Startups in Southeast Asia are facing a funding winter as the global economy worsens. The phrase “funding winter” refers to venture capital (VC) investors reining their spending from previous highs. According to the World Bank, a global recession in 2023 is inevitable, meaning Southeast Asia’s economy and startup investments will be affected. Signs were there last year, as Yinglan Tan, CEO of Singapore-based Insignia Ventures Partners, said, “The era of easy money is already history”.
Data compiled from Crunchbase showed that startups raised less money in the first three quarters of 2022 than in 2021. Gavin Teo, the general partner at Altara Ventures, highlighted the VC trends of that period, saying that Southeast Asian VC deployment contracted by 25-30%.
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In 2020, VC firms held on to funds as the world started fighting the COVID-19 pandemic, and many economic activities were reduced. In 2021, the hunger for investment returned, and many VC firms invested significant amounts of money in startups. Governments provided financial stimulus packages, which boosted investor capital inflows. Hiring escalated dramatically the year before as startups scaled their businesses rapidly to remain competitive.
In 2022, there was a course correction from the record investment highs as the global economy deteriorated, and the realisation dawned on many VCs that their funds were misused. Some investments were unprofitable, unscalable, lacking cohesion and proper governance, or did not align with the VC firms’ goals. As the year progressed, many stories of massive layoffs in Southeast Asia emerged as the region came to terms with the uncertain state of the tech scene and a possible lean funding period in the future.
Now, 2023 poses even more significant challenges for companies in the Association of Southeast Asian Nations (ASEAN).
State of funding
According to the International Monetary Fund’s (IMF) World Economic Outlook report, 2023 will have a low global economic growth rate of 2.7%. Dire challenges worldwide are affecting Southeast Asia, with rising interest rates, high living costs, high food and energy prices, and reduced international trade. The major powers—the US, the UK, the European Union, and China—are experiencing complex issues with their economies, which is putting pressure on other markets. Furthermore, geopolitical tensions, trade battles, and wars are affecting supply chains, raising the cost of trade and exacerbating economic challenges.
Additional issues, of course, are inflation and the predicted recession. A survey conducted by DealStreetAsia found that 88% of family offices in the Asia-Pacific (APAC)—private wealth management companies for high-net-worth families—thought that inflation would threaten their investments. Other signs of diminishing investments are evident, with CNBC reporting that Initial Public Offerings (IPOs) in ASEAN were lower than expected in 2022 after a good year in 2021.
Outlook for Southeast Asia
Despite the bleak outlook for the region and the era of unlimited startup funding coming to an end, many VC firms have funds with plenty of capital. They are just holding off on investing to identify startups with potential for success. The uncertainty in the investment climate is only due to the unknown consequences of the global challenges listed before.
Nevertheless, according to the Investing in ASEAN report, the IMF predicted that Southeast Asia’s economy would grow by 5.6% in 2022 and 6.0% in 2023, higher than the projected global growth rate of 2.7%.
The Finance and Banking sectors continue to attract the most funding, increasing by 22% to USD 57 billion. Sectors like climate technology (climatetech) and green technology (greentech) are coming to the fore as investors seek environmentally friendly and sustainable business activities and products.
As they strive to succeed, startups in Southeast Asia need to be more agile to navigate the challenging and lean funding period. The funds accumulated last year are sufficient to keep the ecosystem going as long as startups change their operating models to reflect the state of the economy. They must hire well, perform strategic cost-cutting, and make data-driven decisions to navigate these headwinds.
Furthermore, startups should focus on establishing proper business fundamentals, such as selecting the right leadership, streamlining operations, and concentrating on ESG (Environment, Social, Governance) models. They should invest in their research and development (R&D) to innovate and develop unique and sustainable products to enhance societal health, boost wealth, and manage waste better. They should find ideal ways to preserve their cash flow during this funding winter, slow the rapid scaling, and focus on profitability.
ASEAN governments and other stakeholders should continue accelerating digital transformation, incorporating technologies like the Internet of Things (IoT), blockchain, and others to enhance many industries. Digital payment innovations will also promote economic growth in the region by making transactions simpler, safer, and inclusive.
Even though the ASEAN VC trends are currently offering a bleak outlook, the future holds promise because businesses are improving their governance and will be better off.