In recent years, the explosive growth of startups in Indonesia has made headlines around the world. Its capital, Jakarta, ranks third in the 2021 Startup Genome Emerging Ecosystems with a combined startup valuation of $34 billion. Indonesia is the second largest venture capital market in Southeast Asia after Singapore, with 136 local venture capital funds.

International VC companies are actively showing their interest in the Indonesian start-up ecosystem — among them are investors from neighboring countries and well-known VCs from across the ocean. Tech in Asia in September 2022 released a list of the 10 most active investors, which includes both local and foreign ones. Singapore-based venture firm East Ventures leads the list with 62 deals in the region in a year, followed by Singapore’s Insignia Ventures Partners with 27 deals, Sequoia Capital with 24 deals, Singaporean VC firm BEENEXT with 19 deals, Y Combinator with 17 deals, Global Founders Capital from Berlin with 16 deals. The local leaders in terms of number of deals are mainly based in Jakarta. Among them are AC Ventures — 43 deals, Alpha JWC Ventures — 30 and MDI Ventures — 26.

Many of the above investors also recently announced new funds focusing on Indonesian startups, including Sequoia Southeast Asia ($850M), East Ventures ($550M), Insignia Ventures Partners ($516M), AC Ventures ($500M), Alpha JWC ($433 million), so the coming years are expected to be a very exciting time for Indonesia’s tech ecosystem.

Indonesian Market Growth Drivers

Indonesia is Southeast Asia’s largest market with a population of 270 million — only the US, India and China have more. Indonesia’s economy ranks 17th in the world with a nominal GDP of $1.29 trillion — the country has quadrupled its GDP since 2000. China and ASEAN are Indonesia’s biggest trading partners. Considering factors such as location, access to sea lanes with modern ports, good educational institutions, Indonesia currently has a thriving startup ecosystem.

SEA is one of the most dynamic emerging markets where introduction of digital services is occurring most rapidly. And Indonesia is the leader in the region in terms of spread of the Internet in the country.

The Internet economy market will reach $100 billion by 2025, while Indonesia has the largest market size in Southeast Asia: the average Indonesian user spends 4 hours per day on mobile Internet, ranked 10th in terms of mobile Internet engagement globally. Moreover, the country has a very young population with an average age of 28.3 years.

Despite the fact that now Indonesia is among the middle-low income countries, it will soon become a middle income country: according to the World Bank, there are already 52 million representatives of the middle class in the country, and their number is growing steadily. By 2030, this figure will reach 118 million. And it is the middle class in Indonesia that is the main driver of economic development. Analysts suggest that Indonesia could replicate China’s experience of economic progress: show an explosion of economic activity through the use of cheap labor, borrowing innovation and building infrastructure. This means that a third of the country will be able to afford a qualitative change in consumption: buy a house, a car, a smart phone, pay subscriptions for digital products and education, use complex banking products, fly planes, buy concert tickets, order home delivery of food and goods.

Thus, the explosive growth of digital technologies and the growth of the middle class are laying the foundation for significant economic benefits for Indonesia. According to McKinsey, e-commerce sales account for only 5% of total retail sales in Indonesia. These figures are expected to grow up to 17–30% in the next five years. Despite the fact that now it is still a poor country, its economy has the potential to grow tenfold, which makes it attractive for investment.

Local venture market

Many venture capitalists have turned their attention to Southeast Asia as an emerging technology hotspot to invest in and profit from its booming startup ecosystem. VC funding in Indonesia is one of the most successful in the region despite the fact that the projects are scattered across the vast archipelago.

Indonesian companies raised $308.7 million at all stages last year, according to Crunchbase, and early stage breakdowns are as follows: pre-seed (10.3% of deals), seed (55.2%) and series A (34.5%) attracted $202.7 million in venture investments. FinTech company Ajaib, which raised $65 million in series A, had the maximum round for the past year.

Since the beginning of this year, according to Crunchbase, companies from Indonesia have raised $136.9 million, and the total for the pre-seed, seed and series A stages amounts to $75.3 million. The leader in terms of the amount of investments was Flip, which raised $55 in series B. According to the CBInsights report for the third quarter of 2022, in the top series A deals, DANA, which raised $555 million in August, ranks second. The company is engaged in telecommunications, mobile software and payment services.

Here are the top 5 venture capital companies investing in startups in the region:

Alpha JWC, a Jakarta-based venture capital firm, works across sectors including FinTech, logistics, data, and F&B startups from incubation and funding support to the exit phase. In April 2022, the VC company announced it had signed 30 new deals under its $433 million Fund III program Alpha JWC Ventures has already raised four unicorns, CARRO, Ajaib, Kopi Kenangan and FinAccel, and is looking to take other startups to the top league.

500 Southeast Asia has funded over 250 startups to date, including five unicorns: Grab, Carousell, Bukalapak, Carsome and Prenetics. At the regional level they supported 15 companies, the value of which exceeded $100 million, including Indonesian startups FinAccel, Stockbit and RedDoorz.

Sequoia Capital announced in June 2022 the creation of the first fund in Southeast Asia with a capital of $850 million, which shows that Sequoia sees the region as an area of ​​huge growth and investment potential.

Insignia Ventures Partner has a portfolio of seven Indonesian FinTech companies, including unicorn Ajaib, funded social commerce platform Super with a $65 million investment, and led the seed funding round for the trading platform Wifkain.

