South-east Asian angel investors still bullish on startups despite downturn

ANGEL investors are still making fresh bets on early-stage startups across South-east Asia, drawn by opportunities in up-and-coming sectors such as electric vehicles (EVs), as well as attractive valuations. This is despite the ongoing “tech winter” where institutional investors have tightened their purse strings.

“Downturns are the best time to angel invest. My best angel investments today were made in the early days of the recovery from the Great Recession,” said James Tan, a longtime angel investor whose post-2008 bets include classifieds platform Carousell and proptech startup 99.co.

In the current tech winter, Tan is bullish on opportunities in Malaysia, the Philippines, and Vietnam. He is also looking into climate and sustainability challenges that are addressable by startups.

Tan, who is also managing partner at venture capital firm Quest Ventures, sees other angel investors being active. “Wealthy individual investors are stepping up. Without the constraints of rigid fund structures, these angel investors are able deploy faster at current attractive valuations.”

Another angel investor, JJ Chai, is on track to do a dozen direct startup investments this year. This is unchanged from the average number of deals he has done in recent years.

A former executive of tech companies such as Airbnb and Carousell, Chai runs his own e-commerce aggregator startup called Rainforest. In his personal angel investments, he continues to focus on startups in e-commerce, direct-to-consumer brands and marketplaces.

Angel investors are a quiet but influential force in the startup scene – often backing founders even before they launch a product or make any revenue. While angel investing was once the domain of a wealthy few, it has expanded in South-east Asia with the rise of the angel-investing networks, as well as startup founders and alumni joining the fray.

Deals became extremely competitive between 2019 and 2021, when the tech frenzy drove valuations sky-high. Fintech entrepreneur and angel investor Vidit Agrawal recalls having to sometimes make snap decisions to get into deals. “There have been cases where, you’re in the middle of a chat for 10 minutes, and the founder is like ‘yes or no’? (That was) two years ago. And you had to make the call that minute, because somebody else would take it.”

These days, such instances are rare. Competition for deals has thinned out, and the more casual angel investors – who joined deals just to experiment – have dropped off the scene. In a survey of about 100 angel investors between May and June, 25 per cent of respondents said that they had paused their angel-investing activities. Another 6 per cent totally stopped, according to the survey, conducted by angel-investment network AngelCentral.

Cheque sizes have also fallen to the range of S$20,000 to S$30,000, compared to S$30,000 to S$100,000 previously, said Huang Shao-Ning, partner and chief angel of AngelCentral.

However, the market seems to be returning since the survey was conducted, added Huang. Attendance at the network’s startup pitch days has gone up to 30 to 40 individuals since June, compared to 15 to 20 earlier in the year.

Reservations for AngelCentral’s coffee chats – where potential investors get to know more about angel investing – have also been going up, and the network recently organised a study trip for angel investors to Vietnam. “More of our members are coming out from the cave… There’s actually quite a few who are SME owners; they have been in the space, dropping in and out. But now it’s more obvious that they are cutting cheques again,” she noted.

Yaw Yeo, of angel investor group XA Network, similarly observes that there “there’s still appetite to invest into early-stage startups”.

“Fintech is still something that people are actively interested in. There’s also interest around electric vehicle-related stuff – it can be battery-charging solutions, it can be EV two-wheelers… especially in Indonesia and Vietnam,” said Yeo, a former Twilio and Alibaba Cloud executive who started angel investing around 2010.

Epic Angels, a female investor collective, is seeing more angel investors interested in startups with a social impact, said its founder and managing partner Maaike Doyer. Its recent investments include Bangladeshi online pharmacy Arogga and Japanese digital bank Habitto.

The network has more than doubled its base of angel investors, from 100 at end-2022 to about 250 currently. “Everyone is talking about the VC winter. It’s the opposite for us,” noted Doyer.

There are also some angel investors who are hoping to recycle their capital. Agrawal, for instance, is holding back on deploying fresh capital. He has hit the maximum amount he wanted to allocate to this asset class, having started angel investing about nine years ago.

But he pointed out: “Some of the deals that are coming in are at a very lucrative valuation. So if I can get an exit then I can go into a new deal at a US$3 million to US$4 million valuation, not US$15 million, which used to be the norm two years ago… I can recycle the capital (in) a much more enticing and just financially a better deal.”

Staying realistic

That said, many angel investors are also more cautious about startups’ financial performance, especially their cash runway.

“In this environment, I prefer capital-efficient startups where the founders show that they can keep iterating and improving their product with low burn rates. I also prefer if they can get to 18 months or longer with the round they are raising, to buffer for the situation where it may still be a tough environment next year,” said Chai.

Doyer of Epic Angels likewise noted that investors’ emphasis is now more on monetisation, rather than metrics like user growth. She sees this as a healthy trend. “That’s what it should be. Before you could get away with like, ‘we have 50,000 users’. That doesn’t really work anymore.”

Angels are also maintaining a sense of realism about the high risks, especially with the illiquidity of the asset class. Yeo of XA Network views angel investing as a chance to learn from entrepreneurs, rather than a pure money-making tool. “At the early stage of investing, the outcome is more likely to be some multiple or zero… Are you even going to see the money, and when you are going to see it back, is a big question mark.”

Nevertheless, the angel-investing scene still appears poised for growth. Agrawal welcomes the maturing of angel investing in South-east Asia. “When I started angel investing, there was no one I could go to; you had to make your own mistakes to learn. That’s changing now; there’s local resources available to join courses and really understand what angel investing is, and how you should approach this asset class… It’s very cool that’s happening in our market.”