Southeast Asia’s funding winter may end next year – but tech companies need viable paths to profitability

Venture capital firms in Southeast Asia expect fundraising to accelerate in 2024, but tech companies need to demonstrate “clear” and “viable” paths to profitability.

Global macro headwinds such as inflation and high cost of capital have driven private funding deployment to its lowest level in six years, according to a report by Google, Temasek and Bain & Company.

According to KPMG, venture capital funding in the Asia-Pacific region is expected to decline to $20.3 billion in the third quarter of 2023, the lowest since the first quarter of 2017. In the second quarter, VC funding into the region stood at $24.2 billion.

Globally too, investment and deal volumes have reached multi-year lows. KPMG said global VC investment in the third quarter was at its lowest level since the third quarter of 2016, while deal volume was at its lowest since the second quarter of 2019.

“I believe, next year, you will see a relaxation of Southeast Asian deployments [of venture capital],” said Peng T. Ong, co-founder and managing partner of Monks Hill Ventures.

Jussi Salovaara, co-founder and managing partner of Asia at Antler, expects VC funding to improve in the last six months of 2024.

“We believe this is on the rise, particularly in the second half of the year. There has certainly been a shock due to rising interest rates, the decline in venture funding, followed by a decline in limited partner capital and fund more Became selective . . . so it takes a while to recover,” Salovaara said.

Venture capitalists interviewed a year ago said they expected there would be greater demand for funds in 2023 than in 2022.

“Most VCs were more selective,” said Antler’s Salovaara. “But we weren’t,” he said, adding that Antler was still deploying capital.

The same Google, Temasek and Bain & Company report showed that “dry powder,” or the amount of money available to VCs for deployment, grew to $15.7 billion at the end of 2022 from $12.4 billion in 2021, as Investors have become increasingly cautious about investment options. ,

But to attract funding in this current economic climate, tech companies need to show investors that they have clear and viable paths to profitability, the report said.

“If 2023 was the gear shift year, 2024 will be the year of the turning point,” said Yinglan Tan, founding managing partner of Insignia Ventures Partners.

“And it will be a tight corner, with pressures from geopolitics, interest rates, public markets, a maturing competitive landscape that will impact monetization and capital allocation for tech companies.”

Tech companies prioritize growth over profitability in the early years, which usually means burning a lot of cash. But with growth slowing due to global economic headwinds, they have been forced to refocus their focus on profitability and be more prudent with costs.

“The opportunity here is to find entrepreneurs and companies that… [are] Optimizing what is within their control, for example, costs or growth strategy, to resist pressures and become capital efficient in growth,” Tan said.