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The term “funding winter” has permeated discussions from panels at tech conferences to casual cafe conversations over the last twelve months. The fundamental question pertains to venture capital liquidity constraints induced by prevailing macroeconomic and political challenges. Will these constraints persist in Southeast Asia, or can we anticipate a resurgence in funding levels to reach heights achieved in 2021? During that year, the tech sector in the region witnessed a historic high, with investments exceeding the unprecedented milestone of US$20 billion.

Let’s review the global funding trend over the past decade, encompassing venture capital investments into startups across the Americas, Europe, the Middle East, Africa, and Asia, including Southeast Asia. The chart below illustrates a consistent upward trajectory in funding from 2012 through 2022. Notably, 2021 emerged as an exceptional year, marked by an unprecedented surge in capital deployment with investments nearly 1.5 to 2 times higher compared to the preceding and subsequent years. As we approach the conclusion of 2023, it is important to acknowledge that the full-year funding figure is still awaiting final tallying. However, a preliminary estimate, based on a rough calculation, suggests that approximately US$340 billion may have been invested during this year. This would represent a dip from 2021-22 but on par with 2018 through to 2020 funding levels.

In retrospect, the venture capital landscape witnessed an unprecedented bull run in 2021, characterized by a substantial influx of investment dollars from both corporate and venture tourist investors into the startup sector. If we were to eliminate the 2021 funding spike from the chart above and draw a trendline across the past ten years as shown in the chart below, a compelling narrative emerges. Over this period, invested capital has displayed a consistent and progressive growth pattern, expanding by a noteworthy factor of 5 to 7 times.

What sets this trend apart is the discernible shift in capital allocation, with an increasing proportion being directed towards the Asia and EMEA (Europe, Middle East, and Africa) regions. This transformation in the funding landscape signifies a fundamental reorientation of global investment priorities within the tech and venture sectors. The significant surge in investment activity in 2021, driven by both corporate and venture investors, underscores the industry’s dynamic evolution and its resilience in the face of economic challenges.

In the context of venture funding in Southeast Asia, the second quarter of 2023 saw a notable increase, reaching a total of $2.1 billion. It’s worth observing that despite the increase in total funding, the deal count was lower during this period. According to CB Insights, Indonesia emerged as the leading recipient of funding in the region during 2Q 2023, with its startups securing $1 billion, an extraordinary 233% surge compared to the preceding quarter. Singapore (a base for Southeast Asia startups) closely followed with $914 million in funding, although this represented a 15% decline quarter-over-quarter.

The past quarters also witnessed an uptick in exits within the Southeast Asian startup ecosystem. This was particularly evident in the increased number of M&A exits for the second consecutive quarter. In this evolving economic landscape, more tech companies are grappling with the challenge of managing their liabilities and raising funding. As a result, an increasing number of these companies are opting to pursue mergers with larger competitors as a strategic move to sustain their operations and keep their businesses afloat. Startups are adapting to the challenges posed by evolving market conditions, which may include increased competition, funding constraints, or changing investor sentiment. Mergers and acquisitions can offer a viable path forward for startups seeking stability and growth, while also presenting opportunities for larger companies to expand their market presence and capabilities in the region.

In the current funding landscape startups are facing the imperative of planning for an extended runway as the process of closing financing rounds has become considerably protracted. Notably, earlier-stage companies, ranging from Seed to Series A, are finding it necessary to allocate up to 2 years for fundraising, representing an increase from the 16-month average observed just a year ago. Meanwhile, statistics reveal that later-stage companies, specifically those at the Series B stage and beyond, experience even more extended timelines, with fundraising cycles stretching to as long as 34 months.

Several factors contribute to these extended timelines, with one significant reason being the heightened focus of global VCs nursing their existing portfolio companies. Many VCs have slowed down their pace of new investments, with some openly admitting that they have not committed to new deals over the past 12 months. This trend has particularly impacted fund deployment, which has contracted by 25-30% in the current year, especially in regions like Indonesia and at the Series B+ stage. However, VCs remain active in earlier-stage cycles, notably at the Seed and Series A stages.

Despite these challenges, there exists a prevailing sentiment of cautious optimism regarding the future. VCs believe they will gradually increase their investment activities toward the latter part of 2023 and into 2024, provided that macroeconomic conditions continue to improve and unforeseen disruptive events are avoided. In the midst of this downturn, industry insiders, like Oswald Yeo, CEO of recruitment startup Glints, underscore the resilience and growth potential of the Southeast Asian startup ecosystem. Across various industries and verticals, a positive outlook toward sustainable growth persists, with a significant percentage of surveyed companies (86%) expressing their intentions to continue hiring in 2023. This challenging period is also expected to cultivate the emergence of strong founders who can weather such adversity, building businesses that can withstand even the most challenging circumstances.

