SOUTH-EAST Asia might have a crop of startups waiting to break into the coveted world of unicorns, but more financing is needed to bridge the path there.
Nearly 70 such companies are valued between US$100 million and US$1 billion, according to the e-Conomy 2019 report by Temasek, Google and Bain released on Thursday.
These "aspiring unicorns", as dubbed by the report, took home about US$1.1 billion in funding in the first half of 2019, surpassing the US$900 million raised in the same period a year ago. Since 2016, they have raised US$5 billion.
They include sports media firm ONE Championship, fashion e-commerce firm Zilingo, and automotive marketplace Carro.
But unicorns, or companies valued at more than US$1 billion, continued to steal the show. Since 2016, heavyweight tech firms such as Grab and Tokopedia drew US$23.7 billion of the total US$35.8 billion raised by startups in the region.
"All of this is largely the result of investors doubling down on their bets on this group of successful companies with proven track records," said the report.
E-commerce and ride hailing dominated the funding scene - for every dollar raised since 2016, 67 cents went to the two sectors, with the bulk of the capital likely going to the 800-pound gorillas in the room. The report categorised food delivery as a subset of ride hailing.
Does this mean aspiring unicorns are being sidelined by their peers in the spotlight?
It is more of a "natural thing", said Rohit Sipahimalani, joint head of Temasek's investment group. He pointed out that when South-east Asia's economy became a bright spot, corporates and investment groups that traditionally would not have glanced at venture-backed tech investments naturally put money behind the "larger winners".
But the reality is changing. Institutional investors and private equity players such as Northstar, KKR and Warburg Pincus are now itching to dip their toes in the earlier stages, namely Series C and D.
And in a sign of convergence, early-stage venture capitalists are now raising ever-larger war chests to back their star portfolio companies over a longer period of time. Firms including Golden Gate Ventures, Vertex Growth Fund and EV Growth have recently set up growth stage funds with at least US$200 million to invest in the space.
"I wouldn't be surprised if at least three of (the aspiring unicorns) become unicorns by next year," said Mr Sipahimalani. Temasek, for one, already has its eye on a few aspiring unicorns and is watching the space with much interest.
For these startups to break out of their existing bracket, more capital needs to be deployed at the Series C and D stages, which tend to involve ticket sizes ranging from US$25 million to US$100 million and above, said the report.
Late stage deals rose in the first half of 2019 to make up 19 rounds, up from 16 a year ago. But the total amount raised has dipped to US$600 million from US$700 million in the corresponding period last year.
"The lack of funding, or timely funding, can lead to business disruption which can be detrimental to the company, from the balance sheet to staff morale.
"Founders will be forced to prioritise fundraising efforts - including embarking on time-consuming roadshows overseas - above its daily operations, which, ironically, hurts the business as well," said Kelvin Lee, co-founder and CEO of private investment platform Fundnel.
Mature startups told The Business Times that they did not experience being "squeezed" by the unicorns during their fundraising journey. But the emergence of competition from super apps has put pressure on them.
Arrif Ziaudeen, whose company Chope is in its fifth round of fundraising, said some investors have questioned the relevance of Chope, pointing out that an established unicorn could just expand into its vertical.
"Investors are terrified of potential competition from large companies or the unicorns suddenly entering any market. But there is a lot to be said about specialisation as an operator versus one conglomerate that does everything. Specialisation ensures that we produce a better product," said Mr Ziaudeen, CEO of the restaurant reservation and dining deals startup, which also supplies enterprise software.
Shashank Dixit, CEO of cloud-based enterprise software firm Deskera, said smart investors always look for good deals. The next crop of unicorns will need to focus on sound business models and good corporate governance, amid growing public scrutiny of loss-making tech firms in more mature markets such as the US.
As a whole, South-east Asia remained a bright spot even as global tech funding took a hit due to the slowing economy. Against a backdrop of global venture funding falling 17.7 per cent year on year during the second quarter, South-east Asia's Internet firms drew US$7.6 billion in the first half of 2019, about 7 per cent more than a year ago.
In the first e-Conomy report released by Temasek and Google in 2016, it was estimated that to grow a US$200 billion Internet economy, the region will need between US$40 billion and US$50 billion in funding by 2025. Six years ahead of that estimate, South-east Asia is already close to meeting that mark.
The region's Internet economy is now projected to hit US$300 billion by 2025, according to the latest report.