Annually, Temasek collaborates with Bain & Company to produce the e-Conomy SEA report, which delves into the digital economy of Southeast Asia and is published under the aegis of Google. The latest edition of this report, released today, underscores a familiar truth to many startups and investors: the current funding landscape in the region presents significant challenges. However, there is still a substantial reservoir of unallocated capital, often referred to as “dry powder.”
Private investment in sectors related to the digital economy in Southeast Asia has regressed to 2017 levels, following the peak recorded in 2021. In the first half of 2023, the total funding amounted to $4 billion, making it highly unlikely to reach the $27 billion raised in the entirety of 2021. The number of deals also plummeted to 564 in the first half of 2023, in stark contrast to the 2,697 deals in 2021. This decline in funding affects startups across all developmental stages, from early seed funding to later-stage rounds, and is pervasive across various Southeast Asian markets.
While the report attributes the drop in funding to “global trends towards increased capital costs and challenges throughout the funding lifecycle,” it also highlights that Southeast Asian funds have yielded lower returns to investors compared to funds focusing on other regions. Startups are under increasing pressure to demonstrate profitability and present well-defined exit strategies.
Among the investors surveyed by Bain and Temasek, 87% indicated that fundraising had become more arduous, with 64% observing a decline in due diligence and activity at the top of the investment funnel. Furthermore, 88% expressed concerns about the growing difficulty of achieving profitable exits.
The report points out that “SEA-focused funds have distributed significantly less capital compared to funds concentrating on other regions, indicating difficulties in generating returns for investors.” One contributing factor to this situation is the rise in interest rates, which has reduced the number of initial public offerings (IPOs) and listings on regional stock exchanges. Valuation discounts for secondary transactions have also increased.
Although the digital economy is projected to reach $295 billion by 2025, it is worth noting that this estimate has been revised down from the $330 billion forecasted in the previous year’s e-Conomy SEA report.
On a more optimistic note, the report highlights a surge in “dry powder,” despite investor caution. In 2022, there was a commitment of $15.7 billion to private equity and venture capital funds (excluding the portion designated for investment), surpassing the $12.4 billion commitment in 2021.
In 2023, the revenue generated by Southeast Asia’s digital economy surpassed $100 billion for the first time, growing at a compounded annual growth rate (CAGR) of 27% since 2021. Key contributors to this growth include e-commerce, travel, transportation, and media, accounting for $70 billion of this revenue. The Gross Merchandise Value (GMV) is anticipated to expand by 11% to reach $218 billion in 2023.
Furthermore, digital payments have gained prominence, constituting over half of all transactions in Southeast Asia.
