Market Perspectives by January Capital — Q1 CY2022 Southeast Asia Review
January Capital is a venture capital firm that leverages proprietary data to partner with the most promising founders at the earliest stages. We focus on companies in the Asia-Pacific region who are building technologies that will power the digitization of commerce and the future of work.
Market Perspectives is a series where we summarize the past quarter of venture capital activity in Southeast Asia and offer our perspectives on the trends emerging from this data. We publish this content quarterly, leveraging both internally sourced data as well as information from our partnered company, Venture Cap Insights.
Southeast Asia Deal Tracker — Q1 CY2022
Each quarter, we provide a “tear sheet” that includes a number of key metrics for the Southeast Asian technology company ecosystem by stage of growth. We provide this via our monthly newsletter (interested readers can sign up here). The metrics include:
- Number of rounds: The total number of financing rounds verified via regulatory filings in the quarter;
- Deal value: The total dollar value of financing rounds that formally closed during the quarter;
- Average deal size: The average total size of financing rounds that formally closed during the quarter; and
- Average pre-money valuation: The actual share price paid by each investor in a financing round that closed in the quarter.
Overall, Southeast Asia recorded approximately US$1.7 billion of equity venture financing for Q1 CY2022. This was lower compared to Q4 CY2021, marking a decrease of 36% quarter-on-quarter. Digging deeper, this was largely attributed to the slowdown of Series B (-36%) and Series C+ investments (-43%) in the region. While the first quarter of the year tends to be a slower quarter generally, the total aggregate deal value this quarter is a marked difference to the momentum we observed throughout CY2021.
The most common narrative cited by commentators at present for why this type of slowdown in late-stage growth funding may occur is generally:
(i) A convergence of macroeconomic factors (i.e., geopolitical instability, inflation) are producing a negative environment for “growth” oriented companies;
(ii) Market uncertainty and downward forces have created public market volatility which has resulted in a rapid sentiment change towards “defensive” assets. This has led to substantial re-rating of public market technology multiples, driving down returns for investors; and
(iii) The poor performance of initial public offerings (“IPOs”) and growth stocks generally have left investors unclear on how to price assets, goading a general movement away from the technology sector.
While this narrative is logical, we believe there are also nuances at play in our focus geographies:
- In Q4 of CY2021, more than 40 Series B+ companies raised an aggregate of ~US$2.2 billion of capital (refer to our Q4 market perspectives here). This amount of capital raising was a record quarter for growth stage companies in Southeast Asia and one that felt anecdotally (to us as a firm) as though almost all growth-stage companies were undertaking fundraising processes simultaneously in a single quarter.
- Therefore, it is probably unreasonable to assume that we would see another record successive quarter of fundraising. If we zoom out and look at Q1 CY2022’s trend on an annual basis, year-on-year funding for Series B+ companies is +137% higher than Q1 CY2021, indicating that there continues to be an inflow of patient, long-term capital towards growth assets in Asia.
- This aligns with what we have observed from investment firms raising record funds over the past 12 months — reports estimate that the amount of dry powder held in reserve by GPs today for Southeast Asian technology investments has never been higher (on a dollar basis).
- We can also observe from data held in Venture Cap Insights that at least 33 Series C+ companies have raised successive (two or more) rounds within the last 24–36 months, as timing between funding rounds narrowed over CY2021.
- By capitalizing on this availability of capital during the past 24 months, many of these companies presumably have sufficient cash reserves at present and therefore were not actively in market during Q1 CY2022. Further, we expect that most of these companies could “weather” any mid-term “bear” markets by having cash runway for at least 12–18 months.
At the early stage, investor appetite continues to remain consistently strong — seed stage investments saw a +10% quarter-on-quarter increase in terms of number of financings, and a modest ~3% decline in terms of total funding volumes. It should be noted that alternative financing instruments (i.e. SAFE, Convertible Notes) which are commonly used at this stage of a company’s lifecycle are not represented in our data set. Anecdotally as a firm, we do see an increasing number of financing rounds being completed using these “hybrid” instruments.
Given current price volatility and general market uncertainty, it is reasonable to expect that the use of this instruments increased in Q1 CY2022, meaning overall activity at this stage would be even higher. We analyze the reasons for the continued sustained momentum of Seed funding in our section below on Observed Market Trends.
Observed Market Trends
Early stage activity continues to remain strong even as market volatility persists
Over the past few months, a combination of multiple events including US Federal Reserve rate hikes, record levels of inflation and general geopolitical uncertainty have placed significant downward pressure on publicly listed “growth” stocks. High-growth technology multiples have compressed by almost 50%, according to the Bessemer Cloud Index. Listed companies from Southeast Asia have witnessed similar downward pressure — Sea Limited and Grab Holdings Limited have witnessed CY2022 year-to-date declines of between 45% — 50% as of March 31, 2022.
While there has been a modest turnaround for software companies from absolute market lows (i.e., the Bessemer Cloud Index has increased +22% as of March 31, 2022 from the market low on March 14, 2022), most company share prices remain 30–40% lower than their peak in November 2021. While it is unclear today how public market sentiment will develop in the short-term, for most early-stage investors who tend to adopt a 10-year view when making investments, public market valuations are an important data point but not the sole one.
Despite this volatility in broader markets, data shows that early-stage activity in Southeast Asia continues to remain robust. The number of early-stage financing rounds has remained largely constant over the past five quarters. While there has been a +63% increase in total seed financing volume, this is still much less than broader venture ecosystem which saw a +94% increase year-on-year.
