The VC trends Southeast Asia has experienced in the second quarter (Q2) of this year indicate that companies should be worried about the future. According to a DealStreetAsia Data Vantage report, startups in Southeast Asia saw a sequential 20% decline in deal volume in Q2, from the Seed stage up to the Series C funding rounds. A few mega deals—such as Indonesia’s fintech company Xendit’s USD $300 million fundraising, helped the quarter’s recovery, with a total deal value of USD $4.77 billion more than in Q1. 

A similar drop in deal volume happened a few years ago when the COVID-19 pandemic forced the Association of Southeast Asian Nations (ASEAN) governments to close their borders. Trade disruptions created uncertainty, shattered economies, and made investors wary of funding startups. However, when the virus was briefly contained in 2021, nations began to open up, leading to a record-breaking year of investment deals for venture capitalists worldwide.

As 2022 began, the positive investment trend was predicted to continue. However, the first quarter (Q1) witnessed a dip in investment fueled by new lockdowns, geopolitical instability, and trade restrictions to curb COVID-19’s Omicron Variant. Other issues, such as public stock exchange volatility, contributed to the downturn.

VC trends in Q2 2022

According to DealStreetAsia’s report, the Q2 performance brings the total deals for the year to 580, up from 437 in 2021. Even so, Q2’s deals totalled USD $9 billion, compared to USD $9.3 billion in Q1 to the region. Debt and equity funding were also much lower than in the same quarter the previous year.

Eko Kurniadi, a partner of investments at Alpha JWC Ventures, told DealStreetAsia that investment would be lower than in 2021 because investors are more cautious in the current global economic climate. Startups should prioritise increasing their market share, improving profitability, and recruiting the best talent.

The financial technology (fintech) sector continues to attract the most investment. Last year, one out of every four US dollars went to fintech startups. These companies have the most investors because they offer multiple industries monetary solutions and investment options. They also cater to the large populations who are unbanked or underserved by traditional banking and payment services.

What to expect in Q3 2022 and beyond

Due to the global economic uncertainty caused by several issues, startups should brace themselves for a lean period in upcoming quarters. Some challenges include supply chain disruptions because of geopolitical tensions, rising US Federal Reserve rates affecting the dollar, and the potential spread of novel COVID-19 variants. Furthermore, China’s regulatory fight against tech companies and its provocative stance on its Asian neighbours has hampered political stability in the region, which is essential for investor and business confidence.

ASEAN governments have not done enough to evolve the laws on the startup ecosystem, product development, funding avenues, mergers and acquisitions, and cybersecurity. While some progress is evident, there is still room for more dialogue with stakeholders in order to improve the legal and regulatory framework to enable companies to obtain funding.

Southeast Asian startups have laid off hundreds of workers in the last few months to manage their resources and maintain operational efficiency. Last year, the availability of cheap capital as a result of investor appetite for investments post-pandemic led to businesses growing faster and hiring many workers to handle various duties. Many small businesses can no longer afford to hire or retain top tech talent, therefore larger companies profit in the short term.

Moreover, with the economy taking a turn for the worse, inflation rising globally, interest rates increasing, and the possibility of recession becoming a reality, companies are being pushed to scale cautiously and focus on profits rather than growth. Bold investors may benefit from buying startup equity at lower prices before economies recover, but it is unclear whether VC firms will be willing to make those decisions.

Venture capital firm Sequoia Southeast Asia’s managing director Abheek Anand told CNBC that the firm is “optimistic” about the long-term prospects for startups. Many VC funds, including Sequoia, have raised investment money that they can direct to startups with growth potential, stability, profits, and returns on investment. Anand advised companies to focus on strong corporate governance and develop enduring business models.

Startups in Southeast Asia should look for alternative funding sources in the short term. For example, blockchain-based games enable players to own and trade digital assets at a profit and convert those assets into money. Businesses should also search for mentors, improve their product offerings, and conduct better sales and marketing.

The VC trends Southeast Asia will display for the rest of the year may not bode well for startups who are in need of funding. However, companies should look to alternative solutions until the global market recovers.