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A SEA of red and what this means for the ecosystem

How sentiment changes. 

A scroll through Twitter, LinkedIn, or one’s brokerage apps can be a pretty tough task these days. News of layoffs, declining prices, red hot inflation, and overall bleak predictions continue to dominate headlines.  

This year has seen a dramatic change in global financial markets, with investors around the world coming to terms with an imminent economic downturn. Over the last two months, markets around the world have dropped into the red zone, across industries and asset classes. 

Notably, the technology sector that stood resilient through COVID is seeing a sharp downturn. The NASDAQ index, which measures the health of the technology sector, has fallen by nearly 30% from its peak in November. 

Crypto currencies that were thought to be “inflation hedges” have also taken a beating, falling 40% from its peak late last year.

Inflationary pressures around the world have led to tighter monetary policy measures by central banks. When banks hike interest rates, the cost of borrowing increases for companies, which limits growth opportunities for businesses. 

Moreover, higher rates encourage investors to rebalance their portfolio and invest in safer instruments like bank deposits, which in-turn reduces the liquidity in the stock market and relieves inflationary pressure by reducing money circulation. With tighter monetary controls expected in the coming months, it may be a long road to recovery for public markets.

This has also led to warning signals from prominent funds and accelerators, akin to those seen during 2000, 2008 and 2020. 

So how exactly has this impacted the burgeoning VC ecosystem of Southeast Asia been impacted? 

Not immune to the pain 

2021 was a record year for the Southeast Asian ecosystem, with US$14.2 billion deployed and representing 70% growth year-on-year. 

2021 saw an influx of significant foreign capital, and several mega rounds, such as those for Grab, GoTo, Carsome, Ninjavan, and others, pushed funding to record highs. 

However, just as things got comfortable, the Fed dropped the bomb of higher interest rates. The music stopped, and funding dropped dramatically. 

Late stage investments dropped by 35% in Q1 CY2022, compared to Q4 CY2021. A huge part of this was China, which saw a 50% decline. Several startups paused fundraising efforts, and several others were forced to layoff folks. 

However, while certainly not rosy, negativity can sometimes spiral out of control. Particularly for Southeast Asia, there are certain reasons to still be optimistic. 

A possible temporary blip

Southeast Asia has traditionally been an underfunded region. Most crossover and global funds have only made their first investment in the region in the last 5 years.   

Moreover, a key aspect that does not get spoken about enough is dry powder. Despite a war, a pandemic, inflation and a slowing economy, Asia is on pace for another record breaking year in fundraising. 

As seen below, fund fillings reached a record high, spread across primarily private equity, hedge funds and venture capital.

These funds, with record dry powder, will need to deploy capital sooner or later. While this may not be the case in 2022, the long term capital commitment to be allocated towards Southeast Asia seems to remain intact. 

Therefore, while Southeast Asia may not see the same pace of unicorn creation or capital deployed as last year, it is important to remember that company building is a long term game. 

And in that regard, the Southeast Asia growth story remains strong. 

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