Early-stage startup funding is having a moment in Southeast Asia

Yes, big investment is hard to land but everyone seems to be piling into early-stage deals

Today I’m excited to run an article from my former colleague at The Ken, Ka Kay Lum!

The piece is on the mini boom in early-stage investing in Southeast Asia, a topic she is highly-qualified to write about. Ka Kay works in venture capital these days and previously covered VC and investments in the region for more than five years.

If you don’t already follow her, she’s on LinkedIn and active on Twitter/X: @kakayy.

I’m looking forward to running more stories from KK and others in the future. (If you’re a freelancer reporter or want to contribute to Asia Tech Review, contact contributors@asiatechreview.com.)

We’ll be back with the regular newsletter on Monday. Until then, have a great weekend,

Jon

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Early-stage startup funding is having a moment in Southeast Asia

Yes, big investment is hard to land but everyone seems to be piling into early-stage deals

Thanks to the global economic slowdown, early stage investing is in vogue again in Southeast Asia.

January Capital’s latest report on the state of funding in Southeast Asia showed that seed and Series A stage activity remained resilient this year, with deal count and capital invested actually increasing year-on-year. Indeed, the first half of 2023 saw more seed deals completed than the whole of last year.

That’s in stark contrast to later stage deals—Series B onwards—which suffered a decline both in terms of the number of deals and total funds invested as you can see below.

While most investment reports in the region don’t track pre-seed investments ($500,000 and below) due to the relatively small amount and a scarcity of public data, a number of larger VC firms in Southeast Asia are making moves into the bottom of the value chain. 

Rushing to seed

Take several recent examples which come from very different starting points.

Jungle Ventures, one of Singapore’s “blue-chip” VC firms, surprised the market by launching a programme to back pre-seed and seed startups. It also emphasised that the initiative has none of the “cohort-based” structure where founders could dive straight into business with the firm’s partners. (Jungle actually began as a seed fund more than a decade ago but its latest fund closed at $600M.)

Then there’s Joel Neoh, co-founder of rewards startup Fave, who set up First Move in July, that’s a pre-seed outfit which invests up to $100,000 into consumer startups. More recently, startup factory Antler announced plans to set up shop in Malaysia via a partnership with the local sovereign wealth fund Khazanah. Malaysia will be its fourth location in Southeast Asia after Singapore, Vietnam and Indonesia.

To be fair, dedicated pre-seed funds have been around in Southeast Asia since as early as 2013, the most prominent example being 500 Global—formerly known as 500 Startups—with a dedicated microfund for the region called 500 Durians and local country funds in places like Thailand. But as the region’s ecosystem grew, most fund managers moved up the ladder, raising larger funds to 1) make follow-on investments 2) expand their teams 3) cover more investment stages. 

Overtime, despite claiming to invest across pre-seed to Series A, most funds skip the pre-seed deals ($250k and below), often citing such deals are “too early”. Of course, why look at a $250,000 deal when you can cut bigger checks with startups that are more mature and thus a safer bet, especially during a bull market? 

Refuge from funding winter

Pre-seed deals then became mostly the territory of angels, accelerators and a handful of dedicated pre-seed funds—the likes of Y Combinator, Antler, Entrepreneur First (which exited Singapore last year), Iterative (disclosure: my former employer), Cocoon Capital, Hustle Fund, 1337 Ventures and more. 

Until this year, that is. 

The macroeconomic headwinds are pushing fund managers to flock to early-stage deals as they are hesitant to deploy large checks to later stage startups which may not have a clear path to profitability while exits are hard to come by these days. Some fund managers are also under pressure to deploy capital (otherwise, what are the management fees for?), hence the next best thing to do is to invest into earlier stages. 

But pre-seed investments is a league of its own—small checks and a lot of hands-on work. This is because fund managers are often working with first-time, very early-stage founders who need a fair amount of handholding. This goes some way to explaining why, despite a rather hefty fee of around $35,000 depending on the location, aspiring founders still go to startup programmes offered by the likes of Antler and Accelerating Asia. (Founders, you may want to check out the zero-fee programmes offered by Iterative and 1337 Ventures!)

Of course, the upside here for accelerators and angels is that, since it’s a first check, they can pick up a stake in a promising startup at a very low valuation. The counter argument is that the failure rate is high since these are such early investments and not every startup will survive or grow as planned. But fund managers need only one or two champions to return a fund entirely. The horizon to exit is also much wider. A pre-seed investor doesn't have to wait until an IPO or trade sale to take place in order to exit their investments and it’s common to sell stakes, or parts of stakes, in subsequent funding rounds when valuations are much higher.. 

When you look at it this way, suddenly pre-seed becomes a lot more attractive. 

Don’t believe me? Let’s look at Antler’s fund performance. Without going into its global operations and its multiple revenue streams, including corporate partnerships and charging founders programme fees etc, it is lucrative. 

According to data platform VentureCap Insights, its first Southeast Asia Fund has an IRR of 75.69% and a TVPI (Total Value to Paid-In Capital) of 2.371.

Assuming the data is accurate, Antler’s first SEA fund would generate a return of $2.37 for every dollar invested by its LPs. 

Not too bad, right? 

Entrepreneur-turned-investors

That growth potential will be what led Neoh to set up First Move. Plus, as a founder and active angel investor, I’m sure he has quite a few learnings and observations to share with fledgling founders and, more importantly, the necessary connections to help portfolio companies fundraise in the future.

He’s not alone. There’s a number of early stage funds out there, both managed formally and informally. The founders of Kopi Kenangan—a unicorn coffee startup—set up an angel fund focused on their native Indonesia in 2021, while solo investor Wing Vasiksiri is onto his second fund.

Then there’s XA—an angel collective initially launched for ex-Googlers in 2018, Fintech Angel Operators that started in 2021 by senior fintech execs, and loose networks of alumni from companies like Uber and Grab, where former staff have operational experience and strong connections. 

The emergence of more early-stage funding and mentorship resources, especially those that are being managed by senior operators/founders may eventually alter the way accelerators and incubation programmes work in the region. Currently, the likes of Antler and Accelerating Asia either charge founders a programme fee and/or offer somewhat unfavourable terms (eg. >10% of stake and board seat) simply for cutting ‘first checks’. Competition could force a rethink.

But that change may only happen further down the road. For now, it’s an undoubted positive to have increasing amounts of early-stage capital poured into Southeast Asia to help create more entrepreneurs—young shoots in this brutal funding winter. 

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Based in Malaysia, Ka Kay invests in financial services with Singapore's Cento Ventures. Previously, she was a journalist covering private capital and startups in Southeast Asia.

If you’re a freelancer reporter or want to contribute to Asia Tech Review, contact contributors@asiatechreview.com