The global economy remains uncertain due to high inflation globally and geopolitical conditions. This has created challenges for economies in Southeast Asia, particularly for digital startups.
Inflation is still high, even though it is starting to ease. Interest rates are at a 15-year high and are expected to remain elevated for the foreseeable future. This has led to a decline in startup valuations as alternative investment assets, now significantly below their peak in 2021.
The funding slowdown in Southeast Asia has shown no signs of abating. The number of equity funding deals fell to 427 deals up to 4 September 2023, a drop of 58.1% from 1,019 funding rounds in 2022. The total proceeds are foreseen to decrease by 65.75% to US$6.2 billion by the end of this year, according to the latest report from Tech in Asia.
From the geopolitical landscape, most ASEAN countries will have new leaders by the end of next year, including Indonesia. The leadership transition across ASEAN countries is creating a dynamic political landscape and could impact the investment landscape in the region. It is crucial to be aware of these challenges to make strategic decisions. The new administration will be vital in shaping the country’s values and future while staying relevant and maintaining current economic policies.
“We can only hope that they will continue the previous policies. We believe that they will build on the solid foundation laid by the previous administration and prepare the nation for continued growth and prosperity,” Roderick Purwana, Managing Partner at East Ventures said.
However, as the world’s fifth-largest economy, Southeast Asia shows its resilience. Southeast Asia boasts impressive numbers: a combined GDP of US$4 trillion, a population of 650 million, over 70 million small and medium-sized businesses, and the potential to grow its economy by US$200 billion.
In 2024, ASEAN’s economy is foreseen to grow 4.5%, higher than the global economy. The region’s inflation is also manageable. ASEAN countries can maintain their interest rates and currency depreciation. These facts show that the region has resilience from the global shock. ASEAN’s economic growth keeps becoming a ‘bright’ and ‘rare’ spot amidst the global market. Therefore, ASEAN will be the epicentrum of growth.
Zooming into Indonesia, the country is well-positioned to lead this growth as home to the world’s fourth most populous population, with a growing young population and high internet penetration. The country’s digital economy is expected to hit US$290 billion rapidly in the coming years.
Indonesia has one of the highest real GDP growth rates globally and not just in Asia, according to the International Monetary Fund (IMF). Its GDP per capita is projected to increase from around US$3,000 in 2010 to US$5,000 by the end of this year and potentially surge to US$10,000 by the end of the decade.
“This is an inflection point for Indonesia. Regardless of the exact figure, growth beyond US$5,000 per capita will primarily represent growth in discretionary income, stimulating consumption in various sectors, such as infrastructure, climate, the digital economy, and downstream commodities and raw materials. These factors will drive Indonesia’s GDP to surpass US$2 trillion by the decade’s end,” Roderick added.
Remaining bullish and prudent amidst the scarcity of private funding
Amidst the global uncertainty, regional leadership transition, and scarcity of allocation to private companies, East Ventures, the venture capital firm that has longed in Southeast Asia’s market since 2009, is prudent and bullish in investing in this region, particularly Indonesia.
In the first half of 2023, East Ventures has deployed US$56.6 million to seed and growth-stage startups. Those investments inflow to startups in diverse sectors, including manufacturing, fintech, cybersecurity, healthcare, edutech, logistics, F&B, climate tech, and many more.
Willson Cuaca, Co-Founder & Managing Partner at East Ventures reveals cadence is important. Like a badminton player who has to keep playing, investors must keep investing to feel the market rhythm and make good decisions.
“We never stop investing. We do not care if it is a sunny or rainy day; we will still invest in good founders and stop investing if there are no more good founders to be invested. We have witnessed an improvement in founders’ qualities over time, which can build a successful business more quickly than ever. Time to scale digital business in Southeast Asia has been compressed and accelerated.” Willson emphasizes.
Some strategies worked during the COVID-19 crisis that founders can apply to the current funding crisis. Those strategies differ for each stage, including the growth and seed stages. First, East Ventures’ guiding principle for growth-stage companies is focused on unit economics, which means ensuring that each transaction is profitable and that the company is sustainable.
This strategic positioning ensures the growth of East Ventures’ portfolio companies. Currently, 40% of East Ventures’ growth portfolio companies have positive EBITDA, while other portfolios showcase a clear path to profitability and have a runway beyond 2025. For instance, Fore Coffee, a coffee retail startup, has notched a positive EBITDA since the third quarter of 2021 and is expanding its operation in Singapore in 2023’s fourth quarter.
“We still have a dry powder to support our portfolio companies, and we are prudent in facing this second crisis; First crisis is the COVID-19 pandemic and the second crisis is in this inflationary environment” Willson added. In the middle of this year, East Ventures closed its Growth Plus fund, raising US$250 million, which accumulated the firm’s total of US$835 million of fundraising over the past year, a series of funds from Seed, Growth, and Growth Plus. This fund, a testament to the confidence in East Ventures’ investment strategy by the limited partners (LPs), showcases East Ventures’ support of the lifecycle of its portfolios.
Building a diverse and collaborative digital ecosystem in Indonesia
Apart from the economic and demographic factors, other considerations lying on East Ventures’ confidence in Indonesia’s market.. First, we are investing in founders and businesses rooted in Indonesia.
Second, as an early believer in Indonesia’s market, East Ventures has created a dynamic and collaborative digital ecosystem with broad and diverse sectors, with over 300 startups and 500 founders. Through the broad and collaborative ecosystem, East Ventures brings value creations to founders so they create a product market fit and thrive in their businesses.
The collaborative ecosystem also exists with other stakeholders, including the government and other investment partners. For instance, early this year, East Ventures collaborated with the Ministry of Health of the Republic of Indonesia and launched “Genomics: Leapfrogging into the Indonesian healthcare future” to provide a comprehensive overview of genomics utilization for the healthcare system in Indonesia.
Together with Temasek Foundation and supported by various partners, East Ventures launched the Climate Impact Innovations Challenge (CIIC), Indonesia’s largest climate tech innovations platform of the year. The platform aims to address the climate issues and disparity fund the climate innovators.
Last but not least, East Ventures has been actively involved in the ASEAN Business Advisory Council (ASEAN-BAC) 2023, focusing on Trade and Investment Facilitation and Sustainable Development programs. The firm engages with Indonesian local stakeholders and creates a robust ecosystem in Indonesia. This effort is a testament to East Ventures’ commitment to broader knowledge sharing, expanding local practice, and aim to unite Southeast Asia as a single market while respectfully understanding its uniqueness and diversity.
“Our investments and initiatives to create more impact and build a sustainable future will not stop here. We constantly collaborate with many stakeholders to forge a productive and healthy Southeast Asia for today, tomorrow, and more generations to come,” Willson Cuaca closed.
The original article was published in The Jakarta Post, Thursday, 7 September 2023, on page 1 & 3.