The downturn in Southeast Asia's funding landscape

Several factors are contributing to the downturn in Southeast Asia's funding landscape. It's important to note that the funding patterns of 2021 and 2022 should be considered anomalies, and actual trends in 2023 and 2024 should be compared to those of 2019 and 2020 for a more accurate assessment.

1. Global Economic Trends:?The downturn reflects a global trend characterized by a significant?contraction in the accessibility of liquid capital?compared to previous years, primarily driven by higher interest rates.?
2. Geopolitical Tensions: Geopolitical issues have prompted the restructuring of significant VC funds. For instance, Sequoia Capital India and Southeast Asia have rebranded as Peak XV Partners , Sequoia Capital China is now HongShan and GGV's Asian subsidiary is now Granite Asia . Similarly, Matrix Partners India has been renamed Z47 , and Matrix Partners China is now called MPC (Matrix Partners China). Matrix Partners USA continues to operate under the name Matrix .
3. Reduced Activity from Cross-Over Funds: Cross-over funds like Coatue and Tiger Global Management have significantly reduced their participation in the private market, resulting in a notable decline in mega funding rounds of USD 100 million or more. Additionally, there is a marked decrease in capital deployment from Series B onwards. The scarcity of late-stage local investors in Southeast Asia exacerbates this issue, potentially compelling local startups to either expand to the USA or achieve profitability earlier than planned.
4. The gap between the stories told in recent years and reality: According to Cento Ventures , we are moving from the dream of 2.0 conglomerates with overfunded super apps to the dream of a new India with the story of the Southeast Asian consumer. Added to this are national narratives such as Singapore as a technology hub, Vietnam as the next production hub or the next China, and Indonesia as a large market due to its status as the 4th most populous country.
5. Shift in Investment Focus:?Many startup investors are now targeting emerging trends, particularly in AI and GenAI startups. Most of these companies are in their early stages, and fewer are in Southeast Asia compared to the leading startup hubs. Notable exceptions, such as OpenAI in the USA, Mistral AI in France, and Zhipu AI in China, have secured substantial funding. However, local players in Southeast Asia are less likely to access such massive funding due to the region's fragmentation in terms of regulations, languages, and cultures, which further hinders the achievement of high valuations.
6. CVCs and LPs Shifts:?Corporate investors (CVCs) and Limited Partners (LPs) increasingly focus on their core markets, typically near their headquarters. As a result, Southeast Asia has transitioned from a "nice to have" to a lower priority.
7. Slow Exit Markets: The exit market has experienced a prolonged sluggishness, marked by sparse IPOs and M&A activities. This downturn has significantly diminished the frequency of premium exits for General Partners (GPs). Furthermore, secondary markets are less profitable and prestigious, constraining fund managers' capacity to return capital and, consequently, hindering their ability to raise new funds. Notably, the Singapore Venture & Private Capital Association (SVCA) is trying to rejuvenate the local stock exchange ( 新加坡交易所集团 ), which has lagged behind the Thailand Stock Exchange in providing liquidity to venture capitalists. Amid this challenging environment, there is hope that the rumored deal between Microsoft and Wiz for USD 23 billion will go through, especially following the fall of the Adobe and Figma deal valued at USD 20 billion. Such a high-profile transaction could inject much-needed dynamism and confidence into the market.

Despite these challenges, less capital can bring more discipline to startups and VCs, enabling them to focus on essential activities and eliminate superficial ones.

However, GenAI startups are thriving, with numerous programs from tech giants designed to engage them, including Amazon Web Services (AWS) 's Generative AI Spotlight, 谷歌 's AI First, 微软 's Generative Artificial Intelligence Accelerate program, and 英伟达 's Ignition AI Accelerator.?Additionally, local VC funds focusing on GenAI, such as GenAI Fund , are emerging.

Verticals like Fintech are expected to remain resilient, while the semiconductor industry will benefit from current trends. This will enable Malaysia to emerge as a key player, thanks to its unique assets in the semiconductor value chain.

The Southeast Asian startup ecosystem is also becoming more specialized, with Deeptech emerging as a potential sector. Notable players like IQT (In-Q-Tel) have recently invested in the region and opened an office in the city-state a year ago. They provide access to the U.S. markets and larger checks, complementing the efforts of early-stage Deeptech investors such as Cocoon Capital and Cap Vista Pte Ltd .