Venture investors bet big on SE Asia's potential
Venture investors are increasingly viewing Southeast Asia as one of the world’s most attractive regions. Asia’s vibrant start-up scene, bolstered by the adoption of artificial intelligence (AI), is drawing investment back after a challenging period.
“Southeast Asia stands out as one of the most attractive places in the world to be investing in," said Adrian Li of AC Ventures, at a recent Tech in Asia conference in Jakarta.
"Fundamentally if you look at the demographics and the structural tailwinds in terms of population growth, even the slowest growing economy in SE Asia is growing two or three times faster than any country in Europe, for example."
This positive outlook contrasts with a significant drop in venture funding in Asia since the post-COVID boom of 2021.
OUTLOOK VERSUS INVESTMENTS
Globally, VC investments from seed to series A have decreased by 60-80% from that peak.
Li noted, “Start-up funding has fallen off a cliff in the last couple of years, but this year we are maybe on track of having $3-$4 billion of funding for Asia. The last time we had that amount is probably going back to 2016-17. That is quite a significant reset.”
AC Ventures
This shift is part of a broader re-evaluation of emerging markets (EM), which have underperformed developed markets since the EM equities bubble peaked in 2007.
However, as Nicholas Nash, managing partner and co-founder of Asia Partners, highlighted during the conference, EMs have delivered stronger long-term returns.
“This mean-reversion to trend that has taken place in EM equities since 2007 has caused many global investors to lose interest. That won’t last forever,” he said.
While Asia is poised to attract increasing foreign capital, investor expectations have evolved.
“The capital is there but the criteria for deployment has changed,” said Jefrey Joe, co-founder and general partner at Alpha JWC Ventures.
It’s often difficult to pinpoint why one company fails while another succeeds, even when teams have similar attributes.
According to Li, the safest option for investors is to seek out companies and business models that have been proven in other markets.
“In countries like Malaysia and Indonesia, since they are playing catch up, you don’t have to reinvent the wheel; you can localise a proven business model in order for it to be more effective in your local market,” said Li.
“As an investor, you would expect to have a lot of questions about the business, and the questions should really be a lot more about the team and the founder’s experience in building the company; how they are hiring and problem solving.
“That is not talked about enough in the pitch process,” said Li.
CROWDING INTO AI
At the conference, almost every start-up pitching for investment highlighted AI as a core part of their strategy.
However, many of these companies are not true technology platform firms but technology-enabled businesses. As such, they are likely to be valued more like traditional business than pure technology companies.
Valuations are also being recalibrated, as funding becomes more selective and the competitive environment drives down profitability.
“I’m a huge proponent of the intersection of technology and entrepreneurship, and of delivering companies of value and impact to the markets on SE Asia, but I think all of us, entrepreneurs and investors alike, have to reset our expectations of how big these companies can be,” said Li.
This adjustment also affects the amount of capital a company truly needs.
“It’s not helping anyone when you have inflated valuations and excess use of capital.”
Nonetheless, the consensus at the Jakarta event was that the swift adoption of generative AI (GenAI) and relevant technologies in Southeast Asia will be a significant boon to the region.
“This era we’re entering with GenAI is going to advance significantly the opportunities for entrepreneurs. And it provides investors with opportunities to invest more broadly, so that you’re not necessarily investing in a GenAI company but in technology-enabled segment," said Lai.
GenAI will do to many companies what the internet and digitisation did to successful companies in the past decade.”