Venture Capital (VC) funding will likely be reduced next year if global markets continue to struggle. The forecast for the 2023 VC scene doesn’t look very promising because there are many evolving risks and challenges, such as war and the ongoing COVID strains, that threaten investments worldwide. According to KPMG’s “Venture Pulse Q1 2022 report: Global Analysis of Venture Funding”, VC funding in Southeast Asia will also likely shrink due to multiple factors.

Compared to the same quarter last year, the first quarter of 2022 (Q1 2022) suffered a 7% drop in funding, finishing at USD $36.3 billion. The decline was more significant than the previous quarter of 2021, with a shocking 31% dip. While 2021 saw a record-breaking USD $174.4 billion in investments, VC predictions for this year and 2023 indicate that the funding would likely fall short.

We take a closer look at emerging VC trends in Southeast Asia

According to data from Crunchbase, Asia’s early-stage investment in Q1 2022 declined by 29%, from USD $16.5 billion in Q4 2021 to USD $11.7 billion. The number of deals, however, was higher in the first quarter of 2022 than in the same quarter last year, standing at 586 compared to 545, an 8% increase. Compared to Q4 2021, the deals in this year’s first quarter were lower by 24%, with 772 compared to 586 in 2022. However, seed and angel dollars were up, with a 13% increase from Q4 2021 and an 87% increase from Q1 2021.

Factors affecting VC funding in Southeast Asia

There are a few reasons investors may withhold VC funds in 2023. First, inflation is wreaking havoc globally and might push many economies into a recession. These economic factors make it difficult for investors to finance worthwhile innovations and startups. Asian economies continue to suffer significantly from the COVID-19 variation, Omicron, which forces countries back into lockdowns and the reintroduction of travel restrictions that limit trade and investments.

Geopolitical tensions in Asia and the possibility of China taking control of Taiwan have created market uncertainty. On several occasions, Chinese forces have patrolled the region, heightening their neighbours’ unease. These tensions have led to supply chain disruptions, which affect global trade and push away investors who search for stability in their investments. The Russia-Ukraine war has contributed to the energy crisis and enhanced economic uncertainty worldwide.

China’s restrictive measures to contain COVID-19 have ensured the region is missing the trade giant and its large population of potential customers. The country’s regulatory steps have also hindered business and investor confidence and forced companies to consider moving to regional countries with a more business-friendly approach. With the international outlook looking bleak for startups, some countries in Asia and Southeast Asia may consider making regulatory changes to protect local businesses. 

According to KPMG’s report, the early-stage investment will take a hit as investors try to de-risk their portfolios. Shifting demands in Asia may force VC firms to redirect their funds to other sectors or pull out completely. Furthermore, capital market volatility has slowed initial public offering (IPO) activity, meaning that investors are not getting the investment exits that will provide a return on investment.

Climate change is another cause for concern as nations take various measures to reduce carbon emissions and support businesses adopting greener solutions. Crypto startups and other blockchain-related companies are being scrutinised and criticised for the environmental damage of mining cryptocurrencies. Therefore, investors must search for startups offering sustainable market solutions and substantial environmental, social, and governance (ESG) policies.

How will VC trends change?

Abheek Anand, VC firm Sequoia Southeast Asia’s managing director, stated that although founders are finding it challenging to get started in the current market, there is optimism for the region’s long-term potential. For example, metrics for the technology sector continue to grow, and Sequoia has just launched a USD $850 million fund specifically for Southeast Asia.

Startups are taking a more nuanced approach than in the past by serving local and global markets. Companies like Grab have already gone public, and their seasoned founders are establishing new startups with greater ambitions. The challenge, as Anand noted, is that there will be limited access to the capital soon, which means leaders will have to focus on strong corporate governance and collaboration with others in the ecosystem to navigate the lean period.

With all these challenges, VC funding in Southeast Asia may be significantly reduced. While the 2023 VC scene may offer alternative investment options in various sectors such as electric vehicle manufacturing, cybersecurity, and health, the current funding drops indicate there may be a bit of austerity in the near future.

However, the accuracy of VC predictions depends on the various unresolved challenges. Therefore, it may be smarter to remain optimistic that wars, geopolitical tensions, pandemic variants, and other issues will dissipate by the end of the year.