Seed-stage startups, which have been mostly shielded from the biting funding winter faced by other Southeast Asian businesses, are now starting to feel the pinch. VC trends recorded by DealStreetAsia DATA VANTAGE show a decrease in financial backing for initial round deals in the second quarter (Q2) and first half (H1) of 2023.
Compared to the first half of last year, H1 2023 recorded a 43% plunge, with only 126 seed agreements making it over the line. Q2 2023 only had 52 startups securing funding, representing a 29.7% drop sequentially and a 45% fall year-on-year (YOY). The median value of financing in H1 was USD 2.2 million, down from USD 3 million at the same time last year.
We take a closer look at the funding winter impacting startups in Southeast Asia
These numbers are cause for concern as venture capital is vital to the survival of budding companies, paying for talent recruitment, initial business operations, product development, and expenses. When the median value reduces, it is a sign of a liquidity crunch—when there is inadequate cash in supply despite a high demand.
Factors contributing to the reduced funding
According to the eConomy SEA report 2022 by Google, Temasek, and Bain & Company, countries in the Association of Southeast Asian Nations (ASEAN) were going to encounter global headwinds as they emerged from the COVID-19 pandemic. Predictions saw rising interest rates and high inflationary pressures limiting consumer demand, digital adoption slowed, and spending was trending downward.
Last year, we shared that VC funding would reduce in 2023 due to several factors. For one, geopolitical tensions between the US, China, and ASEAN meant supply chain disruptions in the region. The threat of potential wars created market uncertainty, which puts off financial backers because they only seek to fund startups in politically stable areas.
Secondly, China’s extended lockdowns brought hope that once the country reopened, global trade would kickstart again. However, China’s reopening has not gone well, with the nation experiencing economic issues. These downward pressures in the largest market in Asia Pacific (APAC) are hurting their ability to financially back startups in ASEAN.
Another factor that professional services firm KPMG predicted in a report was that early-stage investments would take a hit in 2023 as investors tried to reduce their portfolio risks. They would, therefore, be seeking to redirect funds to other sectors.
Environmental challenges are leading to a shift to healthier, sustainable solutions, bringing a fourth factor to the table. These changes take time, cost money, and create new problems when weaning people off of costly fossil fuel energy. Thus, capital is being directed toward greentech startups as they will play a significant role in future environmental protection and the green economy.
How to navigate the funding crisis
Seed-stage startups must figure out how to survive during this funding winter. Here are some steps they should consider:
Streamline the business
The first step is to streamline their businesses and cut costs. For example, they should stop paying for subscriptions that do not add value to their business. They should also check for overstaffing by reviewing their recruitment drives.
Find alternative funding sources
Aside from venture capital firms, other alternative sources of money are angel backers, wealthy families, government grants and subsidies, and investment funds. There are also novel ways of getting money; for example, blockchain-powered games enable players to earn while they play.
Negotiate with VC firms
It is vital to learn how to negotiate as it can help eke out more funds from investors. Some tips to remember are:
- determine what the goals are,
- Persevere when they keep getting “No”,
- articulate financing options
- trust their instincts and decide whether the deal is good,
- offer investment funders an exit strategy
Look out for growth opportunities
Money goes where there are opportunities to earn more than usual. That means investors will be more open to sending their funds somewhere they know they will get a return.
Bain & Company reported that there were opportunities in the energy transition space. Carbon reduction goals need energy, agriculture, and waste management funding. The eConomy SEA Report 2022 showed that digital players can engage in recycling activities to combat the predicted 20MT of emissions by 2030.
Another sector with growth potential is digital payments. It will grow to 92% of all online economy payments by 2026, and 426 million people will use mobile wallets and payment models like Buy Now Pay Later (BNPL). BNPL will inspire more transactions, buff up the sector, and attract more financiers.
Examining the reports, the VC trends in ASEAN show that private equity owners are confident about the resilient macroeconomic conditions in the region. While the trade war between China and the United States affects everyone in the Asia Pacific, it also creates an opportunity for Southeast Asia to benefit from companies fleeing tariffs. Thus, funding may have temporarily dried up for startups but will return eventually.