Investors remain cautious even as tap for startup funding flows again

INVESTORS are not wildly writing cheques even as the South-east Asia startup ecosystem’s funding dry spell eases slightly.

Late-stage venture capital (VC) investors are still extremely cautious, said Dmitry Levit, partner at VC firm Cento Ventures. Nine out of 10 series B and C investors he has spoken to are extremely cautious compared to last year.

Some late-stage investors who were previously gung-ho about the situation last year are now saying that they aren’t interested in anything currently. Early-stage investors are divided between those who are not so active and those who are now in expansion mode, such as Cento, which has trebled its investment team.

“We are writing a lot of cheques but not telling anyone about it,” said Levit.

The notion that funding is picking up is something that Piruze Sabuncu, partner at VC firm Square Peg, has observed as well.

During “the first half of this year versus the last half, funding activity has definitely picked up”, she said.

The quantum of cheques being written appears to not have recovered despite funding activity picking up. Sabuncu attributes this to both sides of the ecosystem, with founders being more cognisant about dilution especially in the early stage and VCs having less fear of missing out on deals.

Funds closed in 2020 and 2021 could also have less dry powder than expected due to the quick and large deals being done in 2021 and 2022, noted Lim Kuo-Yi, managing partner at Monk’s Hill Ventures. There is some caution as startups invested in that timeframe may not have a business model that works or are unable to convince investors to raise a flat or down round.

“Largely, people are going to be more cautious and more paced in deploying capital so they don’t have to be back in the market to raise funds more quickly,” said Lim. At the other end of the value chain, capital from limited partners is getting more constrained, so general partners are going to have a hard time raising capital, he added.

This is something reflected in the recent e-Conomy SEA 2023 report by Bain, Google and Temasek that tracks the region’s digital economy. In the report, 87 per cent of investors saw fundraising as being more challenging over the last 12 months.

Levit pointed out that there are two schools of thought around the current funding narrative. One being that funding levels are resetting to 2019 levels, and the other that they are resetting to 2017 levels.

Funding at 2017 levels is significant as that year predates the unicorn bubble that saw startups such as Grab, Gojek and Sea hit over US$1 billion in valuations. Distinguishing where the actual funding levels are for the second half of 2023 will be critical to see how the quantum of cheque sizes will be headed in South-east Asia.

“It matters a lot because for some markets it’s the difference between US$80 million Series A or US$40 million Series A funding,” said Levit.

The e-Conomy Sea 2023 report noted that private funding levels have dropped, with only US$4 billion invested in the first half of 2023. This puts South-east Asia closer to 2017 levels where US$9 billion was raised for that year.

The amount of funding raised in South-east Asia from data platform Pitchbook shows US$9.6 billion has been raised, while data platform Preqin says US$6.7 billion has been raised till the third quarter of 2023. These numbers support the theory of funding returning to the pre-unicorn levels of 2017.

All agreed that pain is something the ecosystem will have to endure for the next six months, on both the startups and investors sides. Some companies would be running out of things they can do to prove the viability of their business.

“The pain has come for players who have been holding on to a 24-month runway, and now that’s dwindled to 12 or less. It’s time to go to market and if people don’t let go of 2021 or 2022 valuations, that’s when the pain sets in,” said Levit.

For investors, fundraising will be tough, with more layoffs and stunted growth for startups ahead. He said this development might not be a bad thing as businesses that are not suitable to be backed by venture can run as normal businesses.

“Venture capital should always go to the one that can give you a higher return, albeit riskier,” he said.

There is more optimism for the first half of 2024, with all three investors noting that market conditions are still favourable for founders looking to build a business. Sabuncu noted that the current funding winter has the upside of reducing competition.

“If you can genuinely add value to your customers or businesses, people are open,” she said.

Lim sees 2024 as a good starting point after the booming valuations and funding of 2021 and 2022. After the hubris, serious founders and investors are the ones left behind to continue building in the startup ecosystem.

“We’ll be at the start of a sustainable good tech cycle,” he said.