Southeast Asia's internet economy remains bright spot despite global investment headwinds

• 70 aspiring unicorns in SEA, economy grown much faster, US$60bil added to projections
• Shift in funding gap from Series B & C to Series C & D slowly & surely being addressed

In a study of contrasts the e-Conomy SEA 2019 report by Google, Temasek and new partner, Bain & Company, points out an overall sombre tone for the global economy. “Rising trade tensions between the US and China has further dampened demand and led to falling trade flows. These, in turn, have curbed investment spending and added to the risk of recession. The spillover effect to funding in the Internet economy is evident,” the report said.

Citing data from Crunchbase’s Q2 2019 Global Venture Capital Report, global venture funding dropped 17.5% in the second quarter of 2019 from the same period earlier.

And yet, despite the macro gloom, the internet economy of Southeast Asia (SEA) seems to have gained an unstoppable momentum, “But even as global tech funding takes a hit, Southeast Asia has remained a bright spot,” says the report, with 2019 set to match and perhaps even exceed 2018 with the report forced to make upward revisions in some of its earlier projections.

Temasek’s joint head of investment group, Rohit Sipahimalani said: “In spite of global headwinds that we are seeing, 2019 continues to be on track, to at least match if not exceed 2018.”

In the original Google Temasek report, it was estimated that the region will require between US$40 billion to US$50 billion in funding to grow a US$200 billion Internet economy by 2025. “Six years ahead of that estimate, the region is already close to meeting that mark,” stated the latest report.

“The economy has grown much faster than what we have expected and we have revised our projections to US$300 billion by 2025,” said Rohit. The latest projection is US$60 billion more than estimated in 2018.

One key finding of the report is that the region’s internet economy has hit US$100 billion, marking a 39% increase from US$72 billion in 2018. In similar fashion, funding flows into the region have continued to grow healthily with Internet firms raising US$7.6 billion in the first six months of 2019, about 7% more than in the same period the year before.

In total, close to US$37 billion flowed into Southeast Asia’s Internet economy for the period spanning from 2015 to the first half of 2019. Dominating the funding scene in the region are ride hailing and e-commerce with US$14 billion and US$9.9 billion worth of investments respectively in four years.

“Unsurprisingly, the bulk of funding has continued to flow to the region’s biggest tech companies. Over the past four years, Southeast Asia’s unicorns attracted $24 billion of the total $37 billion raised,” the report revealed, highlighting Bukalapak, Gojek, Grab, Bigo, Lazada, Razer, OVO, Sea Group, Traveloka, Tokopedia, and VNG as the 11 regional unicorns, with Indonesia leading the pack with five.

Meanwhile, some of the 70 aspiring unicorns mentioned in the report are Carousell, Ninja Van, iFlix, Gobear, Shopback, Halodoc, PropertyGuru, Sendo.vn, and Zilingo. While unicorns and aspiring unicorns likely took up most of the funding, over US$7 billion in funding went to more than 3,000 startups in the last four years.

Investors’ optimism on SEA is encouraged by strong structural drivers in support of the Internet economy which primarily are “a young population, growing Internet connectivity and rising income levels.”

The doubling in the average deal size in early-stage funding over the last three years is a clear indicator of investor confidence. ” In 2016, the average deal size of seed funding stood at about US$500,000, but this has surged to an average of US$800,000 in 2019. Similarly, the average deal size at the Series A stage has doubled from US$2 million in 2016 to US$4 million in 2019.”

The report also draws attention to a shift in “financing gap” in Series B and Series C funding as identified in 2018 to Series C and Series D. “Deals in the Series C and D bracket have risen in the first half of 2019 to make up 19 rounds, up slightly from 16 in the same period a year before. But the total amount raised has plateaued at US$600 million, down from US$700 million a year ago. This pales in comparison to the US$5 billion raised by Unicorns in Series E and above.”

However, Rohit believes it is a gap that is being resolved with some of the larger private equity firms looking at “earlier stage promising companies” in this group. In addition to Temasek itself has also invested in about four companies in this gap area, he shared that venture capital firms that have invested in startups but now find themselves unable to support companies beyond due to “size and mandate to only invest in early stage” have begun raising “growth funds” to go later stage.

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