The big beasts of Southeast Asia’s start-up scene are likely to see cash waved at them this year, investors and experts say, as venture-capital funds with trimmed purses seek the guarantee of profits and shy away from risky new businesses.
Billions of dollars of funds retreated from the region’s start-ups in 2023, as the global economy roiled from conflict, oil-price shocks, high interest rates and surging inflation, drying up the flow of outbound cash, especially from hard-pressed Europe.
This year, Southeast Asia’s start-ups are expecting some of that money to return, but it may be looking to make safer bets, business experts warn.
“There’s now a trend to invest in start-ups that show not just innovation but profitability. Those which have proved their resilience will reap the benefits,” said Edward Ismawan, of the Indonesian Association of Venture Capital for Startups (Amvesindo), told This Week in Asia.
In an increasingly cashless world, fintech, e-payments, online sales and ride hailing dominate the region’s funding rounds, while the green economy offers new opportunities in clear growth areas. But brave new ideas may find it hard to get the investment they need over the coming months.
“Because of the more challenging investment environment, investors are becoming more selective and investing in companies that are past the ideation stage,” said Lawrence Loh, a professor at the National University of Singapore Business School.
Singapore – home to about 4,000 tech start-ups, 18 of them unicorns, and more than 400 venture capital companies – remains the most attractive destination for start-ups and venture capital in the region.
The city state earned a place alongside some of the world’s largest start-up ecosystems like those in Silicon Valley and New York in the global top 10 ranking from innovation policy and research firm Startup Genome last year.
It ranked eighth, leaping 10 places from a year before and overtaking regional peers Shanghai, Seoul and Tokyo, landing just behind Beijing.
“There has been a wave of ideas in the tech and digital spaces recently, but there has been a shift to a preference for later-stage funding because these are ideas that are more amenable to commercialisation,” Loh said.
Investors are still interested in start-ups, but most have become more “selective” and prefer to stick to safer bets nowadays, he said – pointing to 2022, when the US Federal Reserve began raising interest rates, as the start of the trend.
Founded in 2020, Bolttech, a Singapore-based insurance tech unicorn, recently raised USD246m in its series B funding round after a USD50m contribution from an investment firm.
Operating an exchange that allows insurers, distributors and customers to buy and sell insurance products, the company has received a licence to operate in all US states and in October began considering a US$300m initial public offering in the country, sources told Bloomberg.
The company, backed by Hong Kong billionaire Richard Li Tzar-kai, has asked banks for proposals on a potential share sale, which is expected to happen sometime this year, Bloomberg reported.
Indonesia, Southeast Asia’s No 2 for start-ups, saw investment in the sector collapse by 87 per cent in 2023. There is expected to be a turnaround this year, but caution and discernment will still be the guiding light for investors.
Interest in sustainable energy start-ups is increasing, Amvesindo’s Ismawan said, as Indonesia looks to go green.
“Start-ups making waves in the green sector, climate change and affected social issues are on the rise as far as funding goes,” he said.
While Singapore scoops up the most venture capital cash and praise for nourishing a modern, legally sound start-up ecosystem, experts say Indonesia is becoming more investor-friendly, powered by a vast and increasingly connected population.
Southeast Asia’s largest economy was valued at around USD1.3 trillion in 2022, with household disposable income forecast to reach USD1.08 trillion this year. There are an estimated 180 million e-commerce users in the country, spending USD56 billion in total in 2023.
And there’s always room for more innovative start-ups, according to Jakarta-based financial analyst Adi Wijaya.
“I think there are still opportunities for ventures focusing on credit loans and new marketplace platforms able to fill in market gaps,” he said, adding that Indonesia’s status as Southeast Asia’s largest market is conducive for consumption-based start-ups.
Indonesia is currently home to around 2,300 start-ups, 14 of which are unicorns, meaning they have an overall market valuation of more than US$1 billion.
GoTo, which came into being as a result of a merger between Gojek and Tokopedia in May 2021, is valued at USD30 billion, making it Indonesia’s biggest “decacorn” – the term for unicorns worth more than USD10 billion.
TikTok snapped up 75 per cent of Tokopedia’s shares, valued at USD840 million, in December last year, in a move seen as a win for local start-ups. The surprise buy-out followed a government ban on TikTok Shop, which had taken the Indonesian e-commerce market by storm.
“The ban showed [the Indonesian] government’s resolve in supporting home-grown start-ups,” Wijaya said.
“TikTok Shop’s operations had started to encroach on the market share of Indonesia-based start-ups like Tokopedia and the government decided to act.”
Malaysia: regional launch pad?
Smaller markets with big dreams of curating a sustainable start-up space may find themselves in a holding pattern this year as investors test the waters.
Malaysia’s government is promoting it as an ideal launch pad for tech start-ups that can get a leg up from its educated, multilingual population and developed infrastructure before braving Southeast Asia’s wider 600 million-strong market.
“Malaysia’s strategic role is to provide the soft-landing ground for foreign start-ups to build their regional operations, familiarise themselves with the cultural nuances of the Asean market, and test their products’ market fit before venturing to the next country,” Eric Lee, from Digital Districts, an Asean tech ecosystem builder, told This Week in Asia.
Capital Kuala Lumpur and the states of Penang, Johor, Sabah and Sarawak are unique testbeds, he said, with their differing levels of urbanisation, languages, and development mirroring those in neighbouring member states of the Association of Southeast Asian Nations such as Indonesia, the Philippines, and Thailand.
“This allows foreign start-ups to validate their offerings in Malaysia first, and gain invaluable cultural insights that would increase their chances of successfully entering the next Asean country,” Lee said.
In addition, the recent weakness in the ringgit means foreign start-ups can make their money stretch further and manage their burn-rate more efficiently, while enjoying comparable office space, English-speaking local talent, and digital services as they would in Singapore for half the price – or more.
But te main challenge facing start-ups in Malaysia is the complex government structures at both federal and state levels.
“As long as the foreign start-up does not require any licences, approvals, or funding from the government or regulators, they should be good to go,” Lee said.
“If they do, then they will encounter a lot of red tape and bureaucracy that could set back their expansion plans.” – SCMP
