Tech investments in Southeast Asia remain robust this year. While total deal activity remained relatively constant at around 1,200, this year’s deal value has already surpassed last year’s by some 15%, mainly driven by larger ticket sizes that are 13% higher y-o-y on average.
However, the funding landscape tells a tale of two ends: early-stage deals are continuing with strong momentum, while latestage deals are seeing more pronounced dips and a pause in IPOs.
Even after a record high 2021, early-stage investments funding continued pouring in throughout 1H2022, say Google, Temasek and Bain & Company in the seventh edition of their annual e-Conomy Southeast Asia report, released on Oct 27.
With Southeast Asia relatively insulated from macro headwinds, ticket sizes have increased by 40%–60%, giving investors reasons to stay optimistic about the region’s longterm prospects in the private market.
Amid global headwinds and a recent series of inflated late-stage valuations, however, so-called E+ megarounds, which broadly refers to companies that have postponed their listings, have seen funding dry up, as these pre-IPO companies struggle to build a track record of profitable growth.
After a bull run in 2021, a cool-off is happening in 2022. Last year, leading digital players in Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam raised IPO and post-IPO financing rounds ranging between US$1 billion ($1.4 billion) and US$6 billion, comprising over 80% of the digital economy’s total public funding.
Now, rising interest rates, plummeting stock valuations and global investor pivots to safe havens are likely to bring IPO prospects to a near-halt for the next 12 to 18 months.
Bain & Company conducted interviews and a quantitative survey of 30 Southeast Asia-focused venture capital (VCs) investors in 3Q2022. The survey found that most VCs expect valuations to continue dwindling; only a small minority sees recovery in the near-term.
Three in four investors see valuations declining by at least 10%–30% in 2022, while less than one in four investors believe valuations will only return to 2021 peaks in 2023 or 2024.
The VC community, Temasek included, has “certainly” observed cautiousness emerging in the market, says Fock Wai Hoong, deputy head, technology and consumer and Southeast Asia at Temasek. “I think it’s the rising rate environment and macro headwinds that have impacted the public markets, and that has trickled down into late-stage growth market sentiment.”
That said, Fock remains optimistic, pointing to some US$15 billion in dry powder by VCs in the region as at 2021, slightly down from US$16 billion in 2020 but up from US$12 billion in 2019. “The shift in the path to profitability certainly also would indicate that companies will continue to strengthen. I think when the market does come back, they will be better positioned to hit the capital markets.”
Tightening the belt
Digital financial services (DFS) has overtaken e-commerce in investment volume. Across Southeast Asia, DFS is now the region’s top investment sector, growing its share from 21% in 1H2021 to 26% in 2H2021 and to 31% in 1H2022.
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E-commerce, meanwhile, saw its share of the pie shrink from 36% in 1H2021 to 16% in 2H2021 and to 18% in 1H2022.
Critical “backstage” enablers like payment gateways and monetisation solutions clocked two of the year’s biggest private deals, making them the sector’s superstars, says the report.
“Investors will be on the lookout for more infrastructure-based solutions as they seek to expand Southeast Asia’s digital consumer population through DFS.”
With the rise of buy now, pay later (BNPL) platforms, investor interest in lending has multiplied, with deal value doubling from 1H2021 to 1H2022. Between BNPL players, super-apps, traditional banks and more, competition is intensifying and consolidation is likely in the next couple of years, reads the report.
Digibanks and Web3 fintechs have been turning heads too, with investments doubling y-o-y. More than 80% of VCs surveyed expect to increase their focus on healthtech, Software-as-a-Service and Web3, while enthusiasm for edtech cools.
“With the return to in-person training and learning, demand for online-based learning has cooled off significantly compared to peak levels in the past two years. Going forward, it will be vital to consider hybrid learning forms to sustain growth,” says one respondent.
After years of cash burn, most household tech names in the region are expediting their paths to financial sustainability.
Grab Holdings has accelerated its expected breakeven timelines for its core food deliveries and overall deliveries segment by one and two quarters, respectively, to 1Q2023 and 2Q2023.
Meanwhile, GoTo Gojek Tokopedia expects group contribution margin to turn positive starting 1Q2024, up from 4Q2024. Bukalapak.com aims to be Indonesia’s fastest e-commerce player to break even, targeting to turn ebitda-positive by end-2023.
Shopee, the e-commerce of arm of Sea, is maintaining its 2023 breakeven target for the Asia market, less headquarter costs, said group chief corporate officer Wang Yanjun at the e-commerce platform’s 2QFY2022 earnings call.
“From a regional perspective in Southeast Asia, most countries are too small to support local champions,” says Florian Hoppe, partner and head of digital practice in Asia-Pacific at Bain & Company.
“Share price declines and the spectre of job cuts shouldn’t overshadow the fact that these are all highly successful companies,” he says. “They all have sustainable business models; if they truly dial back and focus on profitability, they could get back quite quickly.”
Chinese players enter
Historically, the US experiences peak VC investment activities while riding on prolonged periods of low interest rates, like in the past few years, says the report.
The recent increase in long-term US treasury rates has made investments in high-growth tech companies less attractive from a financial perspective, leading to a gradual slowdown in the latter half of 2022, akin to VC trends in the US.
Southeast Asia-focused VCs may opt to re-invest in their own portfolio companies and weather through the funding winter, but Temasek’s Fock also sees new investor interest coming from North Asia.
“What we’re seeing is Chinese investors starting to pivot, given how growth is slowing in China, looking for attractive potential investment destinations.”
Southeast Asia is certainly one of those destinations, Fock adds. “I might also point out that we are seeing migration of some tech talent [and] Chinese entrepreneurs in some parts of Southeast Asia. This creates a very fertile hotbed for growth and innovation.”
Amid headwinds faced by Asian rival city Hong Kong, Singapore’s digital economy will continue its robust growth trajectory, says Hoppe. “Competition within the digital financial services landscape will further intensify, and the growth to 2025 will be driven by digitalisation of investments and lending via digital banks and fintechs.”
While the market outlook is uncertain, Fock says opportunities abound. “Across the board, whether that’s new challenger startups or incumbents, quite frankly, opportunities are broad and open to all. Ultimately, it’s about whether you’re solving real business problems.”
Infographics: Google, Temasek, Bain & Company