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Are venture investors in ASEAN truly resetting their expectations?

Published on November 27, 2023

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Southeast Asia’s resiliency in weathering macroeconomic headwinds has outshined other regions, according to the latest e-Conomy SEA 2023 report, making it an attractive hub for global investors.

The report forecasts steady gross domestic product growth of over 4% in the coming two years for the region, which is home to more than 650 million people. In contrast, the United States and the European Union are projected to experience growth rates below 2% during the same period.

Consumer confidence, having dipped in the first half of this year, is anticipated to rebound in the latter half, based on the report, which combines data and analysis from Google, Temasek, Bain & Company, as well as industry sources and expert interviews.

Amidst the optimism, the report pointed out a decline in private funding, suggesting an ‘expectation reset’ from investors. However, on a recent episode of Indonesia Digital Deconstructed, Leighton Cosseboom and Adrian Li of AC Ventures argue that the conclusion may be painting with too broad of a brush.

According to the report, there was a record-breaking surge in startup funding in 2021, with nearly 2,700 deals amounting to a staggering US$27 billion. However, the number witnessed a dip to 2,080 transactions valued at US$22 billion in 2022. 

In the first half of 2023, the funding dropped even further to its lowest level in six years, with only 564 deals worth US$4 billion recorded. The report underscores that the trend is in line with global shifts toward higher costs of capital.

However, revenue from the Southeast Asian digital economy is poised to hit US$100 billion this year, growing 1.7x as fast as the region’s GMV. Despite global macroeconomic headwinds, the region’s GMV still continues an upward trajectory and is set to reach US$218 billion, growing 11% year-on-year. 

“So maybe we can say that actually, these conditions that are affecting the US market so heavily are not necessarily affecting the Southeast Asian market as much,” suggested Leighton. “But regardless of the growth, digital companies still need to show clear paths to profitability and prove to investors that they have dependable exit scenarios here.”

Reset valuations, not expectations

Adrian said that overall expectations having been reset by VCs may not necessarily be the proper way to look at the trend.

He pointed out that a significant portion of the capital peak in 2021 and 2022 came from global investor pools seeking emerging growth markets, whereas the appetite of local and regional investors may not have witnessed such a sharp decline since then.

Adrian explained, “I think it would be interesting to see if we can separate which of the funding was contributed by local and regional investors and which came from international and global investors. I think if we could, we wouldn’t see such a precipitous decline, but maybe slightly more of a moderation.”

Another aspect to consider is that the data for 2023 might not capture all deals, as it depends on how those financing rounds are done and announced. For example, financing rounds filed with ACRA in Singapore may not show alternative instruments with convertible notes. Thus, the actual scenario might be more optimistic than the report suggests.

Adrian explained that, from what he saw, local and regional investors have not stopped believing in the value that can be created by technology investments in the region. Contrary to the idea of an ‘expectations reset,’ he opined that investors are actually more excited than ever about the quality of companies they are seeing right now.

He explained, “Actually, the recent deals that can be done, and the valuations at which we can currently come in, give us a lot of confidence around the startups that we’re investing in right now. I think it’s more of a reset of valuations, not a reset of expectations of what this region can deliver in terms of returns.”

The shine of Indonesia

Another recent report titled “Indonesia Venture Capital Report 2023,” produced by AC Ventures and Bain & Company, revealed that VC deal value in Indonesia is actually pretty stable. Despite global declines of between 20% to 40% in 2022, compared to the previous year, total funding in the country held up reasonably well by staying flat.

In terms of volume, the number of deals even climbed around 20% as investors increased focus on early-stage opportunities, such as electric vehicles, climate tech, consumer, healthcare, and agritech. Meanwhile, growth and later-stage startups in the country would prioritize profitability and cash conservation to ensure a longer runway.

Future growth is likely to be fueled by the local tech talent pool of “second-generation founders,” or people who previously held leadership positions in first-generation startups and then went on to create their own firms, as well as the consolidation of national digital infrastructure with tech tools like QRIS and electronic national ID cards.

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