Tech IPO Window Resumes Business, But Not Wide Open

Despite these challenges, there are positive offshoots returning to the public markets with several high-profile IPO listings leading the charge, which hopefully would trickle down to the private markets. The month of September 2023 witnessed a series of notable IPOs, underscoring the enduring interest in technology-driven firms seeking public equity. Among these, Arm Holdings plc, a Softbank-backed entity, stands out, with an IPO that initially valued the company at approximately $54.5 billion and at one point surging to nearly $72 billion. Arm Holdings specializes in the architecture, development, and licensing of high-performance, energy-efficient IP chip solutions, integral to the functioning of over 260 technology companies worldwide, including major smartphone manufacturers such as Samsung, Huawei, and Apple.

Another prominent tech IPO in the same period featured Instacart, a grocery delivery service, which, having been previously valued at $39 billion, debuted on the NASDAQ with a fully diluted valuation just surpassing $11 billion. Concurrently, Klaviyo, a marketing automation firm under the umbrella of Shopify, made its debut on the New York Stock Exchange, achieving profitability and obtaining a $9 billion valuation, substantiated by $345 million in raised capital.

Conversely, some startups have opted to defer their IPO plans. VNG Ltd, a Vietnamese internet company with backing from Tencent, chose to delay its $150 million U.S. IPO until 2024, citing the prevailing volatile market conditions. VNG was established in 2004 and hailed as Vietnam’s inaugural unicorn, operates across diverse sectors encompassing online gaming, payments, cloud services, and the preeminent Vietnamese messaging application, Zalo.

Singapore-based cancer diagnostics firm Mirxes has submitted an application to the Hong Kong Stock Exchange for an initial public offering, potentially becoming the first non-Chinese and non-Hong Kong-based biotech company to list under a specialized provision. This decision follows a $50 million Series D funding round, which ascribed a post-money valuation of approximately $600 million to Mirxes.

Industry analysis by PitchBook indicates a queue of nearly 80 IPO candidates including TikTok, Stripe, Discord and more who are lining up to go public. While there exists a discernible opening in the IPO window, investors are currently leaning toward a cautious stance for the remainder of 2023. Venture capitalists are advising their startups to consider deferring their IPO plans until interest rates have stabilized. The possibility of further interest rate hikes in the year, coupled with reduced expectations for rate cuts in 2024, could further influence market sentiment. Moreover, volatility in share prices for both Arm Holdings and Instacart underscore the necessity for prudence in the prevailing listing environment.

More Dry Powder Reason For Optimism In Thawing Of Equity Winter

In 2022, while the number of newly established funds experienced a decline, the total capital amassed by global funds reached an unprecedented pinnacle, totaling a staggering $162.6 billion. This achievement marked the second consecutive year in which capital inflows surpassed the significant milestone of $100 billion, defying challenging economic conditions.

According to DealStreetAsia’s 2Q 2023 report, Southeast Asian investors successfully raised an impressive US$3.72 billion in the first half of the year. Notably, the recent announcements have catapulted Southeast Asian venture capital firms beyond last year’s fundraising record of $4.14 billion. Pitchbook reported that the US largest public pension scheme, Calpers, which manages some $444 billion in capital, intends to increase its venture capital allocation by more than sixfold, from $800 million to $5 billion. These developments highlight a robust investor sentiment in the region.

Vertex Ventures, for instance, substantially exceeded its expectations by closing its fifth fund at a substantial US$541 million, surpassing its initial target of US$450 million. This achievement notably exceeded the US$305 million garnered for the firm’s previous fund, which concluded in 2019. Similarly, Monk’s Hill Ventures concluded its second fund at a remarkable US$200 million. Additionally, Singapore’s Temasek announced its strategic collaboration with the National University of Singapore and Nanyang Technological University Singapore, committing US$55 million to foster the commercialization of deep-tech ventures emerging from the research pipelines of these esteemed institutions.

The VC market landscape has undergone a notable transformation, shifting away from its traditional startup and founder-centric ethos to one that is more favorably inclined toward investors. Several key drivers underpinning this transformation include the widening gap between capital demand and supply, coupled with a discernible decrease in valuation upticks across various developmental stages.

In light of this evolving landscape, VCs are poised to continue deploying their capital; however, the terms of these deals are expected to skew more positively towards investors. Consequently, entrepreneurs are faced with the imperative to refine their business models and present a meticulously delineated roadmap toward achieving cash breakeven and profitability. Those entrepreneurs who can exhibit robust unit economics and pragmatic growth projections will find themselves in the most advantageous position when competing for coveted VC investments.