Golden Gate Ventures is another venture capital company from the region that intends to invest in unicorns from Indonesia. As part of the Funding Societies group, it recently acquired CardUp, a payment solution provider operating in Singapore, Malaysia, Hong Kong and India.

Startup ecosystem

According to StartupBlink, Indonesia’s startup ecosystem is the regional leader in innovation, ranked 38th in the world and 7 positions up since 2021. Indonesia also ranks 2nd among startups in Southeast Asia. According to the national rankings, the best cities for startups in Indonesia are Jakarta, Bandung, Surabaya, Medan and Yogyakarta.

As of July 2022, there were 6,405 startups in Indonesia, according to Tracxn. Among them there are 954 SaaS startups. “Soonicorn Club of Indonesia Tech 2022” is an exclusive list of the most promising tech startups in Indonesia that have also achieved significant evaluation milestones in the previous few years.

Altogether, according to Crunchbase, there are 14 unicorn companies in Indonesia (could it be true) that launched in 2015 on average, attracting $10.9 billion in total. Here are the top seven unicorns with the highest valuation:

1. J&T Express is a forwarding and expedited e-commerce service provider furnishing international shipping services for businesses and individuals.
2. Traveloka is an online travel agency that uses artificial intelligence to recommend the right vacation for customers.
3. Ovo is dedicated to making online and mobile payments easier for consumers. They offer world-class solutions for banks and financial service providers.
4. Akulaku is the leading banking and digital finance platform in Southeast Asia.
5. Ajaib is an investment platform that allows Indonesians to trade stocks, exchange-traded funds and mutual funds.
6. Kopi Kenangan is the fastest growing coffeehouse chain in Indonesia using a grab-and-go technology strategy.
7. Xendit is a FinTech company providing payment infrastructure in Southeast Asia.

Jakarta as Startup Capital of the Region

The center of attraction for business in Indonesia is Jakarta. All decision makers, opinion leaders, startups, venture funds, government institutions and large international and local corporations are concentrated in the capital. The main business district of Jakarta is the Sudirman Central Business District, where the offices of large international companies and funds are located. Most of the country’s business activity is focused here.

With the upsurge of tech and creative talent and more clients in Jakarta, the capital of Indonesia, more promising startups are being created and developed. A major factor in the growth and success of Jakarta’s startup community is the multitude of incubators, accelerators and other founder-focused entrepreneur support programs. According toFailory, investors should keep an eye out for alumni of the 15 most popular accelerators and incubators in Indonesia:

Arise

Satria Daulat Global, PT

EverHaüs

Skystar Ventures

Indigo by Telkom Indonesia

Ideabox

Maloekoe Ventures

Gojek Xcelerate

SKALA

Accelerice

Binus Startup Accelerator

Tinc

Energy Hub Ventures

X-Cultural Accelerator

Snowbird Group Indonesia

For example, Arise, an early-stage arm of venture capital firms MDI Ventures and Finch Capital, is focused on helping next-generation startup founders in Southeast Asia scale. There are 54 accelerators and incubators in Indonesia.

Measures to support entrepreneurship are also carried out by the state. The Indonesian Ministry of Cooperatives and SMEs is taking action to regulate incubator programs for local startups and continues to provide opportunities for them through its Startup Incubator Program (SIP). A case in point is the Global Entrepreneurship Program in Indonesia (GEPI), which connects stakeholders in the local startup community through its new startup incubator initiative.

Venture funds

There is a growing number of active angels and funds that invest in early-stage startups in the region. At the same time, Indonesia’s high-tech sector is still young and has just completed its first cycle of venture investments and exits. There is relatively little competition here and free niches can still be found. The level of technical personnel is low, and Russian-language projects will be stronger on average, so there is an opportunity to “bite off” part of the market.

According to Tracxn, there are 136 venture capital funds in Indonesia.

Openspace Ventures — an early stage venture fund based in Singapore, invests in technology startups based in Southeast Asia. The portfolio includes B2C and B2B technology companies.

Sovereign’s Capital — an early stage venture capital firm with investments in the US and Indonesia. Fund invests in technology companies specializing in the medical technology sector. The firm invests between $250,000 and $2 million in each company. Notable portfolio companies include Caresync, Cladwell, Maxwell and Soapbox.

Alpha JWC — a venture capital company investing in seed and early stages in the US and Asia Company invests in technology startups in the SaaS, FinTech, e-commerce segments, such as Tokopedia, aCommerce, Carro and Berrybenka.

Monk’s Hill Ventures — a venture capital firm with early-stage investments between $1 million and $3 million. The firm focuses on FinTech, consumer products and technology. Major investments include Scalable Capital, Ninja Van, PlayLab and ZipMatch.

East Ventures — an early-stage venture capital firm investing in e-commerce, social media, gaming, SAAS and mobile services. The company has made over 150 investments in Asia and the USA. Top portfolio companies: Gradberry, Shippo, VenueSpot, Make School.

Convergence Ventures — an early-stage VC firm with a focus on SaaS, FinTech, ECommerce and AI (Kata.ai, Qraved, Males Banget, Paktor).

GnB Accelerator — a global seed and early stage accelerator; a Micro VC firm. Invest up to $50 thousand in mobile technologies.

