SINGAPORE (Sept 30): Amid frothy valuations for start-ups and scepticism about their profit and growth projections, venture capital (VC) deal flows in Southeast Asia have slowed from the year before. Even so, industry players are observing a trend of “fewer but bigger” deals.

“Based on our data, deal flow has indeed slowed. But we’ve simultaneously observed a spike in the total volume of funds raised,” says Sng Khai Lin, co-founder and chief financial officer of Fundnel, which matches companies in the pre-IPO stage with investors.

“This trend is reflective of general market conditions in Asia, which is driven in part by inflated valuations, owing to a growing preference among companies to remain private. In addition, we are witnessing a burgeoning number of public market investors flocking to the private market for a variety of reasons, including higher returns.”

Separate reports from Cento Ventures, a VC fund, and Preqin, a financial data company, concur with Sng’s views, although they have contrasting results on the number of deals: Cento’s report indicates a rise in the number of deals, whereas Preqin says the opposite. Both reports show the amount of money that VCs doled out to start-ups fell in 2019 and, consequently, the total amount of money pumped into the ecosystem has shrunk.

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According to the “Preqin Markets in Focus: Private Equity and Venture Capital in Southeast Asia” report, 222 deals were closed as at June 30, with an aggregate deal value of US$3.4 billion ($4.7 billion). In its report, Preqin also noted growth in Series B and C financing, from US$600 million to US$1 billion in the period, suggesting that the so-called “valley of death” financing gap for start-ups is narrowing.

In Cento Ventures’ report, the aggregate deal value in Southeast Asia was higher than Preqin’s at US$6 billion, but deals included initial coin offerings, project financing and corporate spin-offs, and amounted to 332 transactions. The report noted that almost all deals, except those worth at least US$50 million, were growing. The number of big deals — those worth US$50 million and above — fell from 19 the year before to 14 so far this year.

From the perspective of Fahim Salam, co-founder of Bangladesh-based logistics start-up Loop Freight, despite the changing numbers, the fundraising challenges are still the same: Start-up founders need to be able to articulate their vision clearly, and back it up with strong numbers and a future that “looks green”.

Salam observes that investors have become more mature and more thorough in their due diligence. “I believe this was needed primarily to weed out start-ups with not-so-viable business plans and also prepare the ones with good business plans for solid execution,” he says.

Conversely, Aaron Tan, founder and CEO of Carro, a regional car marketplace, says fundraising has got easier. “We feel there is more capital in the market going after fewer quality deals. So, overall, fundraising hasn’t been more challenging in 2019 versus 2018,” Tan tells The Edge Singapore.

Some venture capitalists, such as Damian Tan, managing director of Vickers Venture Partners, is still seeing a steady pipeline of deals. “Typically, there isn’t any slowdown in start-up activities. In fact, it usually increases year-over-year. Start-up ideas and founders’ aspirations don’t diminish. It’s in line with global growth trends,” he says.

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Indeed, deals are still being done — and some big ones too. In March, China-based, Nasdaq-listed YY acquired Singapore-based Bigo Technology for US$1.5 billion. Bigo operates a portfolio of video broadcast services and is known for its live-streaming app, with more than 400 million monthly active users around the world.

Still, Carro’s Tan notes that venture capitalists are turning more cautious. They are still keen to invest and believe in this region’s potential, but they are less generous in giving start-ups the kind of valuations asked for. “Overall, they remain bullish with the region but are concerned that valuations have gone up, especially in recent years,” he says.

Indeed, as even major players such as SoftBank Group’s Vision Fund is finding out, there is a downside to making outsized bets on start-ups, particularly those that have yet to prove their viability. The fund, which gained fame around the world for its US$100 billion war chest, is experiencing the effect of the underwhelming performance of its portfolio companies, and is looking to write down some of those that have gone public.

It is reportedly finding it not easy to raise a second, and larger, fund, though. Part of the reason might be the IPO track record of companies that Softbank invested in. Of the Vision Fund portfolio companies that have gone public, only Guardant Health, a US healthcare company, and 10X Genomics are trading above listing price. Both Uber, the most high-profile investment made by Softbank, and Slack are trading at below IPO prices. Perhaps the most infamous of its investments is WeWork, which was once valued at US$47 billion. The shared office space provider had a disastrous IPO process and founder Adam Neumann has since quit.

Indeed, founders may be beginning to find out how much power investors command. One prominent investor, Tim Armour, chairman and CEO of Capital Group, has suggested that the “glory periods for companies to remain private and get funding and do things without making money for a long period of time” are over. Speaking at a Financial Times event, Armour said: “The reality is that the public markets scrutinise more at times.”

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<a href="http://www.theedgesingapore.com/capital/tongs-portfolio/declining-attraction-unicorn-ipos" target="_blank">See also: “Declining attraction of unicorn IPOs”</a>

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