Every year, Temasek teams up with Bain & Company on the e-Conomy SEA report. It covers Southeast Asia’s digital economy and is published by Google. This year’s report, published today, underscores what many startups and investors already know—the region’s funding landscape is currently challenging to navigate. On the bright side, there’s still plenty of “dry powder” left to deploy.
Private funding to digital economy-related sectors has fallen back down to 2017 levels, after hitting record highs in 2021. In the first half of 2023, total funding was $4 billion, which means it is very unlikely to reach the $27 billion raised in all of 2021. Deal count fell to 564 in the first half of 2023, compared to 2,697 in all of 2021. The funding decline affects all stages of startups, from seed to E+, and is happening across Southeast Asian markets.
While the report says that the drop in funding is “in line with global shifts towards the higher costs of capital and issues across the funding lifecycle,” it also notes that Southeast Asia funds have returned less capital to investors than funds focused on other regions, and startups are under pressure to show they can be profitable and have clear exit strategies.
Out of investors surveyed by Bain and Temasek, 87% said that fundraising had become more challenging, while 64% said they had seen a drop in diligence and top-of-funnel activity. 88% felt that exits were becoming more difficult.
“SEA-focused funds have seen significantly lower distributions to paid-in capital compared to other funds that are focused on other regions, suggesting difficulty in raising returns for investors,” said the report. One reason for this is interest rate hikes that reduced the number of IPOs and listings on regional exchanges. Valuation discounts for secondaries also increased.
The digital economy is expected to reach $295 billion by 2025, but as Reuters notes, that figure has been lowered from the estimate of $330 billion given in last year’s e-Conomy SEA report.
On a more upbeat note, the report found that “dry powder” is on the rise, despite investor caution. There was $15.7 billion in private equity and venture capital funds committed (minus the amount called for investment) in 2022, higher than $12.4 billion in 2021.
In 2023, Southeast Asia’s digital economy revenue also hit $100 billion for the first time, growing at 27% CAGR since 2021, with e-commerce, travel, transport and media contributing $70 billion. GMV is expected to grow at 11% to $218 billion in 2023.
In addition, digital payments are becoming more popular, making up more than half of transactions in Southeast Asia now.