Access Ventures — venture capital firm specializing in early-stage technology startups. Firm invests in seed and Series A firms. Target sectors include artificial intelligence, data analytics, commerce, AR/VR, fintech. Portfolio companies include Moca, Kata.ai, OP.GG and others.

Venturra Capital — an early stage venture investment company that invests in Southeast Asia in technology companies operating in sectors such as e-commerce, FinTech, HealthTech and EdTech. Notable portfolio companies include Zilingo, Carro, KFit and iPrice Malaysia.

Intudo Ventures — early stage venture capital company investing in Indonesia. Typically invests in technology startups operating in sectors such as Consumer Digital, Media, EdTech and FinTech.

Following the growth and multipliers

Now Indonesia is open to innovation, but at the same time it is just beginning to develop and build a national tech-driven economy. Every rupee invested and service created leaves a huge mark here, because entrepreneurs literally change people’s lives and provide tools to improve the well-being of citizens.

For Indonesia, projects are often relevant that will no longer soar, for example, in Europe or North America, because there are too many of them: mobility, education, HRTech, Ecommerce, FinTech, FoodTech and others. Great opportunities in Indonesia are opening up for FinTech startups. Over 60% of the population do not use banking products, and 40% are not included in the banking system at all: they have no cards or accounts. There are only 16 million plastic cards for 270 million people.

Indonesia attracts venture investors from all over the world, because in such an actively developing market, where the services we are used to are only expected to gain popularity, it is possible to achieve the desired multipliers and in 5–7 years get 10X or 20X, and preferably 100X. For markets that are slowly growing and already have a high level of penetration of such services, it is difficult to achieve such multipliers.

In addition to the total size of the market in terms of the number of potential users, it is important at what stage of development it is and what service products will soon spread nationwide and become part of people’s lives. Therefore, we at A.Partners follow emerging markets, including Indonesia, as well as uptrends in tech segments.

In general, the density of venture capital money for a startup there is high, especially if the project has a qualified team. There have been several major IPOs in Indonesia recently, such as GoTo and Bukalapak. Now local funds are ready to actively invest in new projects.

Over the past decade The United Arab Emirates has become a real hot spot for many: businessmen, rich people, vacationers and workers from all over the world. This Middle Eastern country impresses with the pace of its development, skyscrapers and highways that have emerged where the desert was, as well as with the extent to which industrial, commercial, and business interests from all over the world intersect in this place. Now the UAE aims to attract the best innovation, technology and talent: the country’s goal at the state level is to become the new global innovation hub and home to thousands of digital nomads.

This year, the United Arab Emirates was ranked first in the world as the best place to start a business according to the Global Entrepreneurship Index. There are more than 10,000 small and medium-sized businesses in the United Arab Emirates, and by 2031, the UAE plans to grow at least 20 unicorns worth over a billion dollars. Why is the UAE one of the most attractive regions for startups and venture investors, and what is the role of the state in the increase of innovative potential?

Way to MENA

Although Silicon Valley in California is considered to be the epicenter of startups and venture capital investments, the Middle East is a region where the startup ecosystem is booming and venture capital activity is growing.

The UAE is part of the MENA region, which includes the countries of the Middle East and North Africa. According to MAGNiTT’s report, venture capital funding in the MENA countries soared as of year-end 2021 to a record $2.6 billion (up 138% from 2020), with the United Arab Emirates ranked first in the region in terms of both number of deals and financing: the UAE accounts for 26% of all transactions and 45% of venture capital funding in the entire region.

UAE startups raised $1.2 billion in 155 deals in 2021, with even more funding activity expected in 2022. Also, the UAE ranked first in the Middle East and Africa in terms of the average size of a single financial transaction, which reached around AED 28 billion ($7.62 billion) in 2021, representing a 72% growth compared to 2020.

The growing number of startups and venture capital companies in the region is boosting investment inflows and increasing the activity of Middle East funds in the sector. With a focus on economic diversification, reduced dependence on resources, and innovation strategies and initiatives, the Emirates and Saudi Arabia lead the MENA countries in terms of venture capital growth. This growth was facilitated by the actions of governments and some features of the region itself.

At the crossroads of markets

According to Magnitt, the UAE has been the preferred location to relocate the main and regional headquarters for startups in the Middle East and Africa.

As a natural crossroads of emerging markets, Dubai is located between East and West and is an excellent springboard for the MENA region — according to the Finom financial platform global index, Dubai is among the 35 most attractive cities in the world to draw venture capital investments, creating a dynamic environment of rapid growth for both ambitious startups, as well as for investors. The United Arab Emirates is ideally located in the Gulf Cooperation Council region at the crossroads of the emerging markets of the Middle East and North Africa, as well as at the intersection of global capital flows, serving as a bridge between the leading financial centers of London and New York in the west and Hong Kong and Tokyo in the east and is an ideal location for international business. Companies in Dubai are also located close to key geographies in Saudi Arabia, Pakistan, India and Africa.

In addition to being within a five-hour flight for 2.2 billion people, Dubai also offers outstanding state-of-the-art digital infrastructure, including logistical access to the Middle East’s largest transshipment hub, Port of Jebel Ali and Dubai Airport. For innovative companies, it is also a helping hand for doing global business.

