Venture capitalists eye exits to improve sentiment in 2025 as funding winter shows signs of easing
While VC activity was muted in the first half of 2024, things have started to pick up
THE year 2024 has not been a good one for players in the venture capital (VC) space.
“There was a fair bit of optimism for VC in this region to pick up, but it has lagged behind quite a fair bit,” said Looi Qin En, a partner at corporate VC firm Saison Capital.
While other private equity segments recovered in 2024 to pre-Covid levels, VCs – funding to startups and early-stage companies with high growth potential – have had a “disappointing” year, he said.
But market watchers believe the funding winter for VCs is showing early signs of easing.
While VC activity was muted in the first half of 2024, things have started to pick up.
As Neo Weisheng, a partner at VC firm Qualgro, put it: “Capital can’t sit still” – and the dry powder accumulated during the boom years has to be deployed.
In the second half of 2024, some fundraising announcements by both VCs and startups made headlines. These included VC funds Intudo, Square Peg and Wavemaker, as well as startup Omni HR.
“It seems to be picking up a little, and I think it’s partly due to the easing of the interest rates in the second half of the year,” said Willy Chang, partner at consultancy Bain & Company.
However, a number of VC funds have missed their fundraising targets, and late-stage funding and exits are still far and few between.
Exits remain key
Transaction levels are still very soft, indicated Angela Lai, head of Asia-Pacific and valuations, research insights, at data platform Preqin.
Based on half-yearly surveys conducted by Preqin, investors have been looking to reallocate funds out of the asset class in the past couple of years. The trend has been ongoing since its June 2022 edition of the survey, including the June 2024 edition.
“In VC, we still see down rounds data trending at historical highs. A lot of companies, if they even get to transact, are more likely to accept lower valuations than before,” she said.
But the tide appears to be turning. In Preqin’s latest poll in November, investors said they are now more keen to allocate more funds into VCs.
However, what the market really needs is for exits to come back.
With exits, capital can be returned to investors to be recycled back into VCs, which in turn provides funding for startups. Lai noted that the lack of certainty of exits will continue to weigh on investors’ expectations of performance, which will drag sentiment down.
Foo Jixun, senior managing partner at investment platform Granite Asia, believes that the key to a VC recovery lies in the little things.
For example, he said, share prices of counters such as Grab and Sea will have to recover for confidence to return, and the market needs to see that these companies are making impact and are profitable.
“A lot of times, investment is counterintuitive; you have to be a bit contrarian – the best time to invest may not be the best time to exit,” said Foo.
Meanwhile, activity around trade sales – where a corporation acquires a startup – has been picking up. But few transactions have actually happened.
The way Saison Capital’s Looi sees it, corporates could be trying to kick-start conversations as valuations have dropped to more palatable levels. However, there are still valuation mismatches, and discounts from the 2021 peak might not yet be enough for them to put pen to paper.
On the other hand, VCs could also be partly to blame for trade sales transactions falling through. Some market observers said several VCs have been blocking deals in order not to crystallise losses on their portfolios.
Exiting via a trade sale is something that has always been available, but more VCs are now seeing it as a viable exit plan, said Qualgro’s Neo.
However, not all VCs are necessarily equipped or have the expertise to prepare their portfolio companies for a trade sale.
“Having that muscle to build and position companies as an acquirable profile for US corporates is a different game,” said Neo.
Across the region, startup ecosystems such as those of Malaysia, the Philippines and Brunei are ready to go with capital from governments and conglomerates, said Jeffrey Seah, managing partner at VC firm MSW Ventures.
However, the key to supporting growth in these markets will be the support given to incentivise and galvanise talent, which requires corporates to step in to provide exits, he said.
Whether or not South-east Asian corporates will step up as a potential exit avenue still remains to be seen; the region will require success stories to show that it is possible.
“Success begets success,” said Neo of Qualgro. “A couple of guys get the ball rolling, and you’ll be sure that it will collect steam.”
The road ahead
VCs are optimistic about 2025, with many predicting more fundraising activity for startups and funds alike. Exits, however, may not be as forthcoming as many would like.
“But (they) will start to pick up and will be better than before,” said Neo.
There are signs that positive tailwinds are forming, with lower interest rates potentially translating to more capital being available for VCs to tap. Markets are opening up for initial public offerings (IPOs) as well.
“The window is starting to open. There’s (digital bank) Klarna in the US and a couple of firms here as well,” said Saison Capital’s Looi.
But challenges will remain around liquidity, trade sales and post-IPO performance.
VCs are likely to continue to see the re-emergence of domain expertise, with funds going back to investing in what they have knowledge in. Rather than investing in every hot topic or trend that comes along the way, there will also be a continued focus on financial metrics and fundamentals.
“What is sexy (to VCs)? Sexy is a business that can generate revenue and demand,” said MSW Ventures’ Seah.