Developments In The Venture And Private Debt Sector

Smart money continues to flow into private debt, drawn to the favorable risk-adjusted returns and with plenty of headroom for future growth. The collapse of Silicon Valley Bank (SVB) in March 2023 did not dampen the appetite for venture debt, a subset of private debt. Banks across the world have jumped into direct lending to startups, seizing opportunities in a post-SVB era. HSBC picked up some of SVB’s assets and its team and went on an aspirational strategy to become the next SVB. HSBC announced a $3 billion Hong Kong/China fund and separately a $105 million (RM500 million) Malaysia New Economy fund that will be dedicated to providing high-growth, innovative companies with a suite of tailored debt solutions in their respective jurisdictions. In Japan, Aozora Bank announced its third $60 million (¥9 billion) venture debt fund for local start-ups, while MUFG launched two new venture debt funds worth $400 million for Japanese and European startups, reflecting strong funding demand as the market for initial public offerings remains dull.

BlackRock Inc estimates that between the end of 2018 and the end of 2022, the private credit market doubled in size from roughly $750 billion to $1.5 trillion. To further deepen its private credit offerings, BlackRock acquired Kreos, a provider of growth and venture debt in technology and healthcare in Europe and Israel who has committed around $5.6 billion in over 750 debt transactions, demonstrating strengthening investor demand for exposure to venture debt and private credit.

Venture Debt Dealflow

In the US across all stages, startups closed $6.34 billion across 931 venture debt deals in the first half of 2023, compared to $20.07 billion across 1,513 deals in the same period last year. The diagram below shows the debt committed to startups across different stage of development. While the debt commitment has reduced across all stages, it is more evident for early-stage startups. One possible reason could be the collapse of SVB who primarily operated in the early-stage market, sometimes lending to pre-revenue companies, while its new owner, First Citizen Bank, does not expect to step up to fill that void.

Debt capital remains in high demand among startups as companies turn to alternative financing. The number of new and repeat debt financing conversations has certainly increased. Lenders are however becoming pickier and seek more favourable covenant packages and warrant coverage, in addition to higher interest rates. Lenders also wants additional comfort that startups are on track to receive future investment and that their investors remain committed to the company. While lenders can benefit from a rise in interest rates, the converse is an increased loan repayment risk as increased cost of borrowing and tighter covenants means that borrowers need to operate within their means.

Funding Outlook For The Next Six To Twelve Months

The million-dollar question is how the rest of 2023 and 2024 looks like for the venture and tech sectors? Not to oversimplify things, there seem to be two groups of startups in the market currently: those that have raised funding in 2021/2022 (albeit at a high valuation) but that have adapted to the volatile market, conserved cash and growing sustainably; and another group that has continued to trailblaze growth but that has run out of funding and struggled to raise capital. Valuation expectation will need to be moderated and lenders are certainly witnessing an increase of queries for debt financing with or without new equity injection. In all certainty, entrepreneurs will need to start funding conversations much earlier in anticipation of the longer process.

Venture investors that take the brakes off and continue to invest in startups that have undergone business and capital rationalisation at an attractive entry point valuation may be capitalizing on being ahead of the herd with significant de-risking as the company has demonstrated added traction. The revival of startup funding over the next 6-12 months is intrinsically linked to several key factors reshaping the entrepreneurial landscape. As venture capital firms find themselves flush with more dry powder, they are eager to channel these resources into startups that have proven their ability to survive a major down cycle. This surge in available funding, combined with a slowly opening IPO market, creates a symbiotic relationship where startups have a clear path to exit strategies that appeal to investors. Moreover, startups are emerging from recent challenges as leaner and more efficient entities, well-equipped to maximize the capital they receive. This newfound efficiency not only instills confidence in investors but also ensures that the funding received is utilized effectively, ultimately fuelling the remarkable resurgence of the startup ecosystem.

The technology industry has been one of the most dynamic and fastest-growing sectors of the global economy in recent years. 2022 was a tale of two halves. The first half of the year (and even into Q3) continued on a positive note and benefited greatly from the COVID-induced growth on the user and innovation front. Globally, startups benefitted from the preceding year of funding strength which saw investors plough $621 billion into startups globally, including $20+ billion record funding for Southeast Asia startups.

Towards the second quarter of 2022, we surveyed our portfolio founders on the fundraising environment and business outlook. A clear majority of them were optimistic about the future, observed business growth but were already noticing the slowdown in fundraising. Amidst these uncertainties, three of our portfolio companies Deliveree, Believe, and Trusting Social raised approximately $180 million of funding (April to June 2022).