The UAE’s prime location is confirmed by landmark moves of major companies: Lebanese digital music streaming platform Anghami enters the international market via Abu Dhabi; Egyptian company Swvl, which offers innovative solutions for ride-hailing, moves to Dubai; American company Stripe, the leading financial company in Silicon Valley, USA, has chosen Dubai as a launching pad for its regional expansion to the Middle East and Africa.

Digital nomad halting site

As Silicon Valley once became a focal point for talented developers, so the UAE is becoming a place where investors and founders of technology startups aspire. Two free economic zones, the Abu Dhabi Global Market and the Dubai International Financial Center, are among the favorites for international startups to register their company.

Since its launch in 2019, at least 44,000 people have moved to Dubai on a golden visa, according to government figures. It is issued for 5 or10 years to foreign entrepreneurs, investors, property owners and scientists. With a Golden Visa, you can freely live and do business in the UAE, open an account with a local bank and become a tax resident of a country with a comfortable tax regime.

Being in the UAE gives startups the opportunity to expand into the Middle East and Africa. Offices in Dubai also make it easier for startups to hire talent from all over the world because startups can hire people from their tech diaspora and ask them to move to Dubai.

Real estate brokers Savills named Dubai the third best city in the world for digital nomads. A new $100 million venture capital fund focused on investing in startups is believed to add even more momentum to the UAE’s digital development and increase worker mobility by boosting jobs for IT and innovation professionals.

Focus on technology

The UAE has made clear its ambitions for unicorns with its Entrepreneurial Nation initiative, in which it plans to create 20 such startups worth over $1 billion each by 2031.

To achieve these goals, the government develops strategies and provides comprehensive institutional support for the development of the innovation ecosystem. Thus, the Dubai International Financial Center (DIFC) is the leading financial center in the Middle East and North Africa and the main regional hub for tech startups, providing access to the innovation ecosystem of all stakeholders, including international companies, investment funds, asset management institutions, banks and entrepreneurs.

DIFC started out as a financial services hub but has grown into a sector-independent financial ecosystem with a total market size of over $424 billion, equivalent to 30% of combined GDP of the Gulf countries and over 10% of Dubai’s GDP. DIFC now brings together more than 1,000 financial and innovation companies, more than all other Gulf countries combined. The center has attracted 17 of the world’s top 20 banks, six of the top 10 asset managers, three of the world’s top five insurance companies, and eight of the world’s top 10 law firms. Now more than 500 technology companies work in the center.

Government initiatives have been a key factor in the growth of venture capital investment in the region and the growth of the startup ecosystem. Hub-71, for example, is the flagship initiative of Abu Dhabi’s business acceleration program and the city’s premier innovation hub, bringing together over 100 startups. Dtec Technology Entrepreneurship Campus was opened in Dubai in Dubai Silicon Oasis Free Zone and DIFC Fintech Hive.

But government support for the sector goes beyond just providing a desktop and Wi-Fi. The tax-free environment is complemented by an institutionalized support network — Dubai Future District was created to promote innovation and develop a new economy. Consisting of three major financial zones including DIFC, businesses have access to licensing, visa, legal services, financing and housing support in this county, an environment designed to attract start-ups and give them the best chance to succeed. Governments in the Middle East are also increasingly providing regulatory support to startups. For example, all Gulf States either have or offer Fintech regulatory sandboxes, which provide a secure environment for testing Fintech products under regulatory oversight.

There is also regulatory support for venture capital funds. ADGM, for example, has created a special regulatory framework for venture fund managers. Some of the benefits of this system are lower management and control requirements, such as no requirement to appoint an internal auditor or independent fund administrator, and no minimum capital requirements. However, certain requirements must be met: the fund must invest in shares of early-stage, non-listed companies and have a closed structure, the investment must be made through a private placement among professional investors, and the size of the fund is capped at $100 million if not specified otherwise, and agreed with the regulator, the Financial Services Regulatory Authority.

VCs can access the tools they need to raise capital for funds and venture investment, as well as access AED1 billion in investment from the Dubai Future District Fund. Half of this fund, designed to support new economy companies, is also intended for venture capital funds with a local focus. DIFC provides an independent legal framework and world-class business infrastructure, while the Dubai Financial Services Authority (DFSA) establishes supportive regulation. The DIFC courts operate under an English-language common law court system, allowing international investors and companies to operate in the country. This regime supports cross-border activities, ensuring 100% foreign ownership and imposing no restrictions on the repatriation of capital.

The UAE constantly encourages foreign investment. For foreign venture investors wishing to fund companies operating in the UAE, the transition does not require prior approval if the investments are outside of a regulated sector (such as banking or telecommunications). Moreover, the UAE recently amended its Federal Companies Law to allow direct foreign ownership of certain limited companies, removing the 51 percent local sponsorship requirement. In addition, the UAE continues to facilitate the creation of venture capital funds, whether onshore or offshore.

To finance startups, the UAE can offer a large amount of local capital, which, among other things, has attracted startups to the Middle East. Much of this capital is provided by the sovereign wealth funds of the Gulf states. These funds have become global centers of venture capital, vying with leading private equity firms. Their long investment horizons and credibility make them reliable investors and partners. Mubadala alone, a state-owned holding company that can be classified as a sovereign wealth fund, has invested nearly $3.5 billion in venture capital in the first nine months of 2021.

