Confidence in SE Asian startups remains strong as funding tumbles, says VC

With the prevalence of mobile users and a relatively young population, Southeast Asia has established itself as a digital hotspot. The region continues to attract investors seeking opportunities beyond India and China. A steady flow of capital for tech firms is critical for the digitalization of many sectors in Southeast Asian countries.

Yet a recent report by Singapore-based early-stage investment firm Cento Ventures shows that tech investment in the region has slowed down significantly, going from US$12 billion in 2018 to US$7.7 billion in 2019. There is a pressing concern about startups’ profitability as well as how the coronavirus outbreak will impact business worldwide.

So it’s fair to ask: should we still be optimistic about the startup scene?

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To answer that question, KrAsia recently spoke with Mark Suckling, a partner at Cento Ventures and one of the report’s authors, to hear his take on the matter.

There has been a healthy dose of optimism in Southeast Asia in recent years regarding tech investments, tech-driven businesses, and innovation. What can we draw from the drop in total tech funding from US$12 billion in 2018 to US$7.7 billion in 2019?

When we look back, specifically to 2018, billions of dollars were raised by the region’s unicorns. A number of major funding rounds were announced in the first half of 2018 – for example, Lazada’s US$2 billion, Grab’s US$2 billion, and Gojek’s US$1.5 billion.

Last year, the unicorns raised less money. For example, new investments at Grab and Gojek appeared to be smaller than in 2018. However, we note that these established unicorns are creating separate units (such as in financial services), which can raise their own capital independently. While it appears that total capital invested in 2019 was lower than in 2018, this may only be a temporary phenomenon.

However, we should note that when companies reach later stages, it becomes very difficult to define an individual round. Many of them have multiyear fundraising initiatives. Funding for Grab in 2018 and 2019 amounted to US$5.1 billion, while Gojek collected US$3.7 billion during that time.

I wouldn’t draw a conclusion that there’s a slowdown. It’s also possible that we will see the big rounds announced in 2020 by these late-stage companies for the money that was committed in 2019.

One of the most noticeable trends in 2019 is that it saw a record total of 608 tech VC deals. The total amount invested in smaller deals (less than US$50 million) also set a new record of US$2.4 billion, up from US$1.5 billion in 2018. This is a strong sign of continued healthy investment interest in the region’s startups.

It’s interesting to note that the unicorns’ financial arms or separate units can raise money as their own entities, separate from their parents. What should we look out for in this trend in the coming years?

Both Grab and Gojek started out in ride-hailing and have developed a whole bunch of other services – we refer to this in our report as being “multi-vertical.” In 2019, we saw that some of these initiatives – such as financial services, lending, insurance services – were pushed much further.

Potentially, this can lead to the situation at Alibaba, where you have Ant Financial as a standalone business. That has not quite happened yet with either of these companies, but it’s not unimaginable that their financial services can become standalone entities and raise money independently.