Source: CB Insights State of Venture 2022 Report

As we rolled Into the second half of 2022, and certainly more towards Q4, a new reality set in for the tech industry clouded by an array of challenges ranging from economic uncertainty, market volatility, geopolitical tensions and reverberating ripples from the pandemic. Venture investors slowed their pace of investing, due diligence took longer, valuations retreated, and we started seeing signed term sheets being delayed or even revoked. Round sizes also began shrinking and later stage startups struggled to raise growth capital while holding on to lofty valuations set during their prior fundraising rounds. Funding for tech companies globally declined to $415 billion, -35% YoY but remained healthy compared to pre-pandemic levels.

According to Carta and as a benchmark on valuation, 22% of US venture-backed companies in the US, both private and public, reduced their valuations in Q3 2022, nearly tripling year-over-year. Meanwhile, as the maxim goes, “flat is the new up” with 34% of companies witnessing a rise in their valuations — the lowest increase in five years.

While the weakening fund raising environment became more evident as the year progressed, robust fundraising in the first half of the year more than compensated for the slowdown in the second half of the year with 887 funding rounds totaling US$28.8 billion in 2022 (compared to $25.7 billion raised in 2021), according to a TechinAsia report.

Referring to a joint DealstreetAsia and Enterprise Singapore report, Singapore-headquartered startups closed 517 deals in the first nine months of 2022 raising $8.11 billion, a little shy of the 487 deals and $8.28 billion raised in the same period of 2021, and with less dealmaking as the year prior.

VCs Prefer Early Stage, Late Stage Deals See Declining Investment Interest

Investment statistics from the earlier report also indicate VC preference towards early stage deals, which are defined as seed through Series B rounds. Late stage are attributed to Series C and above rounds. From the graph below extracted from the DealstreetAsia and EnterpriseSG report, investors have shifted their investment dollars into a larger number of smaller, earlier venture deals. The median size of seed rounds have doubled from $1.2-1.5 million in 2021 to $2.5-3.0 million in 2022. For later stage deals, the report also highlighted a contraction of deal value for Series D and E companies by 30-50%.

In the United States, startups seeking late-stage funding are failing to attract investors as dour sentiment in the public markets and dull exit conditions make it tougher to justify higher valuations. As valuations slip to reasonable levels and startups begin to trim operating expenses to get closer to cash or EBIDTA positive levels, they may once again start to look attractive to venture and PE investors who are keen to deploy their fund capital to work.

M&As & IPOs

We observed a notable rise in private-to-private mergers and acquisitions, as publicly-listed big tech companies saw a steep decline in their share price and valuation which in turn affected the SPAC and IPO listing opportunities. Completed venture-backed acquisitions in the first three quarters of 2022 totalled $81.7 billion, according to PitchBook data, down 40.7%, from $137.8 billion in the same period the year before. No significant venture-backed tech startups went public. In total, IPO deal proceeds plummeted 94% in 2022 — from $155.8 billion to $8.6 billion — according to Ernst & Young IPO report. Looking at 2023, there is an air of optimism that the IPO drought will “un-thaw” and favorable market conditions will return to allow the growing pipeline of IPO filings waiting to list – including Instacart (US), Vinfast (Vietnam), Tiktok (China), Stripe (US) and Epic Games (US).

On the M&A front, Microsoft reportedly acquired Fungible, a Santa Clara maker of data centre chips and storage device for $190m, about $134 million less than Fungible had raised in funding since its launch. Closer to home, according to a Tech in Asia report, Singapore-headquartered Amplify Health – a joint venture between AIA Group and Discovery Group – has announced its acquisition of AI-powered data analytics firm Aida Technologies. GoTo Group, the Indonesia-based tech giant, has acquired Swift Logistics Solutions for 583 billion rupiah (US$38 million).

Cryptopocalypse

A year in review would be incomplete without mention of the events that took place in the crypto space which was rocked by high-profile scandals through the year. Terra Luna for example, a cryptocurrency that was launched in 2019 as a stablecoin pegged to the U.S. dollar, witnessed a crash of its Terra (LUNA) crypto token in May 2022 from $120 to $0.02, a 99.9% correction. Forbes Digital Asset estimated that nearly $60 billion was wiped out of the digital currency space.

