Chua Kee Lock, chief executive officer (CEO) of Vertex Holdings, on start-up funding in a post-pandemic world where investments are harder to come by
Vertex Ventures Holdings, the sponsor of Vertex Technology Acquisition Corporation (VTAC), Singapore’s very first special purpose acquisition company or spac, is maintaining its steady pace of investing in roughly one start-up per month even as the funding landscape becomes increasingly difficult.
In an interview with The Edge Singapore, Chua Kee Lock, chief executive officer (CEO) of Vertex Holdings, the VC arm of Temasek Holdings, says: “We believe that it is important to invest in good companies because we are investing other people’s money. We have to do proper due diligence and control our speed. The temptation will be there but we need to impose the discipline and this is done through a lot of thought and experience.”
Following the post-pandemic downturn in start-up funding last year, several other VCs were found to have insufficient reserve capital. This not only meant that they were unable to fund new investments but that whatever capital was left had to be set aside to save any existing troubled start-ups they had invested in.
“This is why you see a sudden slowdown in investment in the VC space,” says Chua, “It’s not that VCs are lazy, they are very hardworking but they are spending a lot of time on their past investments, as some are in trouble and the VCs will need to prioritise them.”
From boom to bust
It was during the Covid-19 pandemic years that the start-up VC scene started to heat up. Although VCs were initially hesitant about investing due to uncertainties about the global crisis, they soon swiftly shed their inhibitions, fuelling excitement over every new start-up that sprung up despite the lockdowns.
“Start-ups can conduct a presentation to a VC in the morning and then get their six- to seven-figure investment by noon,” Chua recalls.
He attributes this to the Fomo or “fear of missing out” effect, which drove VCs to pursue investments hastily without thorough due diligence, and historically low interest rates, which reduced the cost of capital.
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With a “seller’s market” for start-ups seeking funding, it was no wonder valuations became inflated. “Suddenly, every start-up idea looked intelligent on paper or book and their relationship with investors looked fantastic,” adds Chua.
“Less experienced investors and VCs believe that putting every single dollar into play is the way to go. In 2021 and 2022, there was a record amount of money being raised in both public companies and VC funds,” says Chua, adding that in the VC space, it is common for investors and start-ups to expect valuations to climb even higher as valuations hit new highs, inflating them to unsustainable levels before the bubble eventually bursts.
However, the start of the Russia-Ukraine conflict put an end to the rolling good times in the VC universe.
“The conflict caused instability in the market and VCs started becoming hesitant about what was happening. This then caused a reset in valuations, where everyone — VCs, investors and start-ups alike — had to adjust to this downturn in valuation,” says Chua.
What happened next was a “valuation reset” in 2022, during which valuations started to descend from their highs. VCs were forced to decide which start-ups in their portfolios to continue supporting or dispose of amid fundraising difficulties. This situation became more severe in 2023.
“Things have since somewhat improved this year but we are still working through some so-called ‘indigestion’. Some companies, which raised money at very high valuations, have seen those valuations drop by half or one-third,” says Chua. In this case, the entrepreneur and the investor have to make a painful decision: Do they want to raise money at a lower price? Or do they want to write down their valuations?
Eye on the prize
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One big plus of this new environment is that both investors and entrepreneurs are now “more grounded,” says Chua. A good entrepreneur will always be there regardless of good or bad times. At present, most entrepreneurs have become more practical and more sensible in their valuations, so now is a better time to invest.”
This has also led to a significant reduction of what he calls “crazy deals” as momentum investors, who only appear when the market is hot, have exited the scene. “There is no noise and it’s a much better environment for us to invest. We can invest in good companies at fair value,” he adds.
Vertex adopts a disciplined and consistent approach to investing regardless of market trends. Chua says is always imperative for VCs to conduct proper due diligence and ensure that the valuations are sustainable, adding it is fine if a VC misses out on some investments, as there will always be another start-up seeking funds, especially in today’s “buyer’s market”.
Chua says all six funds of Vertex primarily target investments in the technology and healthcare sector, especially applications. However, he clarifies that the funds are not chasing after the one with cutting-edge tech, which often entails a lengthy wait for returns. Instead, they prioritise technology which can is readily applicable across industries to enhance productivity and foster competitive advantages.
