Over the past six months, there have been reports about a funding squeeze hitting startups in India and Southeast Asia. That was certainly true in the last two quarters of 2015, in certain sectors.
Last year was exceptional, because hedge funds added to an already conducive funding environment and took it to record levels. The hedge funds moved out in the third and fourth quarters of last year, and so it was seen as likely that 2016 would trail last year in terms of total funding.
That might still turn out to be true. But if the first quarter of 2016 is any indication, funding has recovered, and the year might actually be as good. VCs have learnt their lesson and are now insisting on a clear roadmap for profitability, but the money is there.
According to research by deal intelligence company Mattermark, the number of venture capital deals and capital deployed, two solid measures to check for funding activity, were both higher than Q1 ’15. That means the pullback in funding seen in Q4 ’15 has recovered. Only Q3 ’15 had higher deals and funding.
Source: Mattermark Research
Total deal volume seems to have stagnated at about 300 deals per quarter, perhaps because good startups in some sectors have raised the amount of funding they wanted to. Or investors might be waiting for valuations to drop before participating in future rounds. In either case, there is significant possibility of bigger funding rounds this year.
So there were down-rounds and funding tapered off by the end of last year. The situation lasted until January, but funds are now getting deployed. And as we reported earlier, venture capital firms have raised $2.5 billion to invest in India. They will need to deploy those funds over the coming quarters as investors renew their focus on finding disruptive or innovative companies in which to invest.
Southeast Asia is a slightly different market for venture capital funding, because there isn’t much deal activity compared with China and India. That has started to change, with more investors heading to high-growth countries like Vietnam, lured by its young demographic and untapped markets.
But still, a large deal can skew activity for the entire quarter, when most of the deals are at the seed or Series A level. To get a more realistic picture, the report excludes funding events that totaled more than $100 million.
Source: Mattermark Research
The number of deals has been between 85-95 per quarter, and that might increase if more promising startups come up. Or, VCs might choose to save funds for follow-up investments in their portfolio firms. In that case, deal size will rise but the number will of deals will stay nearly constant.
With governments in India, Singapore, Indonesia and Malaysia putting in place policies and incentives to grow respective startup ecosystems, the environment for funding might actually improve as the year progresses and the measures take effect.
In India, there is a clear growth in angel and seed investments, particularly in the two quarters last year when funding slowed. And just like India-focussed VCs, their counterparts in Southeast Asia also raised more funds in 2015 to deploy this year.
But unlike last year, venture capital funds will be more selective and likely to focus on companies with strong balance sheets or business models that show a strong plan to achieve profitability. That’s good for the ecosystem.