Enterprise capital companies shall be extra selective in 2023

Venture capital-backed companies raised just $369 billion in the first three quarters of 2022, according to Crunchbase data. In 2021, a total of US$ 679.4 billion was invested worldwide.

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Venture capital firms in Southeast Asia are likely to be choosier next year, with falling valuations and economic headwinds slowing growth in 2022.

“The easy money era is already over,” said Yinglan Tan, CEO and managing partner of Singapore-based Insignia Ventures Partners.

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“The most important thing to watch for next year is how companies will grow, defend their valuation and survive the challenging environment,” said Jeffrey Joe, co-founder and managing partner of Indonesia-based Alpha JWC Ventures.

According to data firm Crunchbase, venture capital-backed companies raised just $369 billion in the first three quarters of 2022, a far cry from last year’s record total of $679.4 billion invested globally — which one 98% increase over the same year ago.

“We’ve seen 25-30% growth in VC provisioning deals in Southeast Asia this year, relatively more in Indonesia and in the Series B+ phase and less in the Seed and Series A phases,” said Gavin Teo, General Partner at Altara Ventures.

However, there’s still plenty of dry powder out there, according to venture capitalists who spoke to CNBC.

“Most funds have capital to deploy, but they’re looking for great investment opportunities,” said Jussi Salovaara, co-founder and managing partner of Asia at Antler.

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Venture capital funds raised $151 billion in the first three quarters of this year — that is, money they made available to invest — which beats any previous fundraising for the full year, according to data from private market data platform PitchBook.

Sequoia Southeast Asia raised $850 million in June, East Ventures raised $550 million in July, and Insignia Ventures Partners raised $516 million in August.

“We can be active and aggressive at stake, but at what valuation?” asked Alpha JWC Ventures’ Joe.

“Caught too much in the money cycle”

Tech stocks plummeted earlier in the year amid rising interest rates and disappointing earnings results. Startups in Southeast Asia are still largely unprofitable, with names like sea ​​group and To grab accumulate billions of dollars in losses every year.

“For the past 10 years, FOMO has been investing,” Peng said. T Ong, Co-Founder and Managing Partner of Monk’s Hill Ventures. He was referring to how big-name investors pumped money into collapsed crypto exchange FTX out of “fear of missing out.”

Southeast Asian tech companies have lost most of their valuations since going public. The market cap of the e-commerce giant and NYSE-listed Sea is around $30 billion, compared to more than $200 billion late last year.

GoTo’s valuation of 400 trillion rupiah ($28 billion) has fallen more than 75% since its Jakarta IPO in April, while Grab has fallen 69% from its original valuation of about $40 billion since its debut in December 2021 lost dollars.

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“We’re back to reality. People are starting to leave: they have to have a path to profitability. You have to stay alive,” Ong said, using a term to refer to companies that can turn a profit before they run out of money. “They have to have positive margins. Those are the things we should have been saying all along, but we were too caught up in the money cycle.”

Venture capital firms have been urging their portfolio companies to lengthen their runways as uncertainties loom.

“Investors invest more of their deployable capital and time in supporting portfolio companies to improve their capital efficiency,” said Tan of Insignia.

“It’s not that we don’t care [profitability] last time,” said Joe of Alpha JWC Ventures. “But almost no startup is profitable in the first five years. Maybe the mindset shift…let’s be more prudent about growing. Yes, they can burn. No, they don’t have to be profitable now as long as they are capital efficient and have a strong unit economy.”

survival of the fittest

This drier fundraising landscape is a litmus test of the true sustainability of business models and industry demand, said Insignia’s Tan.

“The companies that actually survive this winter will prove to be the survivors of the declining market situation. So in a way, the market is doing a lot of work for us,” said Jessica Koh, director of investments at Vertex Ventures.

Some sectors such as fast trading are already posting losses. Quick Commerce promises to put orders in the hands of customers in less than 30 minutes.

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Indonesian fast-trade company Bananas announced in October that it was closing its e-grocery stores after failing to get the economy up and running. It first started in January.

Indonesia-based e-grocery company HappyFresh ceased operations in Malaysia after seven years, while Grab shut down its Indonesian quick trade service GrabMart Kilat. Internationally, several companies – Gopuff, Gorillas, Jiffy, Getir, Zapp and Buyk – have announced closures, strategy changes or layoffs.

“The 15-minute fast trade model in Southeast Asia is very difficult because the unit economics are very negative. Basket sizes and order sizes are pretty small,” said Teo of Altara Ventures.

With the flood of cash now swept away, it’s becoming increasingly clear which companies weren’t prepared for the challenging environment, Insignia’s Tan said.

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