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Why 2023 could be the best—and worst—year for VCs in Asia

Written by Nikkei Asia Published on   6 mins read

Venture capitalists see pickup deal activity, but expect difficulties in fundraising.

2022 turned out to be a chaotic year for the world’s venture investors as war, political tensions and inflation crimped deal flows, stymied fundraising and delayed public listings. Asia, long a prime target for venture investment, has not been immune.

After a bruising year, analysts and investors predict 2023 will offer more opportunities in the region, though shaking off the challenges of last year may take time.

The Asia-Pacific region recorded just USD 107.9 billion worth of venture capital deals by the third quarter of last year, versus a full-year total of USD 227 billion for 2021, according to data provided by Preqin, a London-based investment data company.

China accounted for the majority of venture investment activity in the region, but also the biggest drop. Its USD 65 billion in total deal value as of December 13 was less than half the USD 138.5 billion value for all of 2021, data from market research company PitchBook shows.

“When we talk about APAC venture capital, we are really talking a lot about China. It made up most of the activity there and now the slowdown is most markedly in China,” said Angela Lai, senior research analyst at Preqin.

A difficult COVID situation in China, Beijing’s souring relations with the US, war in Ukraine and rising inflation all combined to cool both public and private markets around the world.

Activity in the five next-biggest markets in APAC by deal volume—India, South Korea, Japan, Singapore, and Indonesia—also slowed to varying degrees, for many of those same reasons.

Will 2023 be the year things get better? Yes and no.

Nan Bai is a Beijing-based principal at venture capital firm DCM, which invests in early-stage companies in the US and Asia, and he sees a season of bargain hunting ahead.

“I think the valuation [for companies] has come down dramatically [in 2022]. So I think now is a great opportunity for investors like us to invest again,” Bai said, adding that 2023 would be one of the rare times when investors will be able to invest in high-quality companies at discounts.

Jeffrey Lee, a Silicon Valley-based partner at venture capital firm NLVC, agreed.

“We are now more than ever convinced that 2023 will be probably one of the best years to invest in venture capital history,” Lee said. While the number of venture deals might not increase drastically, he said, their quality and returns on investment could.

It would not be the first time VCs hit a jackpot after a market downturn. A new generation of venture-backed companies, including Facebook (now Meta) and China’s Alibaba Group Holding, emerged from the 2008 global recession with business models based on the then-new technologies of smartphones, mobile internet and cloud computing. Early backers of these companies reaped some of the biggest returns in venture history.

But the new year promises to be challenging for VCs in another way, namely raising new capital, analysts and venture investors said. “2023 is also going to be a very, very difficult year for VCs,” Lee said.

That is because limited partners (LPs), as investors who put money into venture capital firms are called, tend to respond to market changes later than the rest of the market, he explained. This means they could be slow to seize opportunities once conditions start to improve.

Lai was likewise cautious. “Overall, we don’t think there will be a very strong pickup [in VC fundraising], especially in the next couple of months,” Lai said. “There will probably be a bit more decline [in 2023] before it will eventually get better.”

Last year, one of the biggest concerns for VCs and their backers was a lack of exits from their investments.

Volatile markets and the lackluster performance of many newly listed companies turned a number of companies off to initial public offerings. Globally, 1,333 IPOs raised USD 179.5 billion in 2022, 45% fewer deals and 61% less in value on the year, according to a recent report by EY.

The Asia-Pacific market fared slightly better: 845 IPOs raised USD 120.6 billion, down 26% and 31% by number and value, respectively, the report shows.

DCM’s Bai said 2022 was “probably the most difficult year” for exits, but he expects more IPOs in Asia and the U.S. in 2023, especially toward the second half of the year.

“As LPs start to feel more comfortable, as they see maybe more exits [and a] more stabilized environment, their appetite for investing in VCs will probably recover as well,” he said.

China-focused funds may find the going particularly tough, as concerns from 2022 spill into the new year, including Beijing’s crackdown on tech and tensions with Washington.

The overall health of Asia’s biggest economy as it opens up after years of COVID restrictions is another big question.

“We’re still in a phase of uncertainty [about China],” said Lai at Preqin. “Everybody would benefit from a rebound in China, but for the time being, because the country has sort of lagged the other regions in these couple of COVID years. … Investors are just less inclined to put more money into China.”

Exiting from Chinese startups could remain an issue, too, as the US public market has become less accessible in recent years. Tensions over issues such as technology and access to Chinese companies’ audits contributed to a record-low number of Chinese listings in the US this year, with many companies even choosing to delist from New York.

“Maybe a couple years ago, it was very easy to go to the US Now it has become much more complicated,” said Bai at DCM.

With China a wild card for some, a number of VCs are seeking opportunities elsewhere in the region.

By the third quarter of 2022, China-focused VC firms had raised USD 8.9 billion, less than a quarter of the USD 34.4 billion raised in all of 2021, and nowhere near the peak of USD 97.4 billion in 2017, according to Preqin’s data.

India-focused funds, on the other hand, raised USD 4.7 billion during the same period, surpassing the total of USD 3.7 billion in 2021. Southeast Asia saw a similar trend, with USD 1.3 billion raised in the first three quarters of 2022, more than the USD 1.1 billion total for 2021.

Helen Wong at AC Ventures said she expects deal volume in Southeast Asia to pick up this year, as companies that cut staff to save money last year will be unable to avoid seeking out fresh funding. AC Ventures is now raising its biggest fund ever, targeting USD 250 million, she told Nikkei Asia.

Investors see particular promise in Indonesia, especially in e-commerce and fintech.

Alta Group, which helps clients find investments in alternative asset classes, has helped allocate 80% of a USD 100 million fund for late-stage startups to the country, according to chief commercial officer Benjamin Twoon.

Twoon said his company has seen a spike in investor demand for deals related to tourism, health care, consumer internet and electric cars in Indonesia and China. “And these are the sectors that I would imagine, in the next year or two, we will be following extremely closely,” he said.

Still, India and Southeast Asia both have a long way to go before overtaking China in VC activity. As of December 13, Indian startups had raised USD 22.5 billion, while Indonesia saw a total of USD 3.4 billion worth of venture deals, much smaller than the USD 65 billion China recorded during the same period, Pitchbook data showed.

“For other countries in Asia to absolutely surpass China, it would take some years,” said Lai at Preqin. “India and Southeast Asia, they are much newer markets. … I don’t think their surpassing China is something that will happen in the next one or two years.”

This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.




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