Annually, Temasek collaborates with Bain & Company to produce the e-Conomy SEA report, a publication by Google that delves into Southeast Asia’s digital economy. The most recent report, released today, highlights a familiar challenge for many startups and investors in the region: the current funding landscape is proving to be a complex terrain to navigate. Nonetheless, there remains a significant reservoir of unallocated capital, commonly referred to as “dry powder.”
The report reveals that private funding in sectors related to the digital economy has regressed to 2017 levels after reaching unprecedented highs in 2021. In the first half of 2023, the total funding amassed amounted to $4 billion, making it highly improbable to match the $27 billion raised in the entirety of 2021. Furthermore, the number of deals dwindled to 564 in the first half of 2023, down from 2,697 throughout 2021. This decline in funding is affecting startups at all stages, from seed investments to more advanced stages, and is pervasive across the Southeast Asian markets.
While the report attributes this funding decrease to global trends involving higher capital costs and issues spanning the entire funding lifecycle, it also underscores that Southeast Asia’s funds are yielding lower returns for investors compared to funds concentrated on other regions. Startups are under increasing pressure to demonstrate profitability and articulate clear exit strategies.
In a survey conducted by Bain and Temasek, a striking 87% of investors reported that fundraising had become more arduous, with 64% witnessing reduced diligence and early-stage activities. A staggering 88% expressed concerns about the growing difficulty of achieving successful exits.
The report elucidates, “SEA-focused funds have distributed significantly lower returns compared to other region-focused funds, implying challenges in generating attractive returns for investors.” This phenomenon is partly attributed to the impact of interest rate hikes, which led to a decline in IPOs and listings on regional stock exchanges. Valuation discounts for secondary market transactions also became more prevalent.
Despite these challenges, the digital economy is projected to reach $295 billion by 2025, although this figure has been revised downward from the $330 billion estimate provided in the previous year’s e-Conomy SEA report.
On a more optimistic note, the report reveals that the pool of “dry powder” is growing, even in an environment marked by investor caution. In 2022, private equity and venture capital funds had $15.7 billion committed (minus the amount yet to be invested), exceeding the $12.4 billion in 2021.
In 2023, Southeast Asia’s digital economy achieved a milestone by generating $100 billion in revenue for the first time, exhibiting a Compound Annual Growth Rate (CAGR) of 27% since 2021. Major contributors to this revenue include e-commerce, travel, transportation, and media, which collectively accounted for $70 billion. Additionally, Gross Merchandise Value (GMV) is expected to grow by 11%, reaching $218 billion in 2023.
Furthermore, digital payments are gaining popularity and now constitute over half of all transactions in Southeast Asia.
