Southeast Asia Tech Investment – H1 2017

We hope this helps establish a clearer picture of how Southeast Asia’s tech ecosystem is maturing, where investment is going, and where gaps still remain. We plan to update the report on a regular basis to show how the landscape is changing over time. In future, it would be interesting to extend the research to cover a variety of more qualitative matters, such as the availability of talent, and we look forward to working with partners who can help us achieve this.

The headline story of Southeast Asia is the continued growth in technology investment. A record amount of $2.3B was invested during the first half 2017 over more than 140 deals, compared to $2B in H2 2016 and $1.4B in H1 2017. This suggests a healthy and growing interest in the potential for Southeast Asia’s tech startups. We estimate that this amount may more than double for the second half, based on a number of large deals that were announced in July.

A closer look at the data reveals key features, some of which have been present for a while, that underlie the headline numbers:

Concentration of capital in a few companies

2017 sees a continuation of ‘mega-deals’ as later stage companies capture ever-larger investments. Fully 81% of funding in H1 2017 was captured by just 3 investments (Go-Jek, Garena and iFlix). This trend is expected to continue for the second half of 2017. Interestingly, the earlier stages of capital raising look more stable. The number of deals in earlier stage deals seems consistent with 2016. The amount invested at each stage is also relatively stable compared to the last couple of years. Pre-Series A deals average out at US$0.5M per deal, Series A at slightly more than US$2M per deal, and Series B at US$9M per deal.

Diversification of capital by country

Excluding the mega-deals (since they skew the data), Indonesia and Singapore-based startups account for about half of the capital invested in Southeast Asia. This is a decline from earlier years when startups in these countries accounted for up to three-quarters of investment. The same split is reflected in the number of deals done: 50% to Indonesia and Singapore companies, 50% to the rest of the region. Of the rest, Vietnam and Malaysia appear to be experiencing stable or growing interest, while investment has cooled off in Thailand and the Philippines. However, a single half-year period does not make a trend, so we will look again once the rest of 2017 has played out.

Diversification of capital by sector

A few familiar sectors continue attract the most capital – of course, these are the sectors in which the mega-deals are occurring. These are online retail (e-commerce and C2C) and local services (various on-demand services and urban transportation), along with ‘multi-vertical’ companies (often a mix of the other two).

Other sectors in which multiple deals are happening and significant amounts of capital flowing into include financial services, entertainment and travel. We see growing investor interest in a range of industries such as real estate, healthcare, and enterprise software, as startups emerge to address issues in many traditional, and still largely offline, parts of Southeast Asia’s economy. We expect more attention to go toward B2B models as entrepreneurs explore opportunities to apply technology throughout various industry value chains.

Funding gaps and fund specialisation 

The existence of gaps in the funding available for early-stage startups has been observed by others. It does seem to be the case that Southeast Asian startups raise Series B funding at a lower rate than those based in the US or Europe. However, we are talking about a less mature funding environment, and time will tell whether this ‘corrects’ itself over time. Certainly, we are seeing VC funds being raised that target this stage, and the availability of capital for Series B rounds will likely improve.

We also see the emergence of sector-specific funds, including our own new fund, called STV, which invests exclusively in startups within the online fashion/apparel sector. The fund will seek out ambitious founders who are using disruptive technology to build winners in this exciting segment. To help realise this, we have partnered with Start Today, the US$10B company behind Japan’s leading online branded fashion retailer Zozotown.

Exits are by M&A

The majority of liquidity events for startups and early-stage investors continue to come from the sale of shares either to later stage investors and/or to strategic acquirers, while liquidity through IPOs remains a rarity. Despite a relatively small sample set (we don’t always know the details of exit price or percentages liquidated), it seems that a ‘very good’ exit in the region is priced somewhere in the region of US$200M. Based on 2017 so far, that may well increase by the time we have a full year’s worth of data to look at.

Acquirers generally fall into one of two buckets – either they are corporates (e.g. REA, Seek, Telenor) or larger tech companies (e.g. Alibaba, Grab, Go-jek). In both cases, their motivation for buying Southeast Asia’s startups appear to include a geographic extension (e.g. Alibaba) or acquisition of complementary technology or teams (e.g. Go-jek). Buyers are typically from within the wider APAC region, although there are isolated cases come from all parts of the world. The largest number of deals are made by Singapore-based acquirers, while Chinese buyers have spent the most.

Overall it’s been an encouraging first half to 2017, and the outlook for the full year is very healthy. Various challenges still remain: ensuring sufficient capital is available to high-quality startups based in the less invested parts of Southeast Asia, and possibly also to startups based beyond the region’s capital cities (we don’t have a breakdown of this data yet); bridging funding gaps that still remain; building more successful exit stories that help inspire more founders to start companies and attract more investors to the ASEAN region. And that’s only on the financial side of things: better connectedness within the region and to other tech hubs; more availability of talent; and more equality of opportunity are all topics that merit attention, perhaps in future editions.

The aim of this report is to show how far Southeast Asia tech has developed during the time that DMP has been investing, and perhaps to highlight some of the continuing challenges. We hope it helps everyone, whether they are startup founders, investors, or policymakers, achieve a better understanding of the landscape that we all operate within.