SINGAPORE (May 22): Big-name start-ups such as Grab and Uber have been forced to cut jobs as they come under strain following the Covid-19 outbreak. SMEs operating on a much smaller scale are suffering too. Their weak cash flow and relative lack of economies of scale make it difficult for them to withstand exogenous shocks. This includes loss-making early-stage startups — an open letter to UK Prime Minister Boris Johnson, warning that Britain could “lose a generation of start-ups and high-growth businesses to Covid-19”, has gathered at least 5,000 signatories.
NUS Enterprise, which incubates start-ups at the National University of Singapore, says: “In general, most start-ups’ revenue has been impacted by 40–50% due to weak market sentiment. Foreign markets also form a large part of our start-ups’ income. Travel restrictions [have] severely affected their business functions — project discussions have been put on hold while others who have secured orders are unable to travel to deliver the solutions/installations. Some are also facing delayed payment upon job completions.”
Christopher Quek, managing partner at VC firm Trive, sees the recent collapse in oil prices as adversely affecting certain start-ups even if they are not directly plugged into the commodities industry. “There will be more likely indirect negative impact to start-ups that cater to oil-sensitive industries like travel, robo advisories and logistics. Start-ups usually serve larger established companies, so if these companies suffer a negative fallout from declining oil prices, so will the start-ups,” he says.
In a sense, dark clouds had appeared long before the Covid-19 outbreak, says Quek. With prominent start-ups like Uber and Slack experiencing a fall in share prices following their IPOs, start-up valuation had begun to weaken as forward multiples began to drop. A study by research house Preqin showed that Singapore’s share of start-up investments by value fell from 63% to 54% for Southeast Asia from 2016–2019.
Start-ups in sectors requiring physical contact will be the worst-hit by the crisis, with travel-related, F&B and retail start-ups likely to experience significant strain as the crisis drags on. Start-ups in “pro-social distancing industries” like cybersecurity, e-commerce and FinTech are likely to benefit from increasing internet usage during this difficult time, he adds
Treading Water
Weak investor confidence has created difficulties for start-up financing. A survey by 500 startups among 139 investors found that while 53% of respondents will invest in the same stages as planned prior to Covid-19, 32% believe that the pandemic will have a negative impact on investment while 36% feel it will have a somewhat negative impact on investment.
“Covid-19 has made it more difficult to raise larger sums of money,” says Adila Sayyed, co-founder of regional EduTech start-up Vere360. “Investors are mostly investing bridging funding to tide firms over, which is not a sustainable source of financing in the long run.”
“While there have been a few announcements of late-stage investments across Southeast Asia in the past few weeks, investors will become even more cautious in the midst of Covid-19,” says Quek. “Investors will not be deploying capital so quickly and at a lesser quantum. Anecdotal sharing among the VCs shows there [are more] start-ups approaching them.”
Tim Hentschel, founder and CEO of travel site Hotelplanner says, however, that the present decline in start-up funding was always going to happen due to a lack of judicious investing on the part of private equity. With the market already exhibiting bubble-like characteristics, he adds, the present crisis has only provided additional justification for private equity to exercise more discipline in their investments.
All in this together?
VC firms are digging deep into their pockets to provide start-ups with much-needed cash flow to survive the Covid-19 shock. Local VC firm TNB Aura has offered US$2 million ($2.85 million) in funding for each start-up affected by Covid-19, while Antler Singapore and Expara Ventures have offered to invest in firms developing Covid-19 solutions.
“Trive has participated with other community players in various community-driven initiatives. Mainly we are now providing mentorship, matching and advisory which we have done pro bono over the last 10 years,” says Quek, the firm’s managing partner. Trive has also joined a community-led initiative to recruit start-up workers laid off from the crisis.
Incubators and accelerators are also doing their best to help start-ups tide over Covid-19. NUS Enterprise is drawing on its extensive network to connect start-ups with corporate partners and investor networks to better access demand and capital as global demand flags. It has also waived incubation service fees for two months to help investors preserve cash flow.
Some start-ups have even stepped up to help other small businesses tide over the economic uncertainty. E-commerce marketplace Carousell has teamed up with Unilever to launch the #Supportlocal campaign, onboarding local F&B outlets onto its platform and eventually offering three months worth of complimentary premium services to SMEs.
“Carousell has always been a community-driven platform. This is a moment that is unprecedented in our history, where the community plays a critical role in ensuring the survival of businesses and more importantly, livelihoods,” says its chief commercial officer, Lewis Ng.
Despite strong headwinds in the tourism sector, Blue Sky Escapes has redirected its corporate social responsibility efforts towards ameliorating the pandemic. The firm raised $3,808 for the Sayang Sayang Fund at a virtual dance movement event called “Circuit Connect”, which supports the most vulnerable communities impacted by Covid-19’s precautionary measures.
While states like the UK have initiated startup bailout schemes, Hentschel is sceptical about such policies since many start-ups have yet to achieve profitability, which he defines as at least one profitable year in three continuous years. Although not against governments helping firms offset business losses arising from lockdown measures, Hentschel argues that start-up grant schemes do not yield return on equity to taxpayers. Such policies, he adds, are also unfair to non-start-ups, which need to take on debt to survive Covid-19.
“I believe that start-ups deserve nothing as they have not proven themselves yet and paid into the system,” Hentschel says, observing that recessions have the potential to provide market consolidation by weeding out non-competitive firms. Unprofitable startups, he believes, should either fold or be acquired by larger firms to enhance economies of scale. Singapore has so far not implemented any bailout schemes specifically targeted at start-ups.
J F Gauthier, founder and CEO of research advisory Startup Genome, disagrees. “With the world’s transition to a digital economy, technology start-ups and their ecosystems have become more important and the jobs they create more sustainable, because they are better adapted to our economic future,” he comments. Start-ups contributed strongly to the economic recovery from the 2008 financial crisis, he observes, with the “computer systems design and related services” industry outperforming large sectors of the economy including healthcare.
Luisa Alemany, associate professor of management practice at London Business School, concurs. Start-ups are by definition unprofitable while they innovate, she says, which means that they face greater difficulty accessing credit, denying economies the jobs and innovation needed for recovery.
“In venture capitalism, a single good investment can be enough to return all the money invested in 10 companies with a healthy profit. The government may well get its money back — and it will help change and improve our lives,” she adds.