There is a ”checklist” of sorts that Vertex goes through when looking into companies to invest in. Factors to consider include: Is the company’s solution disruptive and innovative? Is the application making a difference? Is the implied total addressable market significant? Who are the people in the company? What are some of the current problems in the business?
While these are some of the questions Vertex will ask to determine the quality of the start-up they could invest in, are there some other important trends and traits it will look at before coming to a conclusion?
“It’s hard to go into specific trends now because they move so fast and are ever-changing.” says Chua, “I could say something now and it won’t be relevant the next week.”
Nonetheless, Vertex has two main approaches to identifying certain long-term trends.
Firstly, research is key when it comes to identifying trends. While the research process and frequency may differ across the different funds, the common goal is for the fund to identify a trend that is still early and will be relevant in the next five to 10 years.
Secondly, Vertex believes in “networking like crazy”. According to Chua, there is nothing like being on the ground and talking to those who are relevant in the scene. This also includes actively going out and listening to pitches from entrepreneurs.
Towards a better market
The only thing certain about markets is that they will come down from a high and hit a bottom before rising again, a cycle of boom and bust that has been repeated again and again. Chua is cautiously hopeful that the market will improve in the next five years, notwithstanding geopolitical tensions or outright shooting wars across different parts of the world.
There are signs that today’s improved market has also been attracting more companies to list through an IPO or spac. One such example that Chua cited was the listing of online forum platform Reddit in March on the New York Stock Exchange. Some of Reddit’s notable investors include the Newhouse family, whose Advance Magazine Publishers continues to own about a quarter of Reddit post-IPO; affiliates of Tencent Holdings; Fidelity; OpenAI’s Sam Altman; as well as venture capital firms Vy Capital, Quiet Capital and Tacit Capital.
On its trading debut, shares in Reddit jumped 48% to US$50.44 ($68.77) from its IPO price of US$34. As at April 18, shares in Reddit are trading at US$39.17.
While Reddit was one of the largest IPOs in the US for the year, back home in Singapore, Vertex too has been responsible for supporting several start-ups in their IPO aspirations.
One example is the homegrown ride-hailing platform Grab, which was listed on Nasdaq via spac in December 2021. However, shares in Grab have not been performing well since its IPO. Since listing, shares in Grab have declined about 74.1% to trade at US$3.21.
This will be Grab’s third year of listing and Chua notes that the group has finally turned profitable. “There are always good companies with good entrepreneurs with innovative ideas and disruptive innovations … This region is also becoming more digitally savvy. So, give the companies some time, it takes time to get there,” says Chua.
Vertex listed VTAC, Singapore’s very first spac, as a blank cheque company on the Singapore Exchange S68 (SGX) in January 2022. Two other blank cheque companies were also listed shortly after VTAC.
VTAC was also the first ever Singapore spac to de-spac after it acquired streaming platform 17Live, a company that was supported by a Vertex fund. However, Vertex and VTAC have maintained that there is no conflict of interest in this de-spac deal, nor is this an interested party transaction, as the Vertex network funds across the Vertex platform are managed by general partners independent of Vertex.
However, the other two spacs chose not to de-spac due to worsening market conditions. VTAC was listed at an IPO price of $5, which dropped to $3.88 just before the de-spac on Dec 7, 2023. The counter officially traded as 17Live on Dec 8, 2023, after completing the de-spac process. On its debut, it closed 18.8% lower at $3.15. This has further fallen to $1.00 on April 22, possibly due to the pressure of being Singapore’s first spac and the current market downturn.
Although Chua refrains from commenting on 17Live, he says that spacs were established as an appealing avenue for high-growth firms to go public. Spacs provide access to public market capital and the backing of reputable sponsors, making them an attractive platform for companies seeking growth opportunities.
“Given macroeconomic factors such as high interest rates and inflationary pressures, we believe business founders and investors will naturally look for alternative options. However, just because we aren’t experiencing the attractiveness of spacs now doesn’t mean they won’t come back, as they do offer companies unique opportunities for growth and innovation. Having invested through many cycles, it’s not unusual for strategies to re-emerge,” he says.
