Articles 19 August 2020

Cut On This, Invest In That


How will the post-pandemic investment landscape and business practices look like moving forward? Fundnel's Chief Commercial and Strategy Officer discusses this topic with startup operators and investors in this panel.

Few industries have been spared from the economic contraction from the impact of Covid-19.

In the startup ecosystem, tough calls have had to be made, from internal company decisions such as layoffs and changes in employee compensation, to fundraising through debt. Fundnel's Chief Commercial and Strategy Officer moderated a panel at Wild Digital's Online Series to discuss what investors and startups have to say about the changes they have observed in the current state of business. Catch the recap below.

Webinar: Wild Digital Online Series - Cut On This, Invest In That [Part Two]


  • Victor Ng, Chief Commercial & Strategy Officer, Fundnel


  • Kay-Mok Ku, Managing Partner, Gobi Partners
    As Co-founder of Private Express, a cybersecurity startup based in Silicon Valley, as well as his experience managing a $500 million fund at the Media Development Authority in Singapore, Kay-Mok brings to the table experiences from both the startup and investment space.
  • Chin Chao, CEO, Southeast Asia, Innoven Capital
    Ex-Managing Director of venture capital firms Venture TDF Singapore and Venture TDF China, Chin Chao has overseen investments into present day tech juggernauts Alibaba and Baidu.
  • Eric Cheng, CEO, Co-Founder, Carsome
    Carsome is Southeast Asia’s leading used car trading platform with presence in Malaysia, Indonesia, Thailand and Singapore with an annual transacted value of over US$300 million. As a one-stop shop for car sellers, Carsome provides a full stack selling solution from inspection to ownership transfer, to deliver a seamless and hassle-free experience to sellers.

Check out some highlights from the conversation below.

Layoffs — The best time to conduct one is after a fundraise

  • Layoffs are an emphasis on profitability and the long term sustainability of the company, beyond pushing for growth.
  • Cutting usually occurs when the growth is not as core to a specific business unit, and hence there is a reallocation of resources to other more profitable aspects of the company.
  • Timings of layoffs have a signaling effect — cutting employees after a fundraise shows that the company is trying to maintain a lean structure by “cutting the fat”, whereas conducting layoffs at any other time would reflect as having poor performance.
  • Good outplacement support and helping employees find other employment opportunities should be in place. Communication of the rationale behind the layoffs internally and externally should also not be neglected.

Short-term savings vs long-term investments — Why investors are focusing so much on cost-cutting for startups now

  • In general, revenues are falling, and there have been shifts in consumer behaviours - 1) Consumers are going for more value for money purchases, 2) Digital spending is taking the lead.
  • The pandemic has evolved from a healthcare crisis to an economic one, and we are currently facing a liquidity crisis. Startups will not see returns as quickly, as less money is being spent.
  • Post-lockdown, we will face a solvency crisis. People will continue to practice social distancing, reducing capacity in restaurants and public spaces. Businesses with high costs and low margins like F&B will face insolvency and some may go bankrupt.
  • In either scenario, the obvious thing for startups to do is therefore cut costs — which is the only thing startups have 100% control over, to ensure survival for their long term vision to come to fruition.

Slow or stagnating growth from cost-cutting — Will this affect chances of future fundraises?

  • Survivors of the pandemic will emerge as the winners in the long term.
  • Most investors are not expecting tremendous growth from startups during this climate.
  • Being able to survive, showing good execution capabilities in cost-cutting and maintaining revenues at a healthy level are sufficient for investors to remain keen.
  • Holistically, instead of just cost-cutting, companies should think about optimising costs, and strategically bring in more growth or recovery for the business.

Supply chains are expected to transform to become more local and decentralised. How have startups adapted and which changes will be temporary or long term?

  • Covid-19 has accelerated the impact of digitally driven businesses like e-commerce and e-healthcare.
  • From a management perspective, it would be more strategic to have a centralised supply chain for operational efficiency.
  • Decentralised supply chains would cater more to on-demand and smaller quality manufacturing.
  • What will change in Industry 4.0 would be automated manufacturing that utilises technologies like 3D printing and robotics.
  • It is less about where one manufactures, but how one executes the integration of the whole supply chain. Having a fully integrated and supply chain, with some aspects centralised and others decentralised would be ideal.

In a decentralised world, how will scaling startup investments look like?

  • What we should look at is the underlying technology. With decentralised supply chains, any company in any part of the world can become a global supplier.
  • Startups are creative and based on their track record, companies will always find different ways to scale their products and processes.
  • What investors should be doing is to keep an open mind to the different ways companies are going to expand and grow.

Despite the philosophy of investing for the long haul, startup valuations are being depressed due to Covid-19 — is this fair?

  • Covid-19 has illustrated who the winners are, and investors will continue to pump money into them. Hence, the valuation for perceived winners is bound to increase.
  • The economic reality is that some companies are not performing as well as they were pre-Covid, making it hard for investors to value them at the same amount.
  • From an investor’s perspective, valuations have to drop to achieve the same IRR if the market is performing poorly. This trickles down to growth investors, the late-stage investors and eventually the early-stage investors.
  • It may seem like an unfair method to value a company now, but this is reality of current circumstances.

Should startups take on debt?

  • It may make more sense to take on debt if the money is spent on activities that directly generate revenue.
  • Startups can also use debt as a complementary tool to fundraising as a way to minimise dilution.

Achieving a fair valuation

  • To understand if the valuation is fair, take reference from market movements.
  • Startups should note that investors may start looking after their own interests more, such as asking for higher liquidation preference, participating preferred shares, anti-dilution clauses, or even more board seats for more control.

How will down rounds impact future investment decisions by investors?

  • This depends on the mitigating circumstances as companies need to do what they can to survive.
  • It also depends on the market outlook at the point of investment. Does the startup look like it will have promising growth in the next 6–12 months? In general, investors will focus more on future growth opportunities more than previous rounds raised.

Have there been any new KPIs introduced by investors due to Covid-19?

  • Some companies have had to change focus because business has been impacted by everyone being stuck at home. Many focus on introducing change in terms of ensuring that their employees are working in a safe environment. Crucially, businesses have also had to think about what they can do to continue driving the business forward post-Covid.
  • Mid-to-longer term KPIs would focus on employee productivity and how to do more with the same number or less people.
  • From an investor’s perspective, for startups with multiple business lines, investors may look at whether it would make sense for them to scale back or sell off an underperforming arm, or pivot into something that has gained momentum.

How Is employee compensation changing?

  • It is increasingly common for executives who are having pay cuts to get equity instead.
  • Compared to 3 to 4 years ago, people are more open to accepting equity as a form of compensation, where full cash compensation was heavily preferred.
  • Employees in managerial positions and above are more likely to be offered stock options since they would better understand how to drive performance of the company.
  • Using equity over cash to extend cashflow is definitely a strategy founders can adopt, as it also helps empower employees.

Why do most entrepreneurs not talk about exits? Is that not the end goal for companies?

  • In Southeast Asia, M&As are more likely. Prospects of a good exit are low in this climate. Most companies are talking about survival.
  • To achieve IPO market potential, companies have to be a pan-Asian champion before considering an exit.

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