Southeast Asia’s startup and venture capital scene has been burgeoning for the past decade.

And the growth sped up to the fast lane over the past few years as rising consumer demands from an increasing affluent demographic, coupled with an influx of both regional and outside capital, have given rise to some multi-billion valued tech mammoths that operate in a wide variety of hotly competed sectors from countries across the region.

For instance, the five biggest names of Grab, Lazada, Go-Jek, Tokopedia, and Sea Group accounted for 70% of last year’s totalled US$11 billion funding in SEA recorded by Cento Ventures, a Singapore-based VC firm. And some of the most funded sectors, the same report calculates, include retail, fintech, logistics, as well as local services.

Findings in the report echo with what was shared with KrASIA by Jianggan Li, founder and CEO of Singapore-based venture builder and investment consultant Momentum Works, who recently sat down with us for an interview.

As much has been said about 2018, Li, who used to be the CEO of Easy Taxi and Foodpanda in Singapore, made some bold but educated forecasts when being asked about the growth trajectory of local VC and startup sectors in 2019.

One budding trend Li pointed out, as exemplified by Tokopedia’s move to go toward offline channel and Warung Pintar’s funding from OVO, but should not be limited to the e-commerce or retail area, is that more and more online giants will be going offline in search of new business and growth opportunities.

According to a PwC report last year, more online retailers are considering establishing physical stores as competition in the space stiffens and retailers look for new avenues for growth.

In Southeast Asia, the report said several online-only retailers – including Zalora, Naiise, and Berrybenka – have opened brick-and-mortar stores, joining the ranks of Amazon, JD, and Alibaba as they explore to combine online technologies and traffic with offline channels.

Additionally, Li said this year will see new consumer brands emerge, as people in the region aspire for more quality goods, while financial technology remains an attractive investment category.

The below interview excerpt is edited for brevity and clarity.

How would you assess Southeast Asia’s VC space in 2018? What were the hottest industries?

One notable change in last year’s VC sector, is the influx of VC funds from outside the region, bringing over an assortment of backgrounds and expertise. For instance, startups from the Indonesian SME online finance sector have been consistently funded by Japanese VCs.

Last year’s attractive sectors mostly include, fintech, e-commerce especially those vertical ones, such as fashion e-commerce, such as Zilingo and Pomelo. There is also logistics thanks to the growth of the e-commerce sector.

In Singapore specifically, there is also deep tech, not gaining much attention but well funded by the government and is also on the right trajectory to grow.

Which areas do you think will attract the bulk of money and give birth to unicorns this year?

There is one keyword, offline. I’m talking about the trend of online companies breaking away from the internet, and going offline to find new business model and opportunities.

For example, both Tokopedia and Warung Pintar have done their share of the online plus offline experiments recently. This will become an important theme in upcoming years.

Another notable theme, which is in line with what is happening in China right now, is that as people are getting richer with more disposable incomes, their desire for higher quality products and services is leading to a consumption upgrade tide.

Lastly, as always, financial technology, logistics, e-commerce, and e-commerce related business will also continue to attract funding.

In terms of sectors that will produce new unicorns this year, two ways to look at it: first, whether a sector is attractive enough to get VCs believe in and chip in to concertedly brood one; second, whether there are enough unicorn candidates from which one will eventually hit the mark.

Based on these, for 2019, sectors that will give birth to unicorns would be online content (think of how Netflix and Tik Tok performed) and mobile payment. Though both categories would still need a lot of capital injection to fuel growth.

Will the existing unicorns (Grab, Go-Jek, Tokopedia, and so on) continue to expand this year or do you see a slowdown?

Grab’s super app strategy, if it works out, will allow its valuation to balloon significantly. Go-Jek, meanwhile, will count on the development of payment business in Indonesia and regional expansion to justify its valuation, which is almost reaching Grab’s level.

Tokopedia’s offline strategy is also interesting to watch. This will be a classic case of how one startup could spur its own growth by dubbing in a new area of mobile payment. There have been other players expanding into mobile payments as well, also worth watching.

Traveloka will face some competition and it will also be aggressively investing and acquiring to defend its market position. The company has secretively done this before, acquiring smaller regional players to annihilate competition and combine strength.

In the ride-hailing space, I don’t see the emergence of a significant new player to challenge Grab and Go-Jek duo. Who would put money in a new ride-hailer? Probably no one.

What are the challenges you observe for VCs investing in SEA? Are there enough companies to invest in?

The biggest challenge is probably there aren’t enough good exits to generate sizable returns to the investors. Some VCs might resort to incubate their own startups if need be.

Right now, many VCs are eyeing to raise their second or third funds. And in order to impress potential LPs with good exits, some funds are even willing to exit their late stage portfolios at a discount.

Over the last couple of months, newer VCs were able to raise easily but 2019 could be a year of uncertainties.

VCs also need to have a country-focused fund, especially one that specialises in early stage investments. This type of fund will require a VC to have a sharpened focus with deep understanding of the local market, especially at a time when good projects are no more lower hanging fruits and not easy to find.

How do you view valuations now both at the early and late stages? Are the valuations fair, too low or to too high?

At the early stage, there are more choices as well as more wiggle room for negotiation. So the market creates an equilibrium.

Moving along to the later stage, companies are usually overvalued based on their current performance and scale. However, if these companies could provide some good exit options and if they also happen to operate in an attractive sector, then their high valuation might be justified.

But all in all, we might start seeing more and more down rounds or a zombie company apocalypse, a sprout of startups that raised high and performed low, with valuations between US$100 million and US$500 million.

You mentioned about VCs in SEA talking to each other this year, how would this benefit the firms and affect their investment decision?

This comes from the previous observation that, albeit all in SEA, VCs from the US, Japan, and China don’t really have deep interaction with each other. But this is changing this year. So that diverse views and thoughts will be exchanged among different VC groups, and I think gradually a healthy debate will eventually follow to influence their investment decisions.

This post originally appeared on kr-asia.com. It has been republished here with permission.

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.