, India, Southeast Asia, Latin America and Israel.
When the first Covid-19 cases emerged in China, GGV put a strategy in place for its portfolio companies based there. As it later became clear that the virus was spreading to the US and across Asia, Lee said that GGV was able to “enhance and refine” its approach, providing early warning to its other companies.
Getting to the bottom-line
In the first quarter of last year, Lee and her team spent two weeks assessing the potential impact of the pandemic, starting by classifying their 300+ active portfolio companies into three broad categories.
“We conducted a worst-case scenario review, assume zero revenue and no headcount reduction,” Lee told FinanceAsia.
GGV’s global portfolio consists of companies in the technology, media and telecom (TMT) space. Being tech-strong, they were largely shielded from the impact of the pandemic.
The review revealed that 6-7% of their companies fell into the ‘red zone’, meaning that their cash run was forecast to last less than six months. The majority fell into the yellow zone – as was typical for many start-ups - with nearly three quarters of their companies holding cash reserves that would last 12 to 18 months. Finally, 15 to 20% were in the green zone, with 20 to 30 months of cash.
Lee noted that strategy differs depending on if you are in ‘survival’ mode - preserving cash and looking at expense reduction, or ‘accelerated-growth’ mode, taking a more aggressive view on acquisition.
Supporting start-ups during a crisis
Having the attention and support from an experienced VC partner is valuable. For GGV, 20 years of investing in start-ups meant that their partners were well-versed in weathering many storms, including the 2007-8 Global Financial Crisis.
Vishal Harnal, managing partner at venture capital investor, 500 Southeast Asia, observed that the current pandemic is the first economic crisis event that many players in the start-up ecosystem within the region have ever experienced.
“It’s very powerful and a good thing from the perspective of developing muscle memory for dealing with such situations in the future,” he said.
Harnal’s firm started investing in the region seven years ago. Home-grown technology giants Grab, Bukalapak, Carsome, Prenetics and FinAccel are among the 250 companies in its portfolio.
He explained to FA that understanding the playbook for dealing with this crisis will help future generations of start-ups operate in changing times; from learning how to deal with internal matters such as staff interaction and the assurance of safety, to external affairs, such as how to maintain and protect elements of the supply chain while still serving the customer base.
He noted that lessons learned from the ongoing situation “separate people who can properly take advantage of these opportunities, from those who can’t.”
Harnal also commented that the current environment offers an interesting landscape for the sector, with one of the notable shifts being the widespread adoption and willingness to spend on technology solutions.
“Start-ups are in a position to create agile solutions that meet the needs of people far better than larger companies,” Harnal said.
But the pandemic hits companies differently, depending on their business model.
Take for example, Singapore-based Grab, which counts GGV and 500 Southeast Asia as its investors. While Grab’s ride hailing revenues took a hit, the firm’s overall business was balanced out by its delivery sideline which includes food, groceries and parcels. In the first quarter of 2021, Grab’s growth was mainly from deliveries which nearly doubled year-on-year to adjusted net sales of $293 million.
Fundraising in a virtual world
Interest in the region’s growth potential remains robust. Cento Ventures reported that in spite of economic uncertainty, Southeast Asian start-ups raised just over $8 billion in 2020 in what the company characterises as “a very normal year”.
Lee’s personal experience in driving GGV’s latest round of fundraising is a testament that the lack of face time did not stop the firm from successfully raising capital. In January her firm completed a $2.52 billion raise, in what she described as the “fastest and largest fundraise we’ve led in the last 20 years”.
In a sign of the times, Lee conducted over 250 zoom calls as part of the process, but she cautioned against thinking that all fundraises would be as fast and short. She explained that the most important factor ahead of virtual roadshows is to be “100% prepared” by ensuring that necessary materials are provided and detailed, minimising any reason to have to take things offline.
“If we think LPs (limited partners) are going to have 100 questions, we're going to have the 100 answers,” said Lee.
Having a proven track record also helped GGV’s raise. 2020 was its biggest year on record with seven of its portfolio companies including Airbnb, Agora and Xpeng going public.
From surviving to thriving
The worst, however, may not be over as the world is still trying to contain the Delta-driven surge. But in planning for a post-pandemic world, Lee encourages her portfolio companies to consider their business model – to do a deep dive into revenue growth and to determne whether their gross margin model is sustainable.
“I think the approach should be that if you're in it for the long haul, then this is the time to step on the gas and to be a clear market leader. In addition to organic growth, if you have your business model in line, then you must consider inorganic growth, because there are going to be opportunities for acquisition as well,” Lee added.
