TOKYO/HONG KONG -- Saving cash has become the new mantra for startups in Asia as capital quickly dries up in the region.
Funds raised by Asia-focused venture capital firms fell to a seven-year low of $2.2 billion in the first quarter, according to U.K. data provider Preqin. Investors are now urging startups to save enough money to support their business for at least a year in anticipation of a prolonged economic downturn brought on by the coronavirus pandemic.
"Assume very little funding will be available in this environment," GV Ravishankar, managing director at Sequoia Capital India, warned startup founders in a video conference on Friday. He advised them to cut spending "quickly and deeply."
The venture capital-backed startup industry is relatively new in many parts of Asia and many founders who have not experienced a financial crisis before are facing a sudden shortage of capital for the first time.
Preqin's data includes venture capital firms investing in startups in the Asia-Pacific region. It does not include Asia-based venture capital firms investing in other regions.
The CEO of a Tokyo-based internet startup that helps major Japanese companies develop new business lines said projects such as building image recognition systems in factories and creating subscription-based lease products for banks have come to a halt in the past few weeks.
The CEO, who requested anonymity, had boosted hiring and moved into a stylish new office before the coronavirus outbreak but now spends much of his time crunching numbers on the company's balance sheet. "We can survive for another 18 months without new business for the rest of this year, but it will require reducing costs as much as possible." Among his options is cutting outsourcing contracts.
Startups in the travel industry, a popular target for venture capital investors before the coronavirus outbreak, have been hit particularly hard. Sora, a Japanese startup that sells AI-driven pricing software to hotels, is seeking to broaden its customer base to parking space operators and retailers, among others, as hotels face plummeting occupancy rates.
Aldi Adrian Hartanto, head of investments at Jakarta-based MDI Ventures, said he is starting to see travel startups implement salary cuts, starting with the founding and management team, while some employees are being referred to other companies instead of laid off.
"It is actually not yet the bottom," he said, adding that he is advising startup portfolio companies to be prepared "for another blow" when more cities implement lockdowns.
The downbeat economic outlook -- the Asian Development Bank expects emerging Asian economies to grow at their slowest pace this year in 22 years -- is not the only problem. Travel restrictions across the region are hampering funding talks between investors and startups, and some are already grappling with the limits of video calls.
"It is difficult [to make a deal] without face-to-face meetings," said Kay-Mok Ku, a managing partner at venture capital firm Gobi Partners which has operations both in China and Southeast Asia. He has replaced physical visits with teleconferences but making investment decisions based only through online interaction is "like going to a dating app and saying 'Let's get married.'"
Startups that "already have funding from credible institutions have the upper hand," said Alex Rusli, an investor in Indonesian startups who also runs his own financial technology startup, Digiasia Bios. Still, he believes even those startups "will get checks at a bad valuation for the founders."
Indeed, founders and investors at late-stage startups are already being forced to review their exit plans amid turmoil in global financial markets. In Japan, 14 initial public offerings have been canceled so far this year, already surpassing the previous annual record of six cancellations in 2018.
The outlook for startups remains bleak even in China, where economic activity has restarted after strict lockdown measures.
"It is very difficult for Chinese startups to raise funding right now," said Zhou Xiang, a managing director specializing in early-stage venture capital investment at China Renaissance in Beijing.
"Usually this time of the year is the peak season for Chinese startups to close deals. But given the coronavirus outbreak this year, very few deals have been completed so far," Zhou said.
Statistics from market research firm IT Juzi show that in the first quarter of 2020, the number of investments raised by Chinese startups almost halved from a year earlier to 634 deals. Meanwhile, the total fundraising value fell to 119.1 billion yuan, a nearly one-third decrease from the first quarter of 2019.
Among the few that have managed to clinch fresh funding are online education and health care startups, which are seeing demand jump due to COVID-19.
Chinese online education startup Yuanfudao on March 31 said it raised $1 billion from investors including private equity firm Hillhouse Capital, in a series G funding round that valued the company at $7.8 billion.
On April 1, MedGenome, which runs genetic diagnostics services in India, announced a $55 million funding round led by LeapFrog Investments, an emerging market-focused private equity company.
Finian Tan, chairman of Singapore-based Vickers Ventures Partners, said he is currently focused on backing health care startups that are working on potential solutions to the pandemic, such as those that develop vaccines and test kits. "We are attacking this from every and any angle," he said.
Additional report by Shotaro Tani in Jakarta.