Ecosystem promotion and culture of transformation

Thus, the explosive growth of the startup ecosystem and venture capital financing in the United Arab Emirates cannot be called accidental. Promoting the development of sustainable VC ecosystems backed by strong sovereign wealth funds has become a key element of their economic diversification strategies as oil-exporting countries — looking forward to moving away from their historical dependency on petrodollars to grow technology leaders and strong innovative economies.

The UAE has been successful in attracting venture capital investment in startups by launching comprehensive national projects to enhance the role of entrepreneurship in the economy. The UAE ranked first in attracting venture capital investment in startups in the Middle East and Africa, for the first time exceeded the $1 billion mark in venture capital investment in startups, and these achievements coincided with the launch of several large-scale national initiatives aimed at developing the entrepreneurial ecosystem, including Entrepreneurial Nation and Projects 50, which provide services for entrepreneurs and project owners. These results confirm the country’s ability to attract quality investment and strengthen its position as an innovation hub for the community of tech companies, regional and international investors. The current achievements are a testament to the effectiveness of the national policies and strategies being implemented to make the business environment and entrepreneurship in the UAE more competitive and attractive.

The UAE has made Dubai and Abu Dhabi cities of entrepreneurs and investors with a flexible legal system, reliable financing instruments and an effective regulatory environment. A thriving innovation system, an excellent regulatory framework, progressive government policies, and geography that provides strategic access to global markets are the main components that attract businesses to the country.

Investors and entrepreneurs are actively enjoying all the benefits of the financial free zone, including talent attraction, zero tax rate and 100% foreign ownership, and these conditions make Dubai one of the best places to conduct international business. It is no wonder that more and more entrepreneurs and investors choose to create and develop companies in the Emirates. The culture of change and innovation that the UAE is creating will ensure that this rapid growth continues.

#UAE #Dubai #startups #VC

2021 turned out to be a record year for the international venture capital market: startups were literally flooded with money according to fairly bold estimates. The volume of global venture investments last year amounted to $643 billion compared to $335 billion in 2020 — the market has almost doubled year-on-year. However, this year could be a perfect storm: global macroeconomic shifts, geopolitics and falling public markets are changing the pace of venture capital funding around the world. We are looking into whether this is the beginning of a major pullback or a correction and stabilization.

First signs of slowdown

In 2021, as the stock market continued to rise and many tech companies jumped at the chance to go public, there was a significant increase in venture capital investment in startups around the world. On the other hand, the doubling of the venture capital market raised concerns about inflated valuations and forming market bubble. In this deal-making race and high competition among funds, some investors began to express concerns about due diligence (or lack of it) as funding declined faster and faster. Many companies raised capital at significantly higher valuations last year, sometimes within months of their previous rounds.

In January, it seemed that 2022 would again break records for the development of the venture capital market — global financing of private companies in the first month of the year amounted to $ 61 billion. However, against the backdrop of the geopolitical crisis and a downtrend in the stock market, the highly overheated venture capital market began to cool down. Already in February, according to Crunchbase, global venture capital funding fell by $10 billion compared to January.

The results of the first quarter of 2022 for the first time showed a slowdown in the growth rate of venture investments over several years. The market is down 13% from the fourth quarter of 2021, when a record quarterly amount of venture capital investments was recorded. Early-stage projects funding amounted to $51.9 billion in the first quarter, down 18% from the previous quarter. Funding in the late stages fell by 12% to 97.9 billion. Only for startups at the seed stage, venture investments turned out to be approximately at the level of previous quarters.

In April, global venture funding totalled $47 billion, the lowest amount in 12 months. And while this decline doesn’t seem significant, it does signal that it’s the start of a long-term shift in global startup funding, especially for late-stage companies. In general, the volume of investment in April decreased by 10% compared to the previous month and by 12% compared to April 2021.

So far, a drop of 10% to 12% does not seem significant given that the April total still far exceeds funding in any month of 2020 by the amount of $5 billion to $29 billion. However, the trend towards active decline in venture funding continues: according to CB Insights, global funding will decrease by 19% compared to the previous quarter, and the number of transactions by the end of the second quarter will fall by 22%.

Degrading valuations affect rounds

Turbulence in public markets impacts funding and valuation of late-stage startups the most. We have already seen how the Instacart unicorn has significantly reduced its own valuation by 40% from $39 billion to $24 billion. That brought the grocery delivery company closer to DoorDash, whose shares have lost nearly 50% in the past six months. This phenomenon reflects that many late-stage companies are now significantly overvalued.

Deal sizes and valuations have begun to decline, and companies that are close to going public have felt the impact of the public markets on their valuations when trying to raise capital. Now various players in the venture ecosystem are beginning to realize that the price they were willing to pay to get into the hottest deals in competition with others has been inflated. For example, the iconic Silicon Valley venture capitalist Andreessen Horowitz (a16z) was at the pinnacle of its success in terms of exits by the summer of 2021. Well-known portfolio companies of the fund, such as Airbnb, Coinbase, Robinhood have launched or planned public offerings with initial valuations of tens of billions of dollars. A year later, a grim picture emerges: of the 17 Andreessen portfolio companies that went public with initial valuations of $1 billion or more over the past 18 months or so, all but one are trading below their offer price. Coinbase, which debuted at an $86 billion valuation in April 2021, has dropped below $15 billion after a disappointing earnings report. Robinhood’s value has dropped over 75% from its IPO price, and Roblox has lost almost half of its value.

