Gita Gisela

Gita Gisela

July 21, 2022

What's Up with Tech Winter?

After fine years of growth, years of slump have started globally. The slow down has impacted startup employees across different industries, ranging from SaaS to crypto to edtech and fintech. Some expected the trend will only impact growth-stage startups that had crossed over their limits, while some argued that this is an ongoing threat for every scale of business.

Y Combinator had cautioned their portfolio companies through an email. The famed Silicon Valley startup accelerator told founders to plan for the worst amid a perceptible slowdown in the financing market, which could cut costs and extend the runway within the next 30 days.

As a result, most companies in Asia have tightened their spend considerably over the past three to four months The illustration presented by TechInAsia below shows us the number of founders that have pulled the brake during the crisis:

The layoff trackers below show that job cuts spiked in May 2022 across Southeast Asia, surpassing that of China. A majority of the layoff were contributed by Indonesian startups, such as edtech firm Zenius, fintech company LinkAja, and JD.com.

These shedding staff eventually has shown the segment which has survived and even grown during pandemic, is now struggling to prune costs during the tightening of larger-sized funding rounds. Moreover, VC funding for startups in the region has been on the decline due to dried liquidity

According to a Crunchbase report, funding in the region had dropped by 7% in the first quarter of 2022 to US$ 36.3 billion compared to the same quarter last year.

In Southeast Asia, capital raised had dropped significantly over the past three to four months. Around $1,8B can only be reached in June 2022, which is only half of capital raised in March. The number of funding remains relatively high with 74 startups receiving funding rounds in June 2022.

Not So Friendly Investment Climate For Founders

Aakash Kapoor, VP of Sequoia Southeast Asia, stated what’s going on today was triggered by the global inflation and the hawkish stance of central banks that try to battle the ascending economy. To combat the unforeseen challenges of the global economic crisis, the global central bank is taking corrective measures which result in a raised interest rates. 

“Rate hikes have happened and hikes are likely to continue. There's a cost to capital and investors are reassessing how much they're willing to pay, both for public companies as well as private companies. As a result, valuations are going down dramatically in public markets and there is a spillover effect of that in private markets too,” said him in the Surviving Tech Winter webinar that was held by Aspire.

Accordingly, founders will be able to raise capital at lower prices and business reassessment is required in order to survive the macroeconomic trend, “That's the first impact, and business should not be focused on growth at all costs they understood earlier.”

Michael Duyvesteijn, a VC scout at Saison Capital uttered similar views. Since the capital market is going down to 20% earlier this year, investors generally are less interested to invest. This eventually affects VCs which become less bullish and more picky in selecting a startup to invest in.

“VCs will be less bullish if their investors are less bullish. And that's why these investors are now less likely to invest in companies and will be more picky about it. VCs are back in the driving seat. Founders will face a difficult time in securing new funding rounds,” Michael said in an interview with Brick.

“One of a very late stage company in Europe, Klarna, even had a down round that brought their valuation down eighty five percent because of the current market conditions,” He continues.

With a lot of capital retrenchment, VC partners are now demanded to be more selective at choosing startups to invest in. However, this does not mean certain verticals will likely be prioritised to raise funding. Startup with a clear business model and predicted to be profitable in the next seven to ten years will actually be preferable to VC partners.

“Generally, yes there will be less funding round for startups and now VC will be more selective in choosing a company to invest in, especially if we look at its business model and profitability in the future. That’s why, we are now more cautious to businesses which are not economically sound or still burning too much on promo or cashback for user acquisition, or even have a high unnecessary OpEx,” Reza Birowo, VP Investment in Kejora Capital, said in an interview with Brick.

Not only that, but instead of looking at a startup's stage, VC prefers to look at how it makes sense and economically the startup will be before giving a raise.

“I don't know who is going to suffer the most. But, I think for sure VCs wouldn't put their money into pre-product or pre-revenue startups. VCs will really be looking if the business makes sense, if it's economically sound,” said Michael.

What should founders do?

Amid this global funding crunch, founders had tightened their belts as VCs now are demanding more on profitability. Some of them eventually had to freeze hiring and reduce cash-burn and some even had to adjust their business plan. These strategies are actually built now to help startups survive this tech winter.

Formi.id has started to take action due to the crisis. As they are fast growing and need to keep maintaining good numbers, this early stage beauty and dentistry startup needs to take control in their OpEx and CapEx right now, along with ensuring that their unit economics are plausible.

“We're having very fast growth, something that we need to make sure that we are increasing month by month. So, maintaining those good numbers are very important, especially in this very early stage. We are making sure that we are having a controlled OpEx and CapEx right now, but we are also making sure that every unit of ours is actually positive,” Rahmat Hidayat, Chief Product and Growth Officer of Formi.id, said.

Aside from financial strategy, Rahmat also said that Formi.id is enhancing on the partnership side with other suppliers, clinics, and financial institutions. This is required to aim that the startup has all of the element needs available for the market.

“We are partnering with suppliers, clinics, doctors, banks, and insurance. So we would like to be the point where all of the elements are actually needed, “ Rahmat continues.

Similar to Formi.id, Chatat also took an adjustment to face the crisis. From giving promo and other cash-burn, now they changed to plan for the efficient strategy to acquire users. Adi Bapa, the CEO of Chatat, said this could be the exact way to extend the runway as funding becomes the essential element to achieve growth.

“Previously, we tried to achieve growth by giving promo. But as the tech winter is coming now, we tried to adjust our plan and strategy ranging from marketing, sales, to product units. We think it is the reasonable way as investors are looking at business profitability now and funding is the essential thing for us to acquire users,” told Adi to Brick in the interview.

However, there’s also startups which are not really worried about how big the tech winters will be. Founders are still confident to get through this as long as they are more careful with their burdens. Gavin Tan, the Co-Founder and CEO of Brick, stated that VC still needs to deploy. Hence, good business will still be funded even though it only has lower valuations. 

“It has an impact on us in a negative way but we have definitely been more careful with our burdens, so I think as a start-up founder I'm not too worried about the winter. VCs still need to deploy and good businesses will still be funded, right? I think at lower valuations for sure,” Gavin said on the Challenge and Innovation in Indonesia’s Fintech Landscape Panel Discussion.

Compared to early stage startups, Gavin also convinced that tech winters will only crash more on big companies which would move aggressively. This can be said as the big company cost base is much higher and the runway is usually much shorter than the early stage startup.

“I also see a trend where a lot of young Indonesians' larger companies are actually not safer. Very often this happens because companies would move aggressively, because their cost base is also much higher and the runway is actually much shorter than the early stage,” Gavin continued.

Brick is a financial infrastructure layer that provides fintech developers with the API keys they need to create easy and accessible experiences for their users. By delivering access to the financial system, we aim to empower innovators to build amazing products solving big problems thereby democratising financial services in Southeast Asia.
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