CompassList: Cautiously Opportunistic : How Indonesian VCs are Hiding out the Covid-19 Crisis — More than two months after the Indonesian government announced the first Covid-19 case on home soil, the country’s VCs are cautiously adapting to “the new normal.” The firms are still seeking out new deals, but have mostly narrowed their criteria to what they refer as “pandemic-proof” sectors.

Melina Subastian, Principal at Alpha JWC Ventures, said at a webinar organized by GK-Plug and Play that VCs and their LPs are questioning whether they should go forward with investments given such uncertain conditions. Alpha JWC is not backing down from making new commitments, she said, but has taken a more “selective mode, in terms of dollar value and number of investments.”

Just this week, O2O coffee startup Kopi Kenangan, an Alpha JWC investee, said it had raised $109m in a funding round led by Sequoia Capital India. Alpha JWC also participated in the deal, raising its stake in the company.

At Indogen Capital, Managing Partner Chandra Firmanto said LPs from East Asia are eager to shift to resilient sectors. “Edtech, fintech and online entertainment and gaming, as well as e-commerce and logistics, are looking very promising now,” he said in an interview.

He said Indogen is the midst of closing an investment in an Indonesian gaming company, which he declined to name. The deal has been in the works since last year and is expected to be announced this month.

Recent new funding deals reflect similar preferences. Init-6, the new fund established by Bukalapak’s co-founders Achmad Zaky and Nugroho Herucahyono, provided seed funding to edtech platform Eduka in late April. That same month, smart logistics platform Kargo Technologies raised $31m, while this week student lending startup Pintek raised an undisclosed amount of funding on May 13.

Indonesia’s economic growth in the first quarter has slowed down to 2.97% year on year, below the 4% the government projected. The economy grew 5.02% last year. Ratings agency Fitch expects the country to slip into recession in 2020, with GDP contracting 1.3% this year, as consumer spending declines and major infrastructure projects, including those associated with the new capital city, are postponed.

The government has floated plansto relax the restrictions on movement and activity, including exempting officials and certain employees from the ban on taking flights and traveling within the country. However, as the number of cases continue to rise, there are worries that the virus will continue to spread and put the country under a prolonged state of lockdown.

Work from home, VC-style

VCs have long relied on face-to-face meetings with startups as part of their due diligence and to establish trust with founders. Due diligence on tech platform companies is best done through onsite visits, said Firmanto, but these are now on hold due to the current travel restrictions.

Despite the limitations, VCs have made sure they adapt to the new normal by moving meetings and deal signings online. Services like DocuSign have come in handy for securely sharing of contracts and term sheets before parties digitally sign them. Webinars and Zoom calls are their tools of choice for outreach efforts and preliminary talks with the company founders of prospective investments.

For example, global startup accelerator program Antler will deliver its program through online modules and webinars, focussing on startups that can offer ways to mitigate the impact of the pandemic and help people cope with working and living at home.

Venturra Discovery’s Raditya Pramana told CompassList that the VC firm signed a deal to invest in a Vietnamese fintech company, despite never having met the startup’s team face to face. He declined to provide more details about the investment, saying an announcement will be made later this year.

Although VCs have adapted, they are also hoping that their business environment will soon return to pre-pandemic conditions. “Face-to-face meetings are important because that’s how we can establish trust and see if we have chemistry with the founders,” Pramana said.

Meanwhile, Firmanto believes that online meetings will continue, but Indogen “will meet founders face to face, at least from the second meeting onward.”

More M&As?

In these difficult times, smaller, cash-strapped companies may be forced to merge with their similarly struggling competitors, consolidating their businesses and buying themselves time until the pandemic is over.
For investors, M&As could help them recoup some investment losses when they sell their shares, whether when entities merge or as a result of takeovers. Investors also stand to make money from M&As if they are able to exit by selling their shares at higher prices, Firmanto pointed out. This is mostly true in “pandemic-proof” sectors like edtech, entertainment and logistics, where the stronger players can use the crisis as an opportunity to acquire their competitors. But this is less likely to happen in the services and proptech sectors, and for transport companies without government contracts, he added.

Startups considering M&A should prepare by improving their business before selling, he advised. In the current climate, “you can’t sell your company as it is; you risk getting a low valuation. Corporates will be eager to collaborate, do a joint venture, or even acquire your company if you’re pandemic-proof.”

Pramana agrees. He suggested that startups not rush into M&A, but look for ways to collaborate with other startups. “You’d want to optimize the value of an exit, and one way to do that is to go for a consolidation where the result is greater than the sum of its parts,” he said.

Survival tips

Pramana believes that in the end, the balance sheet will separate the companies that can survive the current recession from those that cannot. He and other investors are advising startups to maintain a cash runway that can last them six to 12 months with little or no revenue.

Alpha JWC’s Subastian says startups should analyze various scenarios and “explore alternative cash options, which can be venture debt, bank loans, or bridging rounds.” She also cautions against laying off staff, and that it should be the last resort. “The culture you have built might be compromised and morale [among remaining employees] might fall,” she said.

Instead, Subastian suggests cutting pay across the board, with leaders also reducing their wages. “When [employees] see their management take pay cuts, they will recognize that they are not alone in this,” she said.

Startups should also find alternative sources of income when their primary business activities are severely impacted. Firmanto gave the example of cosmetics retailer Lunadori, which had to close its offline locations and so shifted its sales online. It also used its industry contacts to source for masks and hand sanitizers, goods that became highly sought-after commodities as people try to keep themselves safe during the pandemic.

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