Tiger Global Management, the most active global venture investor in 2021, also has its fair share of failures. Among the portfolio companies that have gone public in the past 18 months, self-driving truck technology developer Embark (down more than 80% from original market cap) and automation software provider UiPath (down more than 70% since IPO) stand out.

The SoftBank Vision Fund, for example, has many portfolio companies that have gone public over the past 18 months with dismal performance: WeWork is down more than 50% in six months, high-tech real estate broker Compass is down 80% from its IPO price, and smart glass maker View, which has just closed at around 50 cents a share. In addition, SoftBank announced a loss of $27.7 billion from investing in its Vision Fund for the elapsed fiscal year and informed investors that there would be “stricter investment choices” for the coming year.

Analysts expect IPOs to fall 34% in the second quarter as public market volatility forces more startups to put their exit plans on hold. The total number of listed companies in the second quarter of 2022 is forecast to reach 92, the lowest number in 9 quarters.

Local markets

Last year, venture capital funding across Europe also reached an unprecedented $116 billion, an incredible 159%-increase from last year. Early in the year, the pace of funding was promising, but it slowed down sharply in the spring: in March and April, investors gave a total of $7.5 billion for 472 deals with EU companies at different stages of development, which was the lowest volume of financing in a two-month period over the last year. In general, investments over the past two months have decreased by 39%.

A nosedive of this magnitude is usually due to macroeconomic reasons, and for start-ups from the EU there are plenty of them. Since the launch of a special military operation in Ukraine, the number of disclosures of EU startup funding has sharply decreased. Now the figures illustrate that it’s not so much a reluctance to disclose information about deals but rather a regional slowdown in funding. Rising inflation across the EU, disruptions in the supply chain, including measures to reduce or eliminate the influence of Russian oil and gas, are driving prices up and contribute to investor caution. Following the global trend, we are witnessing in Europe a significant pullback of super-giant funding rounds — investments of $100 million and more.

Meanwhile, investment in start-ups is slowing significantly outside the EU as well. The slowdown takes place in different regions, including North America, Latin America and Asia. Once a major competitor to Silicon Valley’s tech success, China is now leading the global decline in venture capital investment. The value of venture capital transactions in the country fell 44% to $24.7 billion in the first four months of the year from a year earlier, according to the research company Preqin. This is almost twice as much as in the US and almost four times faster than worldwide.

In the Latin American market in the first quarter of 2022, investors paid 30% less than in the fourth quarter of 2021. The number of rounds also declined, with the biggest slump recorded at a later stage with just 15 rounds reported, down from 35 in the fourth quarter.

Have already been through this before? Experience of global crises: 2008 and 2020

If we compare the signs of the current slowdown with past crises, we shall see that after the financial crisis of 2008 there was a cutback in venture capital funding, but not immediately. It took the private markets about six to nine months to react to what had happened on Wall Street. In October 2008, Sequoia Capital sounded the alarm with its R.I.P. Good Times presentation, warning portfolio companies to buckle up and optimize costs to extend their runway.

A huge funding gap emerged in 2009: according to Crunchbase, Series A, B, and C funding fell 40–47% compared to 2008. It took several years for venture capital investment to reach and exceed pre-crisis levels: it was not until 2011 that funding returned to the level of 2007.

However, during the recession of 2008–2009, along with the growth of cloud and mobile technologies, systemic investment in tech companies at early seed stages was born. Entrepreneurs continued to create new companies and attract investments in the initial stages, as the development of IT and mobile technologies was in full swing. It was the seed investment that subsequently led to a new wave of innovation.

Seed investments emerged as an institutional asset class and have shown continued growth since 2008, with 16,000 companies raising early-stage funding in 2014, compared with fewer than 1,000 companies in 2006, according to Crunchbase data.

To sum up, the 2008 financial crisis slowed down funding for late-stage companies, but not seed funding or creation of start-ups. New companies were created and funded throughout this period at an increasing rate.

When the pandemic hit, we also saw some early signs of a slowdown in the first quarter of 2020. Sequoia Capital again issued a warning, this time calling the emerging pandemic a “black swan” event. But contrary to expectations, there was no slowdown in the subsequent quarters of 2020. Instead of cycles of ups and downs, there was a paradigm shift: the pandemic has catalyzed the transformation of many industries when technological innovations came to the rescue. The accelerating integration of technology into all areas of our lives has led to an increase in early-stage investment — ​​more than 30,000 venture capital startups received funding in 2021 — up from 3,500 companies in 2006 and 16,000 in 2014.

Last year was a record year for global venture capital, with $669 billion invested in startups around the world. And this record mark is the result of more than two decades of development of the innovative economy. As we head into the second quarter of 2022 with concerns about potentially overvalued companies, supply chain issues, inflation and turmoil in public markets, there are fears that we are heading for another weakening of investment in private companies.

If funding and company valuations drop in 2022, startups should brace for some blows, but the structural changes brought about by the past decade in venture capital are here to stay.

Why investors are not in a flap

There is a saying that all investors stick to: great companies are built at difficult times. Everyone knows that companies like Amazon and Google were created in the run-up to the 2001 crash, while Twitter, Uber, Airbnb, Cloudflare Twilio, Okta and many others were founded in the run-up to or during the 2008 financial crisis.

