Challenges remain even as VCs ride out a tough year

IT HAS been a rough year for venture capitalists (VCs) in South-east Asia. It has been tough to raise funds, and tough to find good deals.

As at October 2023, 578 deals had been signed for a total of US$6.7 billion. This was down from US$14.3 billion across 1,139 deals in 2022, according to a report by private-markets data tracker Preqin.

Exits in the region fell to US$1 billion across 44 transactions, down from US$4.1 billion across 76 transactions in 2022.

The Business Times spoke to 12 VCs with operations in South-east Asia to find out what the past year has been like for the VC landscape and how they view the outlook for 2024.

500 Global

Best bets:

• eFishery
• Kredivo
• SwipeRx
• Una Brands

Vishal Harnal, global managing partner of 500 Global, said that there had been too much capital chasing too few opportunities in 2021 and 2022.

“You needed to have someone pull the rug. It was necessary for something like (the funding winter) to happen, and it has happened in every single economic cycle,” he noted.

The “consistent narrative” of a funding winter has worried him, though.

It scared many founders, he said, such that those at the early stage have been focused on profitability at a time when they should be focused on growth.

He added that investors are starting to reinvest capital, however, and more limited partners (LPs) are “starting to come out of their cocoons” and ask managers about new funds. “I’m cautiously optimistic about 2024.”

East Ventures

Best bets:

• Tokopedia
• Traveloka

Roderick Purwana, managing partner at East Ventures, has found deployment of capital to be a major challenge this year.

“The supply of capital is there. Many funds raised money these past two years, and so they’re sitting on capital on the sidelines,” he noted.

“People are waiting because they want good deals, and to make sure the companies they back are the right ones.”

South-east Asia sits in a very beneficial position amid US-China tensions. A lot of money is being pulled out of China by the United States and some will be redeployed to this region. Investments are also coming in from China, Purwana added.

Elev8

Best bets:

• AIM Biotech
• Curium
• Entropica Labs
• Mesh Bio
• MiyaHealth
• Xinterra

Aditya Mathur, managing director of early-stage deep-tech VC Elev8, said that amid US-China tensions, deep-tech VCs in South-east Asia have been unable to raise much capital from Chinese VCs, or even exit via acquisitions by Chinese companies due to the sensitivity of the technologies they invest in.

The past year has also been about a reversion to a “steady state value”, he added.

“There was a surplus of capital (in 2020 and 2021), which inflated valuations for growth-stage companies.”

Lower valuations will be the new normal and will force companies to have real products and not just rely on hype to raise capital, Mathur noted.

Heritas Capital

Best bet:

• Holmusk

The past few years of low interest rates have made it easy to raise and deploy capital, leading to many startups being overvalued.

This year has been marked by valuation gaps, said Chik Wai Chiew, chief executive officer and executive director of Heritas Capital, which is focused on healthcare, education, the environment and technology.

“Initially, (startups) can still extend the runway with convertible loans; but after a while, how many convertible loans can you raise?”

There may be a lowering of interest rates going into 2024. This might close the valuation gap and create a conducive recovery environment, he added, but investors will still be discerning about valuations.

Insignia Ventures Partners

Best bets:

• Carro
• Flip

The lagging effect of higher interest rates, a sluggish Chinese economy and continued US-China uncertainty – these are the challenges that Tan Yinglan, CEO and founding managing partner of early-stage tech VC Insignia Ventures Partners, sees for 2024.

“I think there’ll be greater differentiation – those who are good will thrive, and those who are weak will get weeded out,” he said.

He added that it will take “some rationalisation and a more focused allocation of resources, but those who have quality will shine”.

Peak XV Partners

Best bets:

• Kopi Kenangan
• Multiplier
• Sunrate

The biggest challenge for most companies this year was balancing growth with profitability, said Rohit Agarwal, managing director of Peak XV Partners.

He noted that many companies slowed down on growth, but almost all improved on profitability.

While this has led to better unit economics, a shorter payback period and improved return on capital, companies have still found it hard to raise follow-on capital this year.

