The fundraising in Southeast Asia 2022 recorded in the first nine months shows that the region has had lower venture capital (VC) funding than last year. According to a report compiled by DealStreetAsia DATA VANTAGE, the reduced fundraising this year affected the Association of Southeast Asian Nations (ASEAN) and the entire Asia-Pacific (APAC).
In the year’s final quarter, APAC VC trends continue to show that funding will be far below the levels reached in 2021, and the gap will be too substantial to be bridged in such a short time, especially in the current global economic climate. For example, startup fundraising in Southeast Asia thus far is USD 10.5 billion, well short of last year’s USD 23.17 billion. The previous quarter (Q3) had the lowest funding value in seven quarters, coming in at USD 3.72 billion.
Despite deal values dropping, ASEAN and China’s deal volumes could exceed 2021’s numbers. Southeast Asia’s startups raised USD 12.68 billion in the first nine months, which made up 54% of 2021’s fundraising value. Deal volume increased by 11%, according to the SE Asia Deal Review Q3 report.
Reasons for the fundraising shortfall
Several factors impacted the deal values for the first three quarters of the year. Firstly, private equity (PE) and VC investors have cut more deals, albeit focusing on the smaller, early-stage investments that can be lucrative in the long run. Nikkei Asia reported that downward pressure on listed tech stocks has seen them fall more than 50% since their peaks, causing investors to veer away from companies that are doing later-stage deals.
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The challenges in the stock market have reduced the valuation of later-stage deals, which is not conducive for investors. This knock-on effect sees businesses seeking an Initial Public Offering (IPO) facing lower valuations. Early-stage deals are less sensitive to market fluctuations.
As such, PE-VC investors have shied away from making big bets in near-IPO companies this year, according to DealStreetAsia. Exit uncertainties and the global bear market have made it impossible to get larger, growth-stage investments, which would have boosted 2022’s overall deal value. ASEAN startups have sealed 837 deals in nine months, 131 short of 2021’s deal volume, representing nearly 20% year-on-year (YOY) growth. Most of the deals were in the seed stage.
China’s numbers are also far below 2021 levels. The country has had very long pandemic lockdowns that have impacted businesses, trade, and the economy. The outcome is visible in its deal values, with Chinese startups raising only USD 38.7 billion, less than half of 2021’s numbers. Furthermore, fundraising in the first nine months is down 39.7% from the USD 64.2 billion raised in the same period last year.
Deal volumes in Greater China have increased by about 15%, with 1,658 deals closed compared to 1,440 in 2021. Like ASEAN, smaller, early-stage deals led to higher volumes but lower deal values in China.
India has also witnessed a decrease in its deal values this year, with a 29.3% YOY drop in the first nine months of 2022. The country’s first quarter (Q1) started strongly before fizzling out by Q3, raising USD 22.7 billion, almost half of 2021’s total. However, deal volumes were 76% higher, matching the divergence in deal value and volumes between ASEAN and China. There have been 1,245 deals in nine months, compared to 2021’s entire total of 1,634.
What it means for startups and the region
Last year’s global liquidity led to a lot of capital flowing into startups. Companies hired new tech talent and scaled their businesses to take advantage of the extra funds. This year has seen a correction, with inflation, geopolitical issues, China’s lockdowns, and tech company targeting affecting deals in APAC.
APAC VC trends, therefore, show that VC funding could be lower in 2023 if current global problems persist. The US and Europe are bringing down international markets as their economies continue to struggle with inflation, high-interest rates, and increased energy costs.
Multinational companies are not eager to invest as they study the markets, and VC funds are holding onto their money, optimistically hoping that every challenge worldwide will resolve in the coming months so that they can get back into the business of investing. Bain & Company’s Global Private Equity Report 2022 says that PE firms face a dual threat from rising rates and costs. Regardless, divestments from China to India and ASEAN may improve mergers and acquisitions in APAC.
China is starting to open up after its restrictive COVID-19 management measures, so we should expect to see deal values and volumes in APAC increase. Overall, the trends concerning fundraising in Southeast Asia 2022 remain concerning, but there might be some good news if things change in 2023 and the region can hope to bounce back quickly.