After five quarters of extended growth, the total volume of venture capital funding in Southeast Asia finally fell in the second quarter of this year as macroeconomic indicators turned sour and investors shifted their focus from growth to profitability.
While the stance of the fund managers had been predicted since the start of the year due to factors such as the tech stock crash, inflationary pressures, global monetary tightening and rising geopolitical tensions, we are only now beginning to see it get reflected in fundraising performance.
Total deal count fell nearly 20% quarter-on-quarter to 250 in Q2 2022 – a three-quarter low, finds the latest report by DealStreetAsia – DATA VANTAGE. The drop was sharper than the 15% quarter-to-quarter contraction precisely two years ago when most countries in the region first implemented travel lockdowns to curb COVID-19 transmission.
Major deals such as Coda Payments’s $690 million Series C round and Xendit’s $300 million Series D helped the region clock a total deal value of $4.77 billion, which is higher than the previous quarter. But this does not necessarily negate the impact of worsening macro conditions on the risk appetite of investors or the growth of homegrown startups, which saw a string of layoffs in the last few months.
The second-quarter performance brings the total tally for the first half of the year to 580 deals worth $9 billion. This compares to 437 deals worth $9.3 billion in the same period last year. However, we need to bear in mind carry-over deals from last year that were finalised and announced in the first quarter.
Equity vs debt funding in venture-backed startups
A prolonged downturn
Although there is no liquidity crunch as such, fund managers DealStreetAsia interviewed noted that investors have been taking a more cautious and prudent approach in the last three to six months.
“Prioritisation has meaningfully shifted, from aggressive growth, scale and acquiring market share, to proof of monetization and healthy economics, and for more mature startups, sustainable and positive profits,” said Eko Kurniadi, partner of investments at Alpha JWC Ventures.
Kurniadi expects a slower pace of investment and valuation normalisation for the remainder of the year, especially in the growth and later-stage funding environment.
1982 Ventures managing partner Herston Elton Powers said the present situation is reminiscent of 2020, but with a more prolonged downturn period. The impact on early-stage startups, however, will be more limited, he added.
“There is an opportunity for early-stage companies to ‘not let a good crisis go to waste’ and capture market share, attract otherwise unattainable talent and emerge stronger,” he said.
Fintech steals the show
Not all startups share the same fate though. Many that are focusing on fintech services have had a good run. One in every four dollars of venture funding went to fintech startups in 2021. This trend was repeated in the first quarter. By the second quarter, the share of fintech startups increased to 46% of the total deal value.
Driven by decentralised finance (DeFi) startups, wealthtech emerged as the top fintech category in terms of deal count in the second quarter. Indonesian crypto exchange Pintu and DeFi services platform EktaChain collected the largest funding among blockchain-powered fintech firms at $110 million and $60 million, respectively.
Overall, DeFi startups continued to defy the ongoing crypto bear market and contributed roughly a third of total fintech deal volume in the second quarter.
GameFi, a portmanteau of gaming and DeFi, had its best quarterly performance in Q2, regardless of a $650 million hack of Ronin, the crypto wallet platform of play-to-earn monster pet game Axie Infinity, in March.
Genpin Liu, a partner at Vertex Ventures Southeast Asia and India, who monitors DeFi activities, believes investments in early-stage DeFi startups will continue.
“During the market peak last year, there were many new funds that managed to raise capital. This provided them with enough dry powder for deployment in the following two to three years,” Liu said.
The SE Asia Deal Review: Q2 2022 report covers fundraising by startups in the second quarter and the previous quarters. It covers:
- Funding trends across quarters, sectors and countries
- Deal volume and value across funding stages
- Median and average deal value across stages
- Investor perspectives, and more.
The report is available exclusively to DealStreetAsia – DATA VANTAGE subscribers. Subscribe/upgrade your subscription now to access our entire set of reports.