Investors who remember 2001 and 2008 believe that there are lessons to be learned from these moments in history, especially for an industry as young as venture capital, so they are not too panic-stricken. Despite lower valuations and nearly closed IPO markets, investors are hopeful that their portfolio companies will have time to grow to their previous valuations. A number of companies last year may have raised more money than required. Now these startups need to optimize costs and save this capital until the next round.

But perhaps the main reason investors are not overly concerned about the possibility of a sharp decline in the value of their current portfolios is the unprecedented amount of capital in the system. In the first quarter of this year, venture capital funds in the US raised more than $70 billion, according to PitchBook. That’s already more than half of what was raised in all of 2021, and the amount is the highest on record. This year alone, Andreessen Horowitz announced a $9 billion new investment in its venture capital funds. The San Francisco-based Founders Fund recently closed over $5 billion in two new funds that will focus on both early and late stages of investment, and just this week it was revealed that Sequoia Capital China is raising four new funds totalling $8 billion. This is just a small part of the massive funds recently raised by some of the biggest names in the venture capital business. How these firms, which control so much, react will tell a lot about the near future of the market.

However, investors will seek to place these funds at a more reasonable price. The bar for attracting Series A and Series B rounds has already been raised. Raising huge rounds with valuations as high as they were last year is now not in the cards for entrepreneurs around the world. Sequoia Capital has warned founders and executives that the good times are over and they need to prepare for a new era of severely limited access to capital. “Stakes are rising, money is no longer free, and this has huge implications for valuing companies and raising funds”, the presentation for portfolio companies says. Startup accelerator Y Combinator has expressed similar sentiments to its companies. “No one can predict how bad the economy will be, but things don’t look good”, YC wrote in a letter sent to its portfolio founders last week titled “Economic Downturn”. Earlier this month, SoftBank announced that it would become much more selective in its investments after posting a $27.7 billion loss on investments in its Vision Fund for the fiscal year just ended.

With the IPO window nearly closed, late-stage companies may feel the need to raise additional capital in the private markets or look for other ways to exit. Interest in SPACs has largely waned in the second half of 2021, but some companies may now consider revisiting SPACs as an alternative to IPOs. Exit opportunities through corporate mergers and acquisitions may stir up more interest, especially as large corporations have the financial capacity and are looking for start-ups to increase their deficit in technology.

While the venture capital industry has shown unwavering resilience throughout the pandemic and hit new heights last year, early 2022 suggests the start of an inevitable but healthy recalibration period. VC market adjustments coming in from the public markets will hit late-stage companies first, while early-stage startups are somewhat insulated from public market volatility. Sufficient capital available protects the early stage as these deal sizes are easier to maintain compared to later stage deals that quickly deplete capital resources.

Investors are now slowing down investment in late-stage startups but are preparing for a new stage of growth and are more closely looking for future technology leaders among early-stage startups. In this sense, venture capital companies and business angels continue to look for projects for investments that can conquer the market in the future or establish new niches in the current situation. The decline in market activity opens up new opportunities for companies, because in good times, when there is strong competition around, it is difficult to gain market share.

Moreover, the mobility of tech entrepreneurs outside established innovation hubs is indicative of the growing strength of new small VC markets, potentially insulating them from changes in risk tolerance on the part of international investors.

#vc #venturecapital #startups

pre-IPO, pre-IPO, pre-IPO… A whisper is heard from far and wide. A year or two ago in Russia it was a sacred phrase that only a few people could understand, but now everyone and his brother trades pre-IPOs: funds, so-called “funds”, investment companies, private banking units, brokers on A, B and sometimes on F, super-business angels, and even podcast hosts… The funny thing is, as one of my interlocutors made a good point on it, that now even those who used to be buyers, have attached the word Capital to their last name and are now also engaged in originating and selling pre-IPO.

I have great respect for those who were the first to bring this product to the Russian-speaking world. And I am sad for them that their golden age seems to be passing… It’s a pity, given the huge amount of work they have done to “craft” all this. I can’t relate to this except with admiration. Taking this opportunity, I greet them and shake hands!

The thesis is approximately the same for everyone: “We buy shares from a former / current employee / early investor who decided to get a little cash before going public. The company expects to be listed next year / by the end of the year / in a year or two.” Depending on the “gravity” of the case, there are options like “directly to the cap table, take it to the bank!”, “the shares are already on our SPV” … and many others. For effect, they often say “these promotions are just ours”, “we have an exclusive offer”, “we have the lowest price”, and so on… All in all, a good a brisk market, so to say.

Many have learned to register with Forge, EquityZen and even with SharesPost and Ourcrowd. Many quickly realized that it was not necessary to actually buy shares. It is enough to find them, then a buyer, take his money under colour of “we have 3 days till the end of ROFR”, buy shares with his money, take sf and sign up carry. Profit!

There is only one problem, and it is called, pardon, “a crapped-up market “. Projects are launched not being properly prepared, and “marketeers” are increasingly unable to answer business questions, trying to get ahead of competitors. Any “exclusivity” on the market lasts from 24 to 48 hours : as soon as a project appears, many other pre-IPO sellers ask themselves: “Hmm … where did he get such shares?” and with due diligence, they find the answer to the question quickly enough (we have also found ourselves in such a situation: it’s unpleasant, I’ll tell you). At the same time, more and more often there are no answers not only to questions about business, but also about the shares themselves (which shares, from where, of what class, how they had been acquired, on which hand the seller is (first, second or third), etc.)

