Private funding for the digital economy in Southeast Asia has plummeted to its lowest level in six years, according to the latest e-Conomy SEA report. This year’s report, a joint effort by Temasek and Bain & Company and published by Google, underscores the challenges that startups and investors are currently facing in the region’s funding landscape. Despite this, there is still a significant amount of untapped capital waiting to be deployed.
Key Takeaway
Private funding for Southeast Asia’s digital economy has dropped to 2017 levels, signaling a challenging environment for startups. However, there is still ample capital available for investment.
Funding Decline Hits Southeast Asian Startups
In the first half of 2023, total funding to digital economy-related sectors in Southeast Asia stood at $4 billion, a far cry from the record-high $27 billion raised in 2021. This decline in funding has affected startups at every stage of their development, from seed funding to later-stage funding rounds. The downturn is felt across various Southeast Asian markets, indicating a region-wide trend.
Challenging Fundraising Landscape
Bain and Temasek’s survey revealed that 87% of investors found fundraising to be more challenging, while 64% observed a decrease in diligence and activity at the early stages of the funding pipeline. Additionally, 88% of respondents reported difficulties in achieving successful exits.
The report attributes the funding decline to global shifts towards higher capital costs and broader issues within the funding lifecycle. Furthermore, Southeast Asian funds have delivered lower returns to investors compared to funds focused on other regions. Startups, therefore, face mounting pressure to demonstrate profitability and clear exit strategies.
Factors Contributing to the Funding Downturn
According to the report, interest rate hikes have resulted in fewer initial public offerings (IPOs) and listings on regional exchanges. This, combined with increased valuation discounts for secondaries, has hampered the ability of SEA-focused funds to generate returns for investors.
Future Growth and Investor Optimism
The e-Conomy SEA report predicts that the region’s digital economy revenue will reach $295 billion by 2025, though this figure is lower than last year’s estimate of $330 billion. Despite the challenging funding landscape, there is reason for optimism. The report highlights an increase in “dry powder,” with $15.7 billion committed to private equity and venture capital funds in 2022, surpassing the previous year’s $12.4 billion.
Furthermore, Southeast Asia’s digital economy revenue hit a milestone of $100 billion in 2023, growing at a compound annual growth rate (CAGR) of 27% since 2021. Notably, e-commerce, travel, transport, and media contributed $70 billion to this figure. The report also indicates that digital payments have become increasingly popular, accounting for more than half of all transactions in Southeast Asia.
As the funding landscape continues to pose challenges for founders and startups in Southeast Asia, it becomes crucial for them to approach their Total Addressable Market (TAM) strategically. With venture capital becoming scarcer, founders must demonstrate clear value propositions and viable growth strategies to attract potential investors.