Three Arrows Capital (3AC), a crypto hedge fund founded in Singapore and believed to be managing around $10 billion in crypto assets, incurred significant losses due to its staked Luna position. 3AC has since filed for Chapter 15 bankruptcy proceedings in the US Bankruptcy Court for the Southern District of New York to protect its US assets from creditors. And this triggered a contagion of Chapter 11 bankruptcy involving Voyager, BlockFi, Genesis Global and Celsius who had dealings with 3AC. And just before the year ended, the crypto industry experienced a Black Swan event that saw crypto exchange FTX valued at $32 billion based on its most recent funding round declared bankrupt. FTX Exchange was the world’s third largest cryptocurrency exchange specializing in derivatives and leveraged products. News around FTX’s leverage and solvency involving FTX-affiliated trading firm Alameda Research triggered a liquidity crisis when FTX’s customers demanded withdrawals worth $6 billion. FTX Token (FTT) is a utility token that provides access to the FTX trading platform’s features and services. The value of FTT fell by more than 80% within two days. The crypto industry is still reeling from a brutal 2022, having lost over US$2 trillion of its value throughout the year. Crypto companies still managed to raise a total of US$21.3 billion in funding in 2022, down 42.5% from the previous year.

Recalibration in 2023

The general consensus is that 2023 will remain challenged but with green shoots on the horizon. Negative macro conditions are set to continue into 2023 – sustained inflation, raised interest rates, Russia v Ukraine, China-Covid slowdown etc. However, there has also been positive news flow on many of these fronts in the past weeks (e.g. inflation levelling off; China emerging quicker than expected from Covid-slowdown, China tech reawakening etc).

Taken together, and as it relates to the tech industry, it seems 2023 will provide the backdrop for a healthy recalibration period for startups globally. In Southeast Asia, for example, where most founders have not yet experienced a significant market downturn, this has been (and will continue to be) an opportunity for founders to adjust internal KPIs towards a more sustainable growth and fundraising future. Creativity loves constraint and we believe that great startups, with solid fundamentals, will emerge winners in a tight operating and funding environment.

Cash is king. VCs are encouraging their portfolio companies to conserve cash and extend their cash runway into 2024 so as to be able to operate through some of these macro headwinds. To that end, it’s worth noting that the companies in Genesis Fund I Portfolio have a weighted average cash runway of approximately 17 months this quarter (up from 13.5 months in Q3 2022).

Profit before growth. Founders are expected to be more disciplined around spending and investors are edging these startups to turn “profitable”, the definition of which is wide, but in these times has come to prioritise a meaningful and sustainable business model.

Talent stocking. Hiring exceptional talent used to come at a premium but with many startups downsizing, startup founders can now hire more prudently with less pressure on the P&L. In Southeast Asia, it’s been reported that retrenched executives from tech companies (and new job seekers) are actively in the market looking for opportunities but with more modest salary expectations.

Dry powder. Venture firms have continued to raise record capital, even as startups received far less money than they did in 2022. Dry powder was estimated to be as high as $1.3 trillion globally for private equity and $580 billion globally for VC. While we do not expect VCs to invest at a pace comparable to 2021, there is pressure stemming from fund size, duration to deploy and the need to put capital to use. As previous downturns have clearly shown, investors with dry powder will find it a rewarding time to deploy capital, amidst more reasonable valuations and the ability to set better deal terms.

2023 Hot VC Target Sectors

January is a hotbed for new tech innovation unveiled to consumers through the annual Consumer Electronics Show held in Las Vegas USA. The 2023 show is focused on a number of areas, including the metaverse and Web3, digital health, sustainability, automotive and mobility, and human security for all. There was strong participation from Asia which include those from South Korea, which number more than 500 and include the likes of Samsung, SK, Hyundai Motor and LG, while just under 150 exhibitors hail from Taiwan. We highlight some interesting technology showcased at CES:

- Sony teamed up with Honda to exhibit a new brand of electric vehicle called the Afeela. The Afeela logo appears on a narrow screen, or “media bar,” on the vehicle’s front bumper. This can also interact with people outside the vehicle and share information such as the weather or the car’s state of charge. Unlike the car Sony showed off at CES 2020, this car is expected to hit the North American roads in 2026. Japan and Europe will follow.
- The battery-operated WasteShark by the Dutch firm RanMarine Technology is an autonomous surface vessel designed to remove algae, biomass, and floating pollution such as plastics from lakes, ponds, and other coastal waterways. At least 14 million tons of plastic end up in the ocean every year, and plastic makes up 80% of all marine debris found from surface waters to deep-sea sediments. Marine species ingest or are entangled by plastic debris, which causes severe injuries and death.
- Canadian-based eSight Eyewear plans to display a headset designed to help people with visual impairments such as age-related macular degeneration (AMD). AMD is an eye disease that can blur your central vision. It happens when aging causes damage to the macula — the part of the eye that controls sharp, straight-ahead vision. The macula is part of the retina (the light-sensitive tissue at the back of the eye). AMD happens very slowly in some people and faster in others. If you have early AMD, you may not notice vision loss for a long time; hence the importance of regular eye exams. Once the user puts on the device, they will be able to see distinct features such eyebrows, mouth and eyes.
- Singapore-based Igloo Company will show off its second generation of smart padlocks at CES, including a slimmed-down fingerprint-based model and another featuring enterprise-grade security. The latest smart padlocks will ship in the spring. The keypad-based Padlock 2 builds on the company’s original Bluetooth-enabled smart lock by manufacturing it to military standards, including a hardened steel case. The Padlock 2 gets eight months out of a single charge of its lithium battery (the original relied on disposable batteries), and its shackle can withstand up to 15kN of cutting force, 5kN of pulling force, and 100Nm twisting force.
- And last but not least, there has been immense interest in generative AI since ChatGPT came online and mesmerised consumers with its ability to provide real-time chat responses (see below). In 2019, Microsoft invested $1 billion in OpenAI, the tiny San Francisco company that designed ChatGPT. Microsoft is now poised to challenge Big Tech competitors like Google, Amazon and Apple with a technological advantage as it is rumoured to be in talks to invest another $10 billion in OpenAI. See the picture below (right column) where we tested Open AI’s ability to write a short paragraph on electric vehicles. Try it at https://chat.openai.com/chat

