Late-stage funding drought triggers shift in SE Asia's investment landscape

*This article is adapted from * Deal Street Asia.

Once a darling of investors, Southeast Asian tech startups have witnessed their coldest winter this year as late-stage funding dried up. Defined as Series C investment onwards, quarterly late-stage financing in the region has been in a downward spiral since 2022 in terms of both value and volume, with deal value touching a historic low, according to DealStreetAsia DATA VANTAGE's SE Asia Deal Review: Q3 2024.

Late-stage funding came in even lower than early-stage investments in the first nine months of 2024, at $0.85 billion versus $2.41 billion, per the report.

The denominator effect, coupled with rising interest rates, has crippled the valuations that Southeast Asian tech firms had achieved in plain sailing.

"Some of the typical late-stage investors are focusing on helping their existing portfolios and may choose to do internal bridge rounds at flat valuations rather than accept a dip in valuation adjustments," said Genping Liu, Partner at Vertex Ventures.

Other investors, often those with an international mandate, were attracted to India thanks to the bull run in its capital markets, he added.

Investors pumped $72 billion into Southeast Asia between 2019 and 2023, triple of that in the previous five-year period, Lightspeed Venture Partners mentioned in its October report "Southeast Asia: Resetting Expectations". The US-based multi-stage investor bitterly realised that using China and India as a proxy for Southeast Asia "is misguided".

Outcomes in Southeast Asia have been significantly less capital-efficient compared to other markets. If in China, the total startup funding within the past decade resulted in 2.4x aggregate value of minted unicorns, it is only 1.3x in Southeast Asia, according to Lightspeed.

It is no secret that the regional majors like Grab, GoTo, or Bukalapak have lost greatly in terms of valuation after their listings, deterring investors from infusing capital into late-stage businesses.

Geographic shuffle

The current funding dynamics also point to the emergence of a new order in Southeast Asia's tech markets. While the erstwhile hottest markets like Singapore, Vietnam, and Indonesia have slipped, Malaysia and the Philippines have seen a recovery.

Take Vietnam. Deal volume plunged to a four-year low in Q3 2024, according to the SE Asia Deal Review: Q3 2024. Malaysia, on the other hand, notched up 21 startup equity investment deals, which was the highest since Q2 2022.

That said, Vietnam tops in terms of expectations that in-country funding activity will increase in the long term, as seen in the e-Conomy SEA 2024 report by Google, Bain & Co, and Temasek.

In addition to the geographic shuffle as Southeast Asia's first batch of unicorns mature, Liu opined that there is "a paradigm shift" with new directions from themes like Al, sustainability, or opportunities from the re-arrangement of supply chain in the region. As a result, "early-stage investments can be more attractive than late-stage investment during such shift," he added.

Yinglan Tan, Founding Managing Partner at Insignia Ventures, sees more emphasis on having a global, or at least regional, presence. This trend is more vivid given Southeast Asia's potential impact on the rest of the world.

"We used to have 24% of our portfolio focused on multi-markets within Southeast Asia or expanding out of the region. Today, that number is 70%.

These are companies using Singapore as a headquarter, replicating production, servicing and operational models to the markets the company is present in, with the goal of a localised ecosystem in each market," he told DealStreetAsia.

Solving the exit math

The tech reset has exposed Southeast Asia's weakness in generating liquidity to investors. Going forward, founders should place their exit in a position where their companies are bought, not sold. There is no general formula for it, but profitability will certainly bring some guarantee.

"Defining an exit is not just about who will buy, but how the company will get to that point where the buyer would find the company truly attractive," Tan asserted.

One aftermath of the funding drought is that the bar for tech investing in Southeast Asia has been raised. And that is a good thing.

The region's combined gross merchandise value (GMV) and revenue have shown sustained double-digit growth over the past three years, reaching $263 billion and $89 billion in 2024, respectively, per the e-Conomy SEA report. At the same time, EBITDA overall increased from $4 billion in 2022 to $11 billion in 2024.

Elaborating his bet on going global, Tan said that the global ambition "is important for investors" as it opens up even more exit options. He expects companies with proven growth outside their own ecosystem to drive Southeast Asia's funding recovery.

These startups, he called them "high-performing outsiders" which have gained a baseline performance without funding, "are able to better adjust expectations for stakeholders while still going for moonshot goals".

More liquidity in the public market for tech companies is another key to unlocking exits, and regional securities authorities have been more active in responding. Last year, Thailand adjusted its listing norms to encourage tech companies, extending the IPO door to mid-sized local firms as well as foreign companies.

Meanwhile, the Monetary Authority of Singapore (MAS) recently set up a review group to enhance the city state's equities market. Among various initiatives is the establishment of cornerstone funds to support IPOs of high-growth companies, MAS said in August.

Malaysia, earlier this year, pledged to speed up its IPO approval to three months, from four to 12 months earlier depending on the complexity of the listing scheme. The Securities Commission Malaysia has also joined forces with Khazanah to increase access to funding and familiarise the capital markets for Malaysian mid-tier companies.

Why it's worth it

Although tech performance has been gloomy over the past couple of years, Southeast Asia remains an attractive market in the long term for investors.

The region "certainly is gaining attention as both a manufacturing base and consumer market, for both Western players and Eastern players [China, Japan, South Korea]," Vertex Ventures's Liu asserted. "Investors who are taking a long-term view will certainly benefit from the potential Southeast Asia will create in the coming decade."

The funding drought might be felt if we look back at the last five years, he added. Make it the last 10 years, there is a clear rising trend of funding activities and booming startup ecosystem, he said.

"2024 might be the year to define another 10 years of bull run, especially considering the potential paradigm shift of investment thesis," Liu bet.

Jenny Lee, Senior Managing Partner at Granite Asia, believes that across her 24 years of investing, this is the best time to deploy money. Even as Granite Asia is more focused on China, the firm is in the process of closing five deals in Southeast Asia, she revealed during DealStreetAsia's Asia PE-VC Summit in September.

Emboldened by the region's fundamentals and government support, venture capitalists with an eye on the region believe that this is the place for high-calibre founders to set foot in.

For the latest news on Vertex Ventures SE Asia and India and our portfolio companies, follow us on Linkedin or subscribe to our monthly newsletter.