Markets are down, but you should double up on seed-stage checks

Henry Wong co-authored this article.

Seed-stage investment deals are down in Southeast Asia, and that’s a big missed opportunity.

With global uncertainties on the up and funding hard to come by, the VC landscape has shifted. Still, history shows that market contractions are opportunities for investors, as they offer the chance at gaining superior returns over the long run.

Image credit: Timmy Loen

Some investors are pivoting to private equity-like strategies. While this is mostly in the US and Europe, Asia will likely follow over the next couple of years.

Despite this, we believe that seed-stage investing has great promise, especially for emerging fund managers. But why seed, and why now?

Macro influence

Periods of economic volatility, such as the time after the global financial crisis and the aftermath of Covid-19, have spawned innovations.

For instance, Airbnb and Uber took advantage of changing consumer behaviors after the global financial crisis and employed cost-conscious models. Similarly, companies like Zoom and BioNTech scaled quickly because of Covid-19.

Today’s environment echoes these periods: Valuations are reset, megafunds are cautious, and founders are pushed to build sustainable businesses.

Structural forces within the VC space also make seed investing more attractive now.

For a start, the growth of megafunds in the last decade has amassed a historic level of dry powder, which is capital that must eventually be deployed. Though dry powder in the Asia Pacific has declined from its peak in 2023, fund managers remain under pressure to invest this capital.

The economics of VCs do encourage large funds to focus on late-stage deals. With these investments, they can write bigger checks and earn higher management fees and carried interest.

See also: Lean giants or labor armies? SEA’s revenue per employee revealed

It’s also more efficient to make a few large deals rather than lots of smaller ones, as less due diligence will be required. This dynamic has left seed-stage firms underserved.

Baked in advantages

Which sectors hold promise?

What this means for founders and investors