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 ASEAN 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 USD 12 billion in 2018 to USD 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?
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.
KrASIA: 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 USD 12 billion in 2018 to USD 7.7 billion in 2019?
Mark Suckling (MS): 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 USD 2 billion, Grab’s USD 2 billion, and Gojek’s USD 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 multi-year fundraising initiatives. Funding for Grab in 2018 and 2019 amounted to USD 5.1 billion, while Gojek collected USD 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 USD 50 million) also set a new record of USD 2.4 billion, up from USD 1.5 billion in 2018. This is a strong sign of continued healthy investment interest in the region’s startups.
Kr: 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?
MS: 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.
It is one of those things that we should be looking out for in future reports. We should keep an eye on them to see which ones within this set of multi-vertical businesses will become separate entities. Or they could just keep everything under one roof.
Kr: The number of liquidity events increased in 2019 to 64, exceeding 2018’s total of 56. What does it say about the potential for exits in this region? In both 2018 and 2019, China was the leading country of origin for acquirers. How might the coronavirus outbreak affect the region’s tech scene in 2020?
MS: Some of the larger acquisitions in the region were done by Chinese acquirers, such as YY Inc’s acquisition of Singapore-based social media startup Bigo for USD 1.45 billion last March. As a qualifier, while we included the full value of the Bigo event, that may overstate things in a couple ways. It included existing YY Inc. owners among the selling shareholders and may exaggerate the value of liquidity generated.
But we also note that there are a number of other sources of acquirers for Southeast Asian tech startups. With an unexpected event like the coronavirus, I think the situation is too new and uncertain to provide an informed point of view, particularly since private markets react at a different speed to public ones. Of course, we hope the virus can be contained quickly, and its effects on people and companies are minimized. I don’t think it’s one we should speculate on at the moment.
The number of exits has not been huge yet. We’ve seen a fairly steady number of exits per year. Given the amount of investment that has entered this region over the past couple years, it’s obviously going to take a while. We should expect these numbers to grow in the next few years.
Kr: What can we expect in 2020, given the expectation for startups to prioritize profit over growth?
MS: Looking ahead, we expect these positive trends to continue as the fundamentals of the region remain positive—a large and rapidly digitizing population that demands better online services, combined with many industry sectors adopting new technology to transform their operations. Whether 2020 sees a return of the same velocity of huge deals that we saw in 2018 is uncertain. While there is a new wave of large tech startups emerging, there are also discussions about prioritizing profitability over growth, and hence the requirements for investor capital may be lower. We will be watching closely and be commenting in the middle of the year.
The interview has been edited for brevity and clarity.