Recession Run: Wavemaker’s Santos sees a crisis as a flight to quality

The funding winter is here. News of layoffs and troubles in startups have been cropping up. In this Q&A series, we talk to Southeast Asia’s investors to suss out what opportunities they see, what strategies they’re implementing, and what areas of investment they’re looking at in the next few months.

As the funding winter continues, tech startups are faced with a basic fundamental question: What value is their product or service bringing for a customer or client? It is a question more relevant to startups today as customers and clients cut back on their spends during this uncertain macroeconomic environment.

“A crisis trigger is a flight to quality,” says Paul Santos, managing partner at US- and Singapore-based VC firm Wavemaker Partners. He adds that a crisis is always a good test of a company’s value proposition and is something beyond sectoral impact.

“If in a crisis your customers find less value in your product, then you have to ask yourself why. But if your customers continue to find value in your offering, then that’s interesting,” he explains.

Wavemaker Partners managing partner Paul Santos / Photo credit: Wavemaker Partners

Here are more insights from Santos on his working style, the macroeconomic headwinds, and what founders need to focus on amid the challenges brought about by the current situation.

Which startup sectors will be least affected by the current economic headwinds?

Santos: When times are hard, things that are more discretionary become weaker as people won’t spend on them. Let’s take food, for instance. I will need to spend on food because everybody’s got to eat. But then if I’m feeling the pinch, I might not buy certain food items. I remember one fun fact from the Philippines: When the economy’s bad, beer sales tend to be low. What went up? The price of hard liquor, so that you get the buzz more efficiently (laughs).

The second principle is that people will begin to realize if you’re actually solving a problem or not. It’s another way to think about discretionary spending. This is slightly more in line with B2B products. Is it helping me increase my revenue? Is it helping me cut costs? And this is where ultimately customers drill down to – what’s the value you’re bringing?

For me, beyond the sector, a crisis is always a good test of your value.

Do you think the funding winter will end after the last US Federal Reserve interest rate hikes expected in Q4 2022?

The anticipation of pain is more painful than the pain itself. It’s the uncertainty that makes you imagine and then you plot out your worst-case scenarios. So that’s what I’m imagining is happening. Everybody’s looking at their crystal ball. Once the uncertainty stops, people would have priced in a certain amount of risk already. But when [those interest rates are] locked, then they will kick in their contingencies because people aren’t sitting around not thinking about this.

It’s just that nobody knows when the uncertainty ends. So once it ends, my answer is yes [the funding winter will end].