Southeast Asia tech investment growing at ‘natural and healthy’ pace

Removing the outliers and mega-rounds, tech investment in Southeast Asia is actually growing at a “natural and healthy” pace, according to Dmitry Levit, General Partner of Cento Ventures. 

Levit made the comment at an online briefing for Chinese investors last Friday (11 Sept), which was hosted jointly by Momentum Works and Cento Ventures. 

During the closed-door event, Levit and Jianggan Li, CEO of Momentum Works, briefed a group of 30 Chinese investors and tech executives Chinese edition of Southeast Asia Tech Investment Report – H1 2020. Some of the discussions were around how Southeast Asia investments are faring during the pandemic and the current investment trends in Southeast Asia with the rising geopolitical issues.

Connecting the dots

Key insights from the report include:

• Overall deal volume is still robust – $5.6 billion was invested into Southeast Asia in the 1st half of 2020; excluding mega-rounds and outliers, the deal volume has been demonstrating consistent growth. 
• Strong growth in $10m-$50m deals – it shows more companies are getting series B or C funding, and capital has not been an issue for companies at appropriate stages.
• Sector diversification continues – investments are no longer concentrated on very few selected sectors, but instead more healthily diversified in many sectors. 
• Decline in exit proceeds – while the number of exits stayed consistent with the previous half-year, the proceeds generated fell by nearly 50%. Over the years, it has demonstrated that $30m to $50m trade acquisition is a more likely exit route for Southeast Asia startups.
• Singapore and Indonesia remain the focus – while investment into Vietnam has slowed down significantly.
• Looking ahead to the rest of 2020 – Most deals completed in H1 2020 may well have originated before the pandemic. And with the pandemic-related restrictions peaked in Q2 2020, the full effects will likely show up in the Q3 and Q4. 

Alfonso de los Reyes, Head of Insights at Momentum Works also shared his view following with his observations from the Momentum Works Industry Enablers in Southeast Asia Report. The report draws deep connections of all the relevant indicators to give a fair representation of Southeast Asia, and its opportunities/challenges. De los Reyes highlights these key indicators and constraints, and advises investors and companies to make prudent decisions and seize the right opportunities at the right timing. 

A ‘normal speed’ of growth

Many interesting questions were raised following the sharing. Here are some of them captured from the discussion:

Q1: Due to the current pandemic, it seems that many VCs are slowing down its investment into startups. What are your observations for the LPs investing in VC this year?

A1: Levit felt that the overall SEA investment landscape from international LPs only slowed down in March & April after it went through the initial shock. But many local LPs in the region started to slowly disappear from the market because they are unsure of the budget allocations, commitment, and some even reconsidered their exposure to tech investment as a whole. However, sovereign investors including Temasek and its affiliate funds remain active.

It is also likely that cross border deals have largely stalled because of the inability to travel or conduct on-site due diligence.  

Q2: From 2016-2019, we saw many mega-deals happen in SEA especially in 2018 where we can see many startups became Unicorns. Except for all those mega-deals, why are other investment deals in Southeast Asia not growing that fast? Is this something that VCs and LPs in SEA should be concerned about?

A2: Levit felt that the current speed is quite normal in Southeast Asia. When big players like Alibaba, Softbank, Sequoia, etc. are actively making mega deals, this segment seems to move faster compared to other deals. But when they are inactive, investment in Southeast Asia is working at a moderate speed of growth, with no massive exits or massive shifts. A new trend for series A round is that many startups choose to increase their fund size to ensure they have additional cash buffers during uncertain times.

Q3: With the rising geopolitics tension between China-US and China-India, is there an observable trend that more capital from Chinese investors would be channeled to Southeast Asia? And should Chinese investors be worried about investing in Southeast Asia?

A3: Levit felt that it’s hard to see under the current pandemic when all things are difficult to analyze and predict, however, he observed quite a number of Chinese entities intensively looking at opportunities in Southeast Asia. He also joked that discussing geopolitics as a Russian is probably a more dangerous move. And for now, Chinese investors should not be worried that Southeast Asia will be like India or the US within the next 3 years.

Li also believes that currently, there is a trend of Chinese companies coming to Southeast Asia or intending to set up Singapore headquarters. This might be good news for Singapore but in the long run, the instability of the international environment will have an impact on the entire industry, which will hurt Singapore as well.

Q4：Blockchain in Southeast Asia is still in its early stage and it seems that not too much capital showed interest here. What is your viewpoint on blockchain investment in Southeast Asia?

A4: Levit felt quite negative on Southeast Asian blockchain although the technology is not solving any real problem there, with the exception of perhaps cross border remittance.

Q5：Do you think the unicorns in Southeast Asia will continue to increase? Regarding the secondary market, how do you see secondary transactions?

A5: Levit believed that some companies valued more than $500M will naturally attract more attention from international investors who are able to write cheques giving companies unicorn valuation. It will be a natural progression for large and still-growing companies. 

For secondary transactions, Levit believed that they are relatively active in Southeast Asia, with local investors more inclined to exit, investors in other regions also want to participate more in the region’s growth story, which promotes the exchange between the two. 

The briefing session was conducted in both English and Chinese. To be kept updated about future Momentum Works private briefings and seminars, please email [email protected]  

Southeast Asia Tech Investment – H1 2020 report is available for download. You can access the English version and the Chinese version respectively. 

An introduction of Industry Enablers in Southeast Asia report can be found here.