A bull run for venture capital funding in 2021

Global technology startup funding clocked in at a record $621 billion in 2021. Southeast Asia startups raised almost $25 billion marking its coming of age as an important, albeit young, tech corridor. In the first quarter of 2022, as macroeconomic and geopolitical conditions continue to evolve in a melting pot of spiralling energy costs, inflation, and interest rates coupled with a war in Europe, how will the rest of the year play out?

Data from Crunchbase seems to indicate continued strength as global startups raked in $61 billion, the 4th month above the $60 billion mark in the last 12 months. Close to $3 billion was invested globally at seed stage. Startup investors deployed another $18 billion at the early stage and just over $40 billion at the later stage and technology-growth stage. This is amidst a changing landscape where global VC funds are raising record mega funds. Andreessen Horowitz closed on a host of new funds this year, with its eighth fund at $2.5 billion, its fourth bio-related at $1.5 billion, and a third growth fund at $5 billion. Fintech specialist Ribbit Capital closed its seventh fund at just under $1.2 billion, marking its first billion-dollar fund.

While the figures for Q1 2022 Southeast Asia funding are yet to be released, funding news throughout the first three months of the year seems to suggest a good quarter for the region, especially with regard to smaller deal sizes of below $50 million.

Sequoia-backed Multiplier, a startup that enables companies to hire and pay remote workers while complying with local laws, raised $60 million at a $400 million Series B valuation with New York-based Growth Equity Tiger Global as its lead. This came barely 3 months after the company’s Series A of $13.2 million. Tiger Global, together with Cathay Innovation and Sequoia, wrote a cheque to Singapore-based AI Rudder, the leading voice artificial intelligence start-up, leading the $50 million Series B funding – less than 6 months after the company wrapped up its US$10 million Series A in November 2021. Tonik Digital Bank targeting Philippines unbanked consumers closed a $131 million round of Series B equity funding in February 2022 led by Japan’s Mizuho Bank. A VC syndicate led by Vertex and includes Prosus Ventures, AC Ventures, and East Ventures injected $30 million in Series A funding into Indonesia-based fishery and marine platform Aruna. Who would have imagined a Southeast Asia Series A round ballooning to $30 million 12 to 24 months ago!

In parallel, investors have raised concerns about the rapid pace of deals and high valuations. Having said that, it could take time for a correction to reveal itself on a market-wide scale. VC and private equity firms are sitting on immense piles of cash earmarked for startups, and competition for deals remains high. The deal-making pace of Q2 2022 will dictate the direction of venture funding for the rest of the year.

Geopolitical risk threatens to trip up venture capital’s global stride

The venture capital model is predicated upon fast growth and rapid scaling. Adding to the lingering pandemic woes is a crucible of geopolitical risk involving the world’s largest nations US, China, and Russia. For VCs, these geopolitical risks can make it more difficult to raise capital from LPs from sanctioned countries. Increased and enhanced due diligence will be necessary to avoid raising capital from sanctioned sources. Speaking to entrepreneurs in Singapore, Indonesia, and Malaysia, we observe that Southeast Asia startups have little to no dealings with Russian investors. However, some startups we spoke to have reported various delays in their supply chains, especially for parts that originate from Europe.

A Reuters report in March 2022 highlighted that global investors have pursued a re-allocation strategy into crypto and blockchain and away from real estate and bond funds, seeking exposure to a sector they believe could withstand the fallout from the Russia-Ukraine conflict. Venture capitalists invested around $4 billion in the crypto space in the last three weeks of February 2022. Bain Capital Ventures, a unit of private equity firm Bain Capital, for instance, announced in March 2022 that it is launching a $560 million fund focused exclusively on crypto-related investment.