“We have advised founders to cautiously start investing for growth again as they are able to derive more value for every dollar invested than in prior years, due to lower competitive intensity and improvements in their operating model,” said Agarwal.

He added that many companies have turned around and plan to invest for growth next year. “It’s already starting to feel like spring.”

Qualgro Partners

Best bets:

• Accredify
• Appier
• Funding Societies
• NoBroker
• Patsnap
• ShopBack
• SirionLabs

One thing that has hampered the VC landscape in South-east Asia is the lack of exits in local stock markets here, said Neo Weisheng, general partner at tech-focused Qualgro Partners.

Singapore may draw a lot of capital, but not all that money stays here and its stock market is therefore not the best for tech company listings.

With the increased interest in artificial intelligence (AI), Neo cautioned against “jumping into investments in companies that masquerade as AI companies without a fundamental understanding of data strategy”.

He thinks that the VC landscape in 2024 will be much better than this year’s.

Said Neo: “Everybody wants to deploy and we are seeing good opportunities in the market; there’s an impatience building up.”

Real Tech

Best bets:

• Aerodyne Ventures
• Jala Tech
• ProfilePrint

Next year could be a less busy year, with fewer new funds being created, said Louis Murayama, managing director and CEO of deep-tech VC Real Tech.

He thinks a “real funding winter” could come in 2025 or 2026. This is because the startups that have been overvalued will be a drag on fund performances in one to two years’ time.

Weak performance data within the industry will also make it tougher for VCs to raise funds.

Trirec

Best bets:

• Oort Energy
• Sunseap
• Type One Energy

Investment opportunities started to pick up in the second half of this year as most central banks signalled a stop to interest rate hikes, said Melvyn Yeo, founder and managing partner at Trirec, which is focused on decarbonisation investments.

He expected this to continue into 2024, as investment volumes pick up while investors remain cautiously optimistic.

Investments related to AI, biotech and decarbonisation will be among the most popular in the region, noted Yeo.

The plant-based alternative meat space has been a disappointment, he added.

“I think it was heavily overhyped… so the quality of the products suffered. There’s been disillusionment from consumers on its nutritional value, leading to adoption rates dropping.”

Vertex Ventures

Best bets:

• FirstCry
• Licious
• Nium
• Patsnap
• RPG Commerce
• XPressBees

South-east Asia suffers from a lack of exit routes, which has hurt its investability among the larger LPs, said Chua Joo Hock, managing partner of VC firm Vertex Ventures.

In addition, interest rates are still very high.

He expects 2024 will see more funds having to support their portfolio companies, such as through follow-on rounds.

“We are already seeing a lot more bridge financing than new rounds. Convertibles are also very common nowadays.”

Vickers Venture Partners

Best bets:

• Aardvark Therapeutics
• Awak Technologies
• Eavor
• Emergex Vaccines

High interest rates have depressed valuations, but some sectors – such as AI – are depressed because they have not delivered on revenue expectations in the last few years, said Dr Finian Tan, founder and chairman of early-stage deep-tech VC Vickers Venture Partners.

He sees light at the end of the tunnel as interest rate hikes cool off. The initial public offering markets are starting to open, as investors move back into equity markets expecting that interest rates will fall.

Dr Tan is also hopeful of some successes in the biotech space, with more clinical-trial approvals in the next few years.

This will come as startups work through the backlog accumulated during the pandemic. Biotech investors will then be able to exit investment and redeploy their capital.

Wavemaker Partners

Best bets:

• eFishery
• LiveIn
• watchTowr

General pessimism in the markets this year has caused a liquidity crunch and increased urgency for more exits, said Joel Ang, principal of investments at early-stage VC Wavemaker Partners.

Startups are also finding it harder to raise their next rounds of financing, he added, with flat or down rounds becoming more common.

The best companies will still get funded, though, as VCs still have dry powder to deploy. Next year, Ang believes that markets will continue to value sustainable growth and strong unit economics.