Venture capital (VC) has been a vital component in Southeast Asia for many years now, helping startups grow, innovate, and thrive. Once the region began its digital transformation drive, companies needed to have enough money to achieve the transition requirements expected and fulfil customers’ desires. Thus, VC firms have assisted the governments in the Association of Southeast Asian Nations (ASEAN) to bridge the funding gaps in the tech ecosystem.
According to Statista Research, the total capital raised in ASEAN will likely reach USD 18.2 billion in 2023. VC financial backing is higher in the early-stage market and looks set to reach USD 9.8 billion this year. However, the money raised will be lower than in 2022 and 2021, which had USD 18.7 billion and USD 21.2 billion, respectively.
We look at the role of venture capital in fueling Southeast Asia’s startup and SME growth
The capital decrease is primarily due to the worsening global economy and the severe impact these financial challenges are exerting on investors. Other reasons may be shifts in VC firm tactics, shortage of startups with potential, difficult regulatory drawbacks, and a lack of experience for startups in identifying and securing financial backing for their businesses.
Key trends driving VC investments in Southeast Asia
DealStreetAsia reports that ASEAN is struggling to adjust to the economic headwinds, with the first half of 2023 (H1) recording only 44% of the previous year’s total for the same period. Startups amassed USD 4.2 billion in H1, but the figure showed a 56% drop year-on-year. This amount meant that H1 2023 fundraising would be lower than the total raised in the first quarter (Q1) of 2022.
Even so, Southeast Asia remains a worthwhile place to invest due to its many advantages over other areas. The first is its population, which consists of young, urbanised, and tech-savvy citizens. They are curious, willing to try novel innovations, and comfortable operating in a digital-oriented world. Moreover, they are part of the rising middle class in the region, meaning they will provide a broad market for tech startups for years.
ASEAN’s digital transformation has meant a significant number of citizens, over 400 million, are internet users. There is greater access to affordable smartphones, ensuring mobile penetration is very high. Startups offer services to customers and can easily enable payments directly through mobile apps.
For example, integrated services company Grab has been an excellent case study on the impact of VC funding. It received support from Vertex Ventures—a subsidiary of Temasek Holdings—as well as other investors to grow and become a super app. It now offers solutions such as ride-hailing, digital payments, food delivery, and more.
The region has many growing sectors, including eCommerce, Health, Beauty, and Climate tech. A quick case study is VC firm 917 Ventures, which partnered with Gogoro Smartscooters as part of its mission to combat climate change and enable sustainability through solutions like battery-swapping systems.
Furthermore, technology is growing at a fast pace in ASEAN with an ongoing rollout of 5G infrastructure in the area. Innovative uses of blockchain are impacting many industries, and artificial intelligence (AI) is streamlining operations. The startup Instill AI received USD 3.6 million in a seed round funded by RTP Global, Hive Ventures, and Lunar Ventures. The goal was for companies to use the solutions to extract value from unstructured data.
Challenges and opportunities for ASEAN
According to VC firm East Ventures, the global economic recession not only affected the tech industry but also hindered funding disbursement. Nevertheless, the investor raised USD 250 million through its Global Growth Fund to deploy it to businesses that deserve a long-term partnership.
Venture capital firms are looking for the right opportunities, collaborative founders, companies with ESG (Environmental, Social, Governance) policies in place, and verifiable track records of success and profitability. Furthermore, the tech startup must be disruptive, innovative, marketable, and have the potential for growth to succeed in the long term in Southeast Asia. But there remain many challenges to overcome.
ASEAN will continue being impacted by global economic headwinds, increased geopolitical conflicts in the region, talent crunch and recruitment expenses, poor infrastructure, energy and production costs, and restrictive government regulations.
Nevertheless, there are still many opportunities for investors to benefit from in the region. Firstly, the tech startup ecosystem is maturing and creating a business-friendly environment for new companies. Secondly, the growth of sectors like climate tech and healthtech means that workers in ASEAN will have more job openings. Additionally, as the infrastructure improves, technology will penetrate rural areas, expanding the market.
The region expects that new tech businesses will reach a valuation of USD 1 trillion by 2025. The demographic advantage of young, risk-taking entrepreneurs, multifunctional service platforms like Gojek, mobile wallets, and creative payment models like Buy Now, Pay Later (BNPL) will power the continued growth and attract more funding. Moreover, there will be extensive support and initiatives from each government in ASEAN.