Rising Inflation, Rising Interest Rates: A Threat To Venture Capital And Entrepreneurship?

For the first time since 2018, the Federal Reserve lifted the target for its federal funds rate by a quarter of a point, in order to battle rising inflation, thus signalling the end of a long-lasting pool of cheap capital for companies. Based on historical rate hikes globally, interest rates when they do change are expected to do so gradually. Three or four rate increases by the end of this year could add up to 1% or more to base interest rates in the US.

While higher interest rates will likely lead to a pullback in liquidity, this might have a balancing effect in that it may prevent market pricing and valuations from being driven up to unsustainable levels over the next few years.

The reduction in liquidity may also push VCs and founders to seek alternative forms of capital financing, including venture debt, which will in turn come at higher borrowing costs with venture lenders mirroring (or at least partly mirroring) any interest rate increases in the market at large.

There are two types of companies that need to be careful: companies that are “all tech and no revenue” or “all revenue and no tech”. The critical question is whether these companies are indeed solving real problems for people in a sustainable manner.

Further, such a liquidity pullback may have a disproportionate impact on later-stage technology companies that are pre-IPO (as we witnessed in Q1 2022 in the US). In this scenario, founders and investors will likely delay major liquidity events in order to prevent valuation discounts, given the recent poor performance of many newly listed technology companies.

It’s not all doom and gloom, however. Many technology companies that had a funding event in the past 12 months have likely raised more cash than needed. These companies will likely have to cut expenditures with the aim of extending their cash runways.

Companies can also raise extension rounds, offering shares at the same price as the most recent funding round. Extension rounds were common at the start of the COVID-19 pandemic as they allowed investors to double down on promising companies without having to face steep valuation uplifts amidst an uncertain trading environment.

Many companies with healthy cash flow turn to venture debt and growth debt to shore up balance sheets. A prime example in 2020 was AirBnB which turned away from equity in favour of $2 billion debt at a 10% interest rate from Silver Lake, shoring up its balance sheet despite having close to $4 billion in cash reserves already.

And not to forget that such moments can offer a silver lining for strong founders; market share can be hard to grow when times are good and competition fierce, and perhaps more easily gained during a downturn provided the company is well-financed with a strong team in place.

John Chambers, Chairman Emeritus of Cisco and founder and CEO of Palo Alto’s JC2 Ventures, shared his views that startups are nimble and flexible which works in their favour, highlighting examples of how Cisco and Amazon had trod on similar paths to becoming industry leaders.

Tight Labour Market

It is likely that the Southeast Asian tech ecosystem is entering a golden phase as the tech market continues to grow strongly over the years, speedbumps notwithstanding. Global and pan-Asian tech giants have recognised the region as a strong potential growth engine as part of their global ambitions. As these giants expand in Southeast Asia, the competition to attract and retain talent is becoming a challenge among startups and their larger counterparts. Startups are finding it tough to hire new and replacement employees and expensive to compete with their better-funded, larger, global competitors.

Speaking to regional startup founders and CFOs, we observed a few notable trends. Product, Technology, and Sales are the most challenging positions to fill. There is a growing trend of candidates who accept job offers but do not turn up for work on Day 1. Their reason: they have been offered up to 50% or even 100% more in salary to jump ship. Candidates are also asking for sky-high salaries and are attracted to “frontier” tech like crypto and Metaverse companies.

Startup CFOs tell us that they try to counter these trends with strong and regular internal communications and frequent external initiatives aimed at potential new applicants. Social media, such as LinkedIn, is a valuable tool to grow the employer brand influence of a company. A startup we surveyed is launching what it calls a “Craftsmen Program” to retain team members who have strong coding skills by providing them with visible career path progressions. Last but not least, the delayed nature of the ESOP (employee stock option plan) vesting schedule does also help with retention.

The role of debt financin

2008 (GFC), 2020 (COVID-19) and now 2022. Bumpy years where prudent leadership teams were/are eager to hold on to more cash and shore up balance sheets.

Debt financing can help companies prolong the life of expensive equity already raised. Having an extra 20% or 30% cash cushion gives leadership teams more options by extending the company’s runway, accelerating growth, and staying ahead of the competition.