The diverging trends in early and late-stage financing rounds
As we noted above, despite quarter-on-quarter declines for late-stage financings in Q1 CY2022, the year-on-year trend is that deal volume and activity is still up +137% year-on-year. Given the material difference of annual growth in early and late-stage financing activity, we were interested to understand how valuations have changed by stage.
The analysis below shows the actual valuation for financing rounds at the mid-to-late stage (i.e., Series A+) and in the early-stage (which includes Pre-Seed, Seed, and Pre-Series A). This analysis is based on the thousands of financing rounds completed since 2015 in the Asia-Pacific region.
From this analysis, we believe it is possible to draw some inferences:
1. Early-stage investing is more “art” than “science” — using market comparable analysis is only one factor when investors invest in early-stage companies. Despite significant growth in Southeast Asia’s technology ecosystem since 2015, pre-money valuations have remained largely consistent.
2. Dilution may be the key factor in determining early-stage valuations — it is often said a founder’s first financing round is the most expensive. Because of this, founder dilution is a very important consideration for early-stage founders and investors. Interestingly, the median dilution across the 56 deals in Q1 CY2022 in Southeast Asia at this stage was ~20%, which is not materially different than the dilution 5–7 years ago (i.e., round sizes have increased in line with valuations).
3. There may be more volatility for late-stage investing depending on market sentiment — the analysis suggests that during “bull” markets, valuations increase far more rapidly for late-stage than early-stage companies, and in “bear” markets the opposite is traditionally true. Interestingly, despite significant market correction in public markets over the past 3–6 months, pre-money valuations actually increased substantially year-on-year.
4. Given the long timelines, there is limited correlation between early-stage valuations and NASDAQ index returns — a study of the gross returns of over 1,500 seed stage start-ups by AngelList showed that there was zero correlation with the NASDAQ index’s returns. This held true even after accounting for a time lag (to adjust for liquidity in public markets vs. private).
B2B investments now account for a larger share of overall volume
Another interesting observation in Southeast Asia over the past two years has been the continued growth in funding for B2B/B2B2C companies across almost all verticals. From accounting for ~48% of total deals in Q1 CY2021, B2B/B2B2C deals now account for 54% of total deals in Q1 CY2022, underpinning increased investor attention to these companies.
Top Sectors Funded in Q1 2022
Digging deeper into the deal data, four key sectors emerged that saw elevated levels of funding in Q1 CY2022:
- Enterprise SaaS — with a particular focus in cybersecurity, HR, and productivity workflow tools.
- Fintech — in particular, embedded fintech focused on MSME financing solutions.
- E-Commerce — a sustained trend of better servicing and unlocking access to the “long tail” of informal and social commerce merchants.
- Healthtech — mainly tackling genetic testing, telehealth, and mental wellness.
Below are two interesting sectors that that stood out to us:
Social commerce grows into an enormous opportunity
Social commerce has emerged in Southeast Asia over the past one to two years as a particularly attractive segment for venture investors. The affinity with these types of businesses has not slowed — in Q1 CY2022, a number of companies in this space were funded. The emerging opportunity appears to be in:
Social reseller platforms
Particularly those platforms that are building category-specific solutions to empower digital sellers.
Other startups that have previously raised in the space include Kitabeli and Dagangan.
Agent reseller model
The reseller model continues to receive investor interest — interestingly, most of the companies funded in this space were in Vietnam (rather than Indonesia) for the first time.
Other startups that have previously raised in the space include Super, Evermos, Chilibeli and Resellee.
Renewed optimism in embedded financial services that better service SMEs
In an underbanked region like Southeast Asia, alternative credit solutions continue to be critical to continue to support the growth of economies. The rise of direct digital lending services and buy-now-pay-later solutions has fuelled the move away from cash payments and increased consumer usage of ecommerce — online payments in the region are poised to exceed US$1 trillion by 2025.
The first generation of SME focused financing solutions were general in nature — companies such as Koinworks and Funding Societies offer point-solutions that allow SMEs to access much-needed credit for the first time. The challenge with these platforms, however, has been reaching SMEs which are notoriously difficult to identify and assess in the form of credit risk.
Starting 1–2 years ago, we have observed the emergence of embedded fintech solutions that take a “distribution-first” model via products that add immediate value to SMEs and then look to monetize over time. The thesis is that these platforms have real, verifiable data to assess credit risk and can control payment flows to ensure Non-Performing Loans (“NPLs”) remain low. This sector has observed significant funding, with new rounds for the likes of Lummo and Desty closing in Q1 CY2022.
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DISCLAIMER
January Capital is a licensed fund manager in both Singapore (through Jan Cap Pte. Ltd.) and Australia (through January Capital Pty Ltd) (together, the “Managers”) licensed under the purview of the Monetary Authority of Singapore and the Australian Securities and Investments Commission respectively.
The information contained in this article is being provided to you for informational purposes only and does not constitute in any circumstance an offer to sell, or a solicitation of an offer to buy any interest in the funds managed by the Managers or any other companies mentioned herein. Additionally, the information in this article and any and all forward-looking statements are based upon assumptions that may not prove to be correct or accurate and the actual financial results/performance and opportunities (amongst others) may differ materially from these statements. As such, nothing contained in this article should be construed as or relied upon as financial, legal or taxation advice, or an encouragement to invest in our funds or any companies mentioned in this article. Past performance is not indicative of future results.
