It’s been a stellar year for venture capital (VC) fundraising in the first half (H1) of 2022 for firms in the Association of Southeast Asian Nations (ASEAN). According to DealStreetAsia’s Data Vantage report: SE Asia’s VC Funds: H1 2022 Review, the VC trends show that VC funds have so far raised USD 2.86 billion against a target of USD 9.85 billion. Furthermore, there are 90 ASEAN-based funds currently in operation.

VC firms closed 23 funds in the year’s first six months, raising USD 3.03 billion. The figure is a record, surpassing the total raised in 2021. Earlier, we reported that startups receiving VC funding in Southeast Asia had witnessed a 20% sequential decline in funding deal volumes in the second quarter (Q2) of the year. We saw this as a sign that startups would struggle to get investment this year due to the current turmoil and uncertainty in the global economic climate.

Why VC funding in Southeast Asia might reduce in 2023

However, it seems there has been an uptick in funding activities, with climate technology (climate tech) startups receiving a lot of attention and financial backing. The surge can be attributed to the desire by organisations and VC firms to support startups focusing on environmental, societal, and governance (ESG) objectives. In addition, society at large is becoming more conscious of protecting the environment, reducing pollution, and lowering carbon emissions, thereby forcing companies to change how they do their business.

Current funding trends in Southeast Asia

Even though VC funding has reduced considerably in Q2, significant deals are still achievable and continuing in the Asia Pacific (APAC) region. At the end of August, Chinese tech giant Alibaba invested USD 912.5 million in Singapore’s online shopping giant Lazada, bringing its total funding to USD 1.3 billion this year. 

Climate tech companies like Indonesia’s Nafas have also received angel backing, according to DealStreetAsia.VC firm Sequoia Southeast Asia’s managing director, Abheek Anand, told CNBC’s Squawk Box Asia in June that they were “quite optimistic” that startups could thrive in the future despite the current uncertainty in the global economy and the challenges of accessing funding. Sequoia has raised USD 2.85 billion to cater to its Indian and ASEAN markets, with USD 850 million dedicated funds for Southeast Asia.

New startups are focusing on serving the regional and global markets. New founders are coming from successful tech businesses to start companies and provide solutions for ASEAN. Anand says startups must be sensible and build enduring business models with robust corporate governance. 

Since the metrics in the technology sector are strong, it indicates that the digitisation of the region will not stop even though the world is facing a potential recession, and startups will be able to access much-needed funds from VCs.

Challenges and scope of VC scene in the region

The investment challenges worldwide, specifically in Southeast Asia, come from multiple issues. The biggest issue still plaguing the region is the spread of the Omicron variant of COVID-19. As a result of this virus, ASEAN’s economies, businesses, and workers have suffered. It has been a significant obstacle to trade, movement of goods, exchange of services, cross-border commerce, and earning revenues. 

As a result, more investors have refrained from investing than they otherwise would have. A wait-and-see approach adds to the uncertainty of whether startups will receive any investment funds.

The high interest rates that are affecting all currencies globally have been another issue. Due to the high cost of energy, food, goods, and operating expenses have all increased. Add to that the geopolitical concerns enhancing regional tensions and supply chain disruptions, and you have a recipe for reduced investments.

According to Paul Ong, partner at leading venture debt and lending platform Innoven Capital, venture debt may be the answer to funding slowdowns. Venture debt is a financing mechanism whereby a startup can receive a loan for up to 3 years. Venture debt funds try to recoup their investment while earning a return, whereas VCs buy equity and try to sell it or exit the company to make money.

Venture debt is also vital to a new business’s survival because the startup may be unable to secure a commercial loan. Typically, it may be because the company does not have the assets or the prior business history for a financial institution to be comfortable lending. Venture debt takes care of that.

VC funding in Southeast Asia will continue evolving, and fresh opportunities will emerge for the region to finance and support its startup ecosystem to benefit from innovative solutions. Climate change, for example, has become a significant issue, and investors will send a lot of money to the climate tech sector in the coming years. The VC trends also show that the financial technology (fintech) sector will remain a popular investment option.