As for rising interest rates, venture lenders will continue to price in risk and mirror market movements. Where bank rates edge upwards venture lenders are expected to generally mirror that movement by way of interest rate adjustments and even adjustments to warrant option coverage, all with the objective of risk-adjusted pricing. In fact, increased interest rates notwithstanding, our conversations with other regional venture debt operators point to strong deal flow in H1 2022. From Europe to India, and in Southeast Asia considering our own deal flow pipeline, indications are positive that a strong lending pace will continue into the rest of the year. However, lenders are also more cautious of who they lend to and will necessarily tighten the qualification requirements and their credit lens.

Over the past two years, we have seen how the global pandemic adversely affected companies across a wide range of sectors from the implementation of lockdowns and travel restrictions, to an increase in the visibility and transparency of supply chains. Despite being a difficult year for numerous businesses, many startups, especially in the Southeast Asia region have powered through.

While the global pandemic will eventually recede, the impact of business decisions made during these pressing times will go a long way. Startups that raise capital and have a spare dime for rainy days like these will have an edge.

Cash Burn J-Curve

One of the most persistent challenges for startups is to sufficiently capitalize the business from the inception of the company until profitability. US startups have had the good fortune of leveraging on venture debt for several decades. Despite a very challenging Covid year in 2020, startups in the US received debt financing valued at more than $25 billion^[1], the third consecutive year for the market to surpass $20 billion in venture loans.

Most startups traditionally utilize equity as their source of capital and go on to raise billions of dollars to fund the J-curve growth of their business. The J-curve is commonly used to illustrate the tendency of a startup company to produce negative net income initially, and then deliver accelerated positive results as the company matures. The negative net income area above the “J” represents the total cash needed to achieve profitability and the typical startup company will take at least six years before becoming profitable.

Fig. 1 – J Curve

Source: https://pitchbook.com/news/reports/q1-2021-pitchbook-analyst-note-venture-debt-a-maturing-market-in-vc

Blend of Venture Equity and Debt Capital Markets

As venture debt has emerged in Southeast Asia, an increasing number of companies have deployed debt financing to complement equity rounds. To date, there are about 80 – 100 Southeast Asia companies that have already benefited from venture debt.

Genesis Alternative Ventures is a Singapore-based venture debt fund that invests debt capital into promising early-growth startups that are expanding their business presence across Southeast Asia. We will feature 2 Genesis portfolio companies – Horangi Cyber Security and GoWork and share their venture debt journeys.

Example 1. Horangi

Founded in 2016, Horangi is a cybersecurity company that provides security support for enterprises in Asia against cyberattacks through its suite of products and professional advisory services.

Venture debt became a useful, less-dilutive tool for Horangi as it enhanced its cloud security products, increased its talent pool and acquired customers through sales and marketing activities as part of their growth and expansion plans. “As a startup with a short operating history, it is almost impossible to get normal bank loans, which is where venture debt fills in the gap.” Horangi was also looking for partners who could add substantial value to their business and “partnering with strategic investors like Genesis will help propel our next growth stage,” said Paul Hadjy, CEO and Co-founder, Horangi.

“As Horangi scales its business, choosing a venture lender who is committed and understands the business is critical. It’s not only about access to capital, but also the flexibility and the invaluable network that Genesis brings along.” – Dr. Jeremy Loh, Managing Partner of Genesis Alternative Ventures.

Example 2: GoWork

Founded in 2016, GoWork is a leading premier co-working space operator in Indonesia.

“Co-working is not a category anymore, it’s just how people work. It’s a matter of time when every office building or mall in Jakarta will need a space.” For GoWork to double down on its focus on Jarkarta and reach over 100,000 sqm by 2020, the company took on venture debt to fund its working capital. “We wanted to have diversification in our capital structure without incurring dilution,” said Vanessa Hendriadi, CEO & Co-founder, GoWork.

Not only does venture debt help with working capital needs, but entrepreneurs are also seeking “more efficient capital and putting in place additional capital buffers”. – Martin Tang, Co-founder of Genesis Alternative Ventures.

Venture Debt Moving Forward

Venture debt offers an additional channel of financing for entrepreneurs who want to leverage debt financing to balance the cost of capital. Venture debt is set to play a bigger role as more startups are growing amid a global pandemic and are looking for ways to raise additional capital without significant dilution to their equity stakes.

To find out more about venture debt, access the Southeast Asia Venture Debt Industry Report 2021 co-authored by Genesis Alternative Ventures and PwC Singapore here.

^[1] https://pitchbook.com/news/reports/q1-2021-pitchbook-analyst-note-venture-debt-a-maturing-market-in-vc

House View: Southeast Asia’s Tech and Venture Sectors Rekindles Cautious Optimism Amidst the Thaw

Reflecting on 2022 and Looking Ahead Into 2023

The Impact Of Global Headwinds And Tailwinds On Southeast Asia’s Venture And Tech Ecosystem

The Value of Venture Debt to Startups