Fundraising in a downturn: Why it benefits investors to go counter-cyclical

Uber. Airbnb. WhatsApp. 

While these tech companies are now household names, most people overlook their inauspicious beginning: These companies were founded during the Great Recession. This forced their founders to fundraise at a time when individual and institutional investors alike were holding tight to their checkbooks and war chests. 

The world finds itself in a similar economy in 2023, and fundraising is similarly down. According to recent data from DealStreetAsia, funding for startups in Southeast Asia declined by 56% from the same period of the previous year. 

As value investors, we do not just sit idly by, waiting for the global economy to recover. Like the investors who fortuitously invested in Uber, Airbnb, and Whatsapp during the Great Recession (and PayPal, Amazon, and eBay from the dot-com bubble for that matter), there are great startups to invest in now. 

Here are 3  reasons that investors should consider when going against the grain.

‍

1.Benefit from dollar cost averaging

One of the consistent recommendations across financial advisors in equity markets is dollar cost averaging: You invest in the same amount on a regular basis, be it monthly, quarterly, or annually. Because the investor is investing consistently - and not trying to time the market - this removes any emotion out of their investment thesis, which generally results in a higher return on investment (ROI).

Dollar cost averaging also applies to the world of venture capital. By investing in startups in any economic environment - including a bubble or decline - investors will minimize any bias in their decision-making. This belief is baked into the structure of Accelerating Asia, which accepts a cohort of about ten startups, twice a year, year-in and year-out since the firm’s founding in 2019. This consistency in the face of wildly different economic climates has led to Accelerating Asia backing founders who can grow their business in any market. 

‍

2. Snap up great deals 

Many founders are forced to look for alternative financing options, such as even invoice financing in this financial downturn. These founders are no less talented, hardworking, or promising than their counterparts in more fruitful years. They have businesses with traction, and need financing support to grow their business. 

By catering to founders who are struggling to obtain financing, investors can snap up greatdeals while the majority of the market sits idly on the sidelines. Prices are artificially low due to the economy, not reflecting their true value. The economic environment is also beneficial from a quality perspective: Because only the strong survive during the downturn, investors can more easily find the grittiest startup founders. 

When the market recovers, both parties will be in a better position. The founders who continued to build during the downturn can find greater momentum in a more bullish market. Similarly, their investors can realize greater value having invested at a discount when others were too conservative to do so. So long as they take a long-term view of five to ten years, they are in a great position to achieve strong ROI. 

This advantage can be further compounded by investing in a startup in Asia Pacific that has global potential. Such happened when Accelerating Asia invested into Giftpack, a gifting marketplace for corporations, that started in Asia but eventually found its niche serving the top enterprises headquartered in the United States. This kind of geographic arbitrage gives investors a much greater multiple on their ROI, and it’s a topic we will talk about in depth in a future article. 

‍

3. Accelerate your portfolio diversification

In equity markets, investors need to diversify their portfolio for optimal performance. Such accounts for why ETFs usually beat actively managed funds and stock-picking. In much the same way, startup investors also need to optimally diversify their portfolio.

According to modern portfolio theory, most place this number somewhere between 100 and 150 startups (As of cohort 8, Accelerating Asia is itself only 20 away from this critical mass, which it will reach by the end of next year). At this point, the portfolio becomes optimally diverse, maximizing the level of return, while minimizing the per unit of risk for early stage startups. As Gridline explained when explaining the need for such optimization: “VC investing is risky at the company level, but it is lucrative at the portfolio level.” 

In other words, these investors are more likely to find winners, which are the companies with multiples and ROI so high that they bring up the rest of the portfolio. This is consistent with the fact that funds in Asia Pacific with more investments will out-perform those with fewer investments. This pattern is evident even at the highest levels of venture capital: Legendary firm Y Combinator is defined by a handful of startups like Stripe, Airbnb, Dropbox, Doordash, Reddit, and Coinbase, rather than the vast majority of over 4000 startups it has funded since 2005.

Needless to say, investors who hold tight to their pocketbooks when times are tough will take a much longer time to achieve such optimization. While the capital of competitors is being diversified through different startup investments, theirs is sitting un-deployed in a bank, losing value against inflation. 

‍

The final word 

Investors take pride in betting on founders that others have overlooked, on investing into industries that others do not see potential in. Investors are contrarian by nature, and it’s high time this attitude extends to the market. Rather than stick with the cycle (read: what everyone else is doing), it is best to blaze your own trail. 

If you are interested in going against the grain, consider doing so with Accelerating Asia (you can register your co-investing interest here).