Venture capital firms that back startups in Southeast Asia and India are raising record sums for new funds as investors shift from China.
Southeast Asia- and India-focused VC funds have raised USD 3.1 billion so far in 2022, already nearing the USD 3.5 billion they raised in all of last year, according to data from research company Preqin. In comparison, fundraising by China-focused VCs fell sharply from USD 27.2 billion in 2021 to just USD 2.1 billion.
“Fifty percent of the investors we spoke to are trying to diversify out of China,” said Amit Anand, co-founder of Singapore-based Jungle Ventures, which recently raised USD 600 million for new funds to invest in Southeast Asian and Indian startups. “They’ve had a fair amount of success there but are mindful about the headwinds, and hence, they wanted to put more money in Southeast Asia and India.”
Jungle Ventures plans to make “concentrated” investments in 15 to 18 companies with an even split between the two regions, Anand said.
Earlier this month, Singapore-based East Ventures said it raised USD 550 million to invest in startups in Southeast Asia, bringing assets under management to more than USD 1 billion. In April, India’s Elevation Capital said it raised its largest ever fund with USD 670 million.
Wavemaker Partners, a Singapore-based VC, launched a USD 136 million fund in March that was 22% larger than its predecessor. Managing partner Paul Santos said he noticed a change in atmosphere when he approached potential investors in the U.S. “Those who were underweight [in China] would say we’ll stay here. Those who were overweight would say we might need to rebalance the portfolio.”
VC funds raise money from investors that range from pension funds and university endowment funds to wealthy tycoons. Southeast Asia and India have emerged as attractive markets due to the fast growth of startups in both regions in recent years, culminating in a series of blockbuster listings last year from the likes of Indian food delivery company Zomato and Singaporean super app Grab.
At the same time, there has been what observers call a dramatic change in policy by the Chinese government. Beijing banned for-profit tutoring last year, crippling the business models of online education companies, many of which were backed by foreign venture capital firms. That led to large paper losses: SoftBank Group wrote down its USD 700 million investment in Zuoyebang, the developer of an app that helped students with their homework, to USD 100 million by March.
China also introduced tougher rules on large tech platforms, including measures to promote competition and regulations on how they must handle user data. The moves caused shares of large publicly listed companies like Alibaba Group Holding and Tencent Holdings to fall sharply.
Beijing has recently sent signals that its crackdown is over. The Politburo of the Chinese Communist Party promised last month to “promote the healthy development of the platform economy,” but at the same time, strict COVID-19 restrictions in Shanghai and Beijing have shaken the Chinese economy and further alarmed investors.
“Some investors are beginning to feel the risk to China’s state system,” said an executive at a Japanese asset management company that invests in VCs. “As a result, when they try to get exposure to Asia, there is a transfer of capital from China to other regions. In the past, allocation to Asia was nearly equal to allocation to China. In the current environment, more investors are considering a diversified allocation.”
The executive added that funds focused on India and Southeast Asia are quickly oversubscribed because the size of the venture capital market is still much smaller than China.
The influx of capital may be a tailwind for startups in these areas, and a counterpoint to the global sell-off in publicly listed tech companies that has fueled concerns over startup valuations. Grab, its Singapore peer Sea, and the Indian payments company Paytm have all seen their share prices drop more than 50% this year.
Forge, a US trading platform for shares of privately held companies, said that in the first quarter shares traded at a 24% premium over the price at their last funding round. That is down sharply from a 58% premium in the fourth quarter of last year.
Despite the expansion of VCs focusing on Southeast Asia and India, however, these are still small compared to the biggest players who are scaling back. SoftBank, which operates the USD 98.6 billion Vision Fund and USD 56 billion Vision Fund 2, will cut investments by half or more after posting a record quarterly loss, chairman and chief executive Masayoshi Son said earlier this month. Fund managers said the sell-off in public markets will still likely hit valuations.
“Valuations in the technology sector have really paced far ahead from value creation in our markets,” said Anand of Jungle Ventures. “It’s about time that valuation and value creation go hand in hand.”
China-focused VCs that did manage to raise new funds this year were in areas that appear to be less impacted by Beijing’s crackdown. Lyfe Capital, which invests in healthcare-related companies, announced in April the launch of a new USD 935 million fund, its fourth. It recently led an investment in Starna Therapeutics, a startup developing drugs based on mRNA technology.
Nio Capital, run by electric vehicle billionaire William Li, in March said it raised USD 400 million for its second fund, which is double the size of its first. It is the backer of autonomous driving startups Momenta and Pony.ai.