For the last few years, the Association of Southeast Asian Nations (ASEAN) has been going through a funding winter, with venture capital (VC) firms becoming very picky about the businesses they invest in. While recent VC trends showed that global macro headwinds like inflation were making it challenging for investors to deploy capital to startups in various industries, they hoped everything would improve in 2024.
Unfortunately, DealStreetAsia reported that the Southeast Asia VC funding landscape continued its downward spiral in the fourth quarter (Q4) last year. According to its DATA VANTAGE report titled “Mapping SEA & Indonesia’s 2024 Journey”, the region closed the year at a historic low regarding investor financial backing. Startups could only muster 116 equity capital receiving rounds, raising USD 1.2 billion. This amount represented the lowest quarterly deal volume in more than six years.
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Secondly, funding for the whole of 2024 was only 54.6% of the amount raised in 2020 during the pandemic. It more than missed the record-breaking haul achieved in the post-pandemic period of 2021, raising only 19.5% of the funds. In addition, last year’s total deal volume dropped 10.3% year-on-year (YoY) to 633 deals, while deal value plunged by 41.7% to USD 4.56 billion.
The increase in debt financing deals was also concerning. While borrowing money can help businesses invest in growth and reap substantial benefits, defaulting on loans and interest repayments would hurt the company’s credit rating and ability to borrow in the future. DealStreetAsia’s report noted 16 debt deals in Q4, bringing 2024’s total debt deals to 54—a six-year high.
Factors contributing to funding issues in ASEAN
The predicted funding trends of 2024 did not all go as expected, as DealStreetAsia’s report shows. Even though aspects like ESG (Environment, Social, and Governance) policies, sustainability, and profitability remain vital for investor consideration, VC firms choose to withhold funds for the future.
The low Q4 2024 amounts raised show there is still much work to do to bring more investment into ASEAN.
Here are some factors that contributed to the funding issues:
- Regional downturn: The structural and economic differences between the countries in ASEAN put pressure on investors, thereby affecting their willingness to deploy capital. According to the report, the Philippines was the standout performer in 2024 compared to the other top six VC markets in Southeast Asia. Its burgeoning startup ecosystem and increasing investor confidence helped the country to increase its deal volume and value.
On the other hand, countries like Singapore and Indonesia experienced significant downturns, with the latter suffering the most in the region. Their problems ranged from slowdowns in late-stage funding deals to governance issues, shrinking middle class, business costs, and more.
- Continued focus on the fintech sector: The financial technology (fintech) sector is one of the top segments in ASEAN for investor funding. It remains a popular target for financial backing over others because it provides value to multiple industries through its fast, secure, and traceable payment solutions.
DealStreetAsia’s report shows that this trend continued in 2024, with the fintech sector receiving 36.8% of the total funding value, bringing in USD 1.68 billion. Software & IT were second, but the eCommerce sector dropped by 29% in deal volume to settle in third.
- Investor caution: Southeast Asia-focused investors expressed uncertainty and exercised caution when backing startups. According to the report, investors were navigating high interest rates, challenging exit environments, declining company valuations, poor profitability, a shift to US capital markets, and business model scalability issues, among other things.
For example, late-stage fundraising took a big hit, with funding plunging by 64% and deal value dropping by 72%.
- Geopolitical and economic headwinds: Global geopolitical conflicts and tensions have contributed to the funding winter plaguing ASEAN. Issues on multiple continents are affecting trade, supply of raw materials, energy costs, infrastructural integrity, and supply chain routes. These issues have created market uncertainties and pushed up prices, leaving very little liquidity in the investment sphere.
Economic issues such as rising inflation and high interest rates also played their part in dwindling the funds available to investors.
2025 outlook for VC funding in Southeast Asia
According to Tracxn, a leading startup data platform, Southeast Asian VC funding in 2025 will focus on backing high-growth sectors like blockchain, fintech, and cleantech. Additionally, the region will overcome economic complexities by updating its policies and tapping into investor enthusiasm to attract more money for emerging businesses.
It should also be noted that the change of power in the United States presents opportunities and unexpected problems for investors. President Trump’s economic plans will tell us what the VC trends in ASEAN will be, how investors will fill up their funds, and which companies they will choose to finance. Therefore, venture capital firms should remain cautious and conduct due diligence before investing.