Silverhorn: 6 tips for investing in venture capital in Asia during a downturn in financial markets

HONG KONG, July 28, 2022 /PRNewswire/ — Silverhorn has published an article entitled “6 Tips for VC Investing in Asia during a downturn in the capital market”. The full text is as follows:

The famous value investor Seth Klarman once stated, “The stock market is a story of cycles and human behavior that is responsible for overreactions in both directions.”

This is also true for the venture capital (VC) market. The toppy phase of the current cycle started with SoftBank $100 billion Vision Fund in 2017, which introduced an environment with optional due diligence, huge funding rounds, and deep-pocketed, non-VC investors who emerged as quick and often easy money. What has kept the party going so far has been accommodative monetary policy and cheap capital. Interest rates are rising globally and public equity market valuations are correcting, especially for loss-making venture capital-backed companies such as Peloton (-91%), Teladoc (-91%) and Uber (-61%), among the others.

Despite geographic differences, the major venture capital markets of China, Indiaand South East Asia also benefited from cheap capital and experienced pockets of foam. Asian venture capital markets are following in the footsteps of the United States and a bear cycle is already underway.

How should venture capitalists behave?

  1. Sort your existing portfolio. Do not invest in companies without fully funded business plans. Most venture capitalists today will have holding companies that need capital only to meet their short-term obligations. With limited capital, fund managers will have to decide which companies to support, and it is better to finance a smaller number of companies that are likely to survive.
  2. Access to capital is both a shield and a sword. The most effective way for portfolio companies to raise funds today is through an internal seed round. Companies that have a capitalization table with better funded investors have an amplified advantage today and should consider assertive operational and tactical measures to gain market share at the expense of their competitors. When times are good, trade valuation for core investors with deep, committed pockets.
  3. Know the numbers. Vision, Opportunity, and the Next Big Thing will not replace an understanding of cash conversion cycles and relationships with trade finance providers. You can’t sort if you don’t understand ROI or how to navigate a balance sheet.
  4. Do not ignore the creation of new investments. The opportunity set grows both in size and attractiveness when there is blood in the street like now. Stick to areas where you have a network and a track record. Consider businesses that cater to the proverbial “last dollar spent” and consumer-facing businesses that provide basic necessities.
  5. Go back to basics with business models. Managers are well advised to take a lucid approach to projects and initiatives with negative returns, which is especially relevant for companies with high customer acquisition costs.
  6. Prepare to rationalize. Be a partner of your CEOs; be in the room to take the blame when your CEO fires his old friends. This is where you earn your 2 and 20.

In the current environment, the best partners will provide added value not visible on social media posts. In recent years, the most vexing portfolio management decisions have revolved around high-class issues like whether to settle for a clean 2x exit to a trade buyer or ride a potential 5x or 10x “to the moon”. Venture capitalists today will have to make tough decisions about which cash-strapped companies deserve the opportunity to generate the fund’s stated return target – even the most favorable LPs will likely challenge you. question.

Written by
Bert KwanHead of Private Equity, Silverhorn
Roger PrinzCIO, Silverhorn

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