From 2016 to 2017, total VC investment in SEA rose from US $2.52 billion to $7.86 billion despite the fact that the number of deals closed dropped from 335 to 320. This means that within a year, the average deal size more than tripled from $7.5 mil to $24.6 mil.

While the shift towards late-stage investments can be observed globally, the trend is particularly pronounced in SEA. In fact, given Asia’s enormous share in private equity, it is safe to conclude that the trend was driven by the region. What could account for this?

Lower risk appetite

With the market downtrend in 2016, many VCs sought to control its exposure to risk. Product-market fit is one of the most important objectives for a startup, and the greatest risk for a early-stage investment. With increased risk aversion, VCs began structuring their portfolio towards late-stage companies with validated market fits. Established market viability and feedback provides investors with more confidence in deal flow projections.

With a validated product, Grab easily receives $2B Investment from Didi and SoftBank

Attractive avenues for late-stage investment

SEA in 2014/15 was populated by early-stage startups raising seed rounds, so investors were not presented with many choices anyway. Many of the startups which raised seed round then are now attractive avenues for late-stage investments. Go-Jek, for instance, raised its Series A round in 2014 and has just secured its US $1.5bil Series E funding earlier this year.

However, not all startups scaled into late-stage giants. One of the most spectacular failures was Novelsys, which set out with the ambition to build Asia’s 1st wireless charging network. After two years of operations, the startup ceased operations in January 2016.

The reason?

“… we failed to build a scalable business to enter retail in the competitive hardware space, like Razer, Fitbit or Oculus. We failed to find a product-market fit.”

Which brings us to our next point.

Cost of due diligence

What is often understated is how hard early stage investing can be. With the sheer number of (often identical) projects, there is high cost of due diligence in selecting for the right deals. Pre-seed and seed investors generally evaluate founder authenticity, market opportunity, product viability and distribution potential before signing off any checks. Funds without the expertise or positioning in early stage investments are likely to move upwards towards Series A investments with known deal flows.

Whatever your goals are, nothing can be achieved without a strong team.

Outlook

Given both global and regional market conditions, the trend towards late-stage investments will continue. That said, if you happen to be an early stage founder, all is not lost. As markets emerge in the region, there remains a sizeable number of players positioning themselves as pre-seed and seed investors. Among the VCs based in the region, 58.4% continue to invest in some ways into pre-seed and seed rounds.

Thanks for reading The Low Down, insight and inside knowledge from the team at Momentum Works. If you’d like to get in touch with us about any issues discussed in our blog, please drop us an email at hello@mworks.asia and let us know how we can help.

 

Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at hello@mworks.asia.