Why Southeast Asia’s Tech Industry Growth is Slowing Down?

Following a few years of dramatic growth, Southeast Asian tech start-ups and behemoths are now facing a bleak future. During the third quarter of 2022, global venture capital investments and deals plummeted to levels not seen since the beginning of the COVID-19 pandemic.

This investment slowdown is affecting North America and Europe hard, and Asia is getting hit too. During 2022, the regressive investment climate impacted both high-income and emerging Asia, with Asia’s largest economies, India, and China, being heavily affected. Tech worker retrenchment became increasingly common.

The gloominess in the innovation ecosystem stems from a complex mix of factors:

  • Aggressive policies of central banks.
  • Developed economies were attempting to curb post-COVID-19 inflation (primarily the rate hikes by the Federal Reserve resulting in an extraordinarily strong US dollar).
  • Russia’s invasion of Ukraine and the subsequent volatility in food and energy prices.

While 2021 was an ideal year to be an early-stage tech entrepreneur and investor, the same was untrue of 2022. ASEAN trends show a similar characteristic – acceleration of investments and deals in the run-up to 2022, followed by the ensuing slowdown and headcount cuts by tech companies.

Birth of Unicorns

According to the ASEAN Investment Report 2022, VC investments continued to grow from the mid-2010s to reach over US$66 billion in mid-2022. VC investment in the region climbed up sharply between 2015 and 2020, outstripping India and China. These developments indicate that ASEAN has great innovation potential. The notable growth of VC investments has spurred the region to give birth to over 40 unicorns.

VC investments in ASEAN remain primarily focused on Singapore, ASEAN’s innovation hub, and Indonesia, ASEAN’s biggest market. Investments in other countries like Vietnam, Thailand, Malaysia and the Philippines have to seen a rise.

Since 2022, these investments have begun to dither. The sums raised by ASEAN start-ups were down by around 40% during the second quarter of 2022 compared to the previous year.

Robust Digital Economy

Deals in tech and Internet start-ups were affected by smaller reductions, if any at all. But investors are now more cautious, especially in regard to late-stage investments. IPO gains are turning less frequent as well in the current macroeconomic scenario.

Global conditions need to be better for investors and early-stage entrepreneurs, and the global economic outlook remains extremely fickle and difficult to predict for the medium to long term. But there is no reason to be overly pessimistic when looking at ASEAN.

A strong macroeconomic performance marks the region. ASEAN’s economic growth is projected to be above 5% in 2022 and 2023, outperforming China for the first time. International and regional investors will certainly consider this fortuitous macroeconomic outlook.

International investors still perceive ASEAN as a high-growth potential and less-known Asian market when compared to developed not only Asian economies, like Japan or South Korea, but also to large emerging ones, like China and India.

There is also room to widen the role of regional investors. ASEAN-based private equity and VC firms are a growing source of funding for start-ups and for cross-border activities. Most leading ASEAN venture capital firms and funds are headquartered in Singapore. However, there is an opportunity to expand activities in other ASEAN countries.

Policies supporting the emergence and consolidation of innovation ecosystems in individual ASEAN member states and on a regional level could significantly accelerate this process.