Unfortunately, all this leads to the fact that HNWI, who for obvious reasons are the main “clients” in this market, are behaving more and more according to the principle “screw you guys, I don’t want to puzzle it out: seems some kind of swindle.” This reminds me of my visit to the Russian city of Orenburg on a business trip back in 2005, when I went to the market and asked a passer-by: “Where do they sell downy shawls here?” and then numerous old ladies surrounded me, shawls in their hands, and began to shake them in my face, which caused a lot of stress and even panic in me (see the pic). Of course, I bought the shawl because I needed one for my beloved mother-in-law, but I don’t want to repeat such an experience again.

Not to mention cases of fraud not yet revealed. And with such a strangle of sellers of all stripes, it will definitely not keep you waiting. And then the reputation of the pre-IPO market will fall even lower.

In my opinion, a quality pre-IPO seller, in addition to having a basic reputation, should:

1. Be able to answer business questions (this is absolutely mandatory);

2. First and foremost, buy shares using their own capital, place them into their SPV or brokerage account, and only then sell or at least use a significant part of their own working capital to carry out such a transaction;

3. Have an infrastructure for onboarding investors and transferring shares to them (ideally — through a brokerage account, but so far few have learned how to do this);

4. There is something else, but more on that in the next paragraph.

Is it possible to compete fairly in all this, earning not only for your investors, but also for yourself, and at the same time developing rather than destroying the market? Yes you can, and how! By what means? Well… each investor has a special secret and a business know-how.

A few days ago Terry Laughlin, an icon of amateur swimming, has passed away. He is the author of the Total Immersion technique of swimming training thanks to which people who didn’t know how to swim at all start swimming on the second day of classes, and a month later they need 25 minutes to swim a kilometer without stopping.

Millions of people around the world have learned to swim thanks to this man. Besides the fact that it is with this technique that I also learned to swim properly, there are a few other things that I got from his approach.

1. Any complex process, skill or project (for example, swimming) should be mastered by decomposing it into smallest components, and each of them has to be analyzed and trained. Position of the legs, body, head, the way your arm exits and penetrates the water, the entry point of the hand into the water, the angle of the head’s incline, the position of the mouth and eyes towards the surface of the water, etc. — dozens of components of the swimming movement. 100% awareness and control of each movement is the key element of mastering a new skill.

2. The technique created by Terry is an example of what captures my thoughts more and more recently — a desire (more of a dream for now) to create a business / product / service that simple people or companies will really need. And it’s not just about sports. The last examples that caught my eye were very diverse: from Smart & Tallented by Marina Egorova to the Russian Business Forum Atlante. And there is nothing about crypto currency in these projects! Terry created a product that millions of people need: isn’t this what we all need to strive for?

2. Individualization. Training programs can / should be individualized: quickly, efficiently, inexpensively. The first one who will figure out how to give feedback to an amateur athlete quickly (via sensors, app, video analysis …) and based on this feedback to adjust the program / technique / diet / recovery mode is candidate number 2.

3. A TOTALY NEW kind of sports. Probably through the convergence of amateur sports / VR / IR / drones and the devil knows what else. The idea is that this shouldn’t be another Crossfit Inc (with all my respect for this sport and their 200M + revenue), but something new in general that will appear and drive off the audience from the classic amateur sports such as fitness, running, swimming , bike, skiing, etc. This is candidate number 3.

4. And the last thing: changing the model of consumption of fitness services. Not as it is now: you buy a subscription — you train for a year (well, or you don’t). There were a lot of ideas in the form of subscriptions / one pass / performance base / cash back / …. There is, of course, a room for tokenization and smart contracts.

In fact, there were a lot of other interesting ideas: from a company that specializes in restoring amateur athletes to a drone that flies in front (or behind you) while you are running and does something (corrects, removes, broadcasts).

Firstly, the essence of VC business is to earn money for LP with a profit significantly exceeding less risky instruments (fixed income, buy & hold NASDAQ 20 years, etc.). This leads to many interesting conclusions:

1. If you have invested in a cool project, but it doesn’t grow at a set rate in hard currency — you did a poor job;

2. If you have invested in a cool project and it grows, but nobody buys it — you you did a poor job;

3. If you have invested in a cool project, it has grown and it was bought in 5 years for twice as much as you invested in dollars — you still didn’t do a good job;

4. If you sold the project in 3 years for 10 X, but 5–7 projects in your portfolio are described by the points from 1 to 3 — you didn’t do a good job.

Everyone who wants to work in VC at any position (especially at the positions of assosiate and manager) should remember: DPI and TVPI are the only metrics by which you can measure the success or failure of the work in our industry.

Secondly, the work of the fund is:

25% — work for the “enter” side (find, make agreements, structure, implement);

25% — support and development work (BoD, follow on rounds, my favorite — crisis management, etc.);

25% — work for the “exit” side, which does not ever end;

25% — everything else (internal processes, LP relations, PR, etc.)

The fund’s partners have + 25% of work with LPs (fundraising and relations management with LPs throughout the life cycle).

Please note that 75% — 100% of the work has nothing to do with “finding a cool startup.”

And, thirdly, the work in VC is a race for 7+ years. If you are not ready, then it’s better not to start.