Technology Slump Refocuses Startups on Capital Discipline
2 min read
31 Mar 2023, 06:57 PM IST
Falling investment valuations are resetting attitudes about cash flow and away from ‘growth at all costs’ in emerging markets
PremiumSlumping valuations for technology companies are making managers at emerging-markets startups direct their attention to capital discipline after years of booming investments and rising valuations that shunted aside cash concerns, according to venture-capital fund managers from areas such as Africa, Asia and Latin America.
“In the last five years, the environment that basically has trained or educated [startup founders] on the ground was not the right environment," said Kuo-Yi Lim, a co-founder and managing partner at Southeast Asia-focused Monk’s Hill Ventures. Mr. Lim and other emerging-markets fund managers spoke during a Global Private Capital Association conference in New York this week.
Rising interest rates and a broad retreat in publicly traded securities that began in early 2022 put an end to years of booming venture-capital investment that drove startup valuations to lofty levels, including in developing markets, conference participants said.
Investments in such markets by venture firms dropped by roughly a third to $100.74 billion last year from a record of $149.34 billion in 2021, according to the trade group’s data. Just one of seven markets tracked by the organization, the Middle East, enjoyed an investment increase last year. Among those with declines, Latin America fared the worst with a 51% drop, the data show.
“This is a natural correction and transition both in terms of the economic cycle—the end of low interest rates and less capital available—but also there has been a saturation in some of the segments of the previous tech cycle," said Monashees co-founder and Managing General Partner Eric Acher. The São Paulo venture-capital firm focuses on investing in Latin America.
The downturn is driving Monashees-backed companies to use capital more efficiently and cut costs, including by shrinking their payrolls, Mr. Acher said. Early last year, 85% of his firm’s companies had enough capital to operate for at least 18 months. Now, about 15 months later, 75% still have capital sufficient to last that long, he said.
“It shows that everybody is really doing their homework on efficiency," he said. “The layoffs, of course, are not good news. But in the end—especially for early-stage growing companies—these companies grow ahead of demand."
Yemi Lalude, a TPG Inc. partner who leads Africa investing for the private-capital firm, said in that region too a focus on cash flow is replacing a “growth at all costs, doesn’t matter how much I spend" attitude that had taken hold.
“Until you get to a point where you have positive cash flow, you don’t control your destiny because you’re at the whims of capital markets, which can go up and down," Mr. Lalude said. “In the past few years, everybody has completely forgotten that."
Blume Ventures, an investor in Indian startups, has also underlined the importance of managers focusing on cash flow as raising capital becomes more difficult, said Sanjay Nath, a Blume co-founder and managing partner.
“It’s a kind of chicken-and-egg situation where you typically will raise [capital] when you need the cash," but now managers need to show how much cash they have on hand and how they intend to bolster that position, he said.
“Cash is king as never before," he said.
