Why Funding Levels in SEA are Constantly Dropping – An Analysis

After hitting a record high in 2021, the funding levels for digital sector startups throughout Southeast Asia have fallen to their lowest levels. In 2021, the total funding in the region amounted to $27 billion. Compared to this, the first two quarters of last year together witnessed a meagre $4 billion being raised.

This rapid decline in funding is being witnessed across all levels and stages of startups. As per analysts, the primary reason is that the capital return on investments in this particular region has been lower compared to others. Now, the pressure is on the startups to prove that they can be profitable.

Is the Industry Drying Up?

Last year, Reuters reported that the digital economy in SEA would grow to become a $330 billion industry. But, this year’s reports show the number reduced to below $300 billion. Investors who deal in SEA-focused funds have been either reducing their distribution rates or giving fewer funds in the form of capital, thereby signalling a fall in overall valuation.

Another significant reason for the decline in valuation is the increment in interest rates. Regional exchanges increasing the interest rate has led to fewer IPOs in the entire SEA region. So, the funding level has decreased as well, including secondaries.

The valuation of the startups dealing in the digital economy segment has also fallen pretty much unilaterally.

Investors Want Profits

Despite the fall in funding, 2023 was the first year that the digital economy in SEA actually hit the $100 billion mark. A whopping 27% CAGR was also witnessed, with media, transport and travel, and e-commerce being the leading segments.

So, there is still room for growth and although investor action may remain low up till 2025, once the profits start showing, they may be back in action.

As of now, around $16 billion worth of funds have been committed by investors in private equity and venture capital. This number will also increase once the profitability factor rises.

SEA has been the hotbed for tech during the last half-decade. And while the innovative nature of startups in the region has not changed, the lack of short-term profitability is definitely a factor that needs to be remedied. The promise of change still remains, but these startups will need to rise to the occasion in order to claim the funding that has been promised to them.