Navigating innovation, investment and challenges in Southeast Asia’s VC landscape

As the global venture capital landscape continues to evolve, Southeast Asia (SEA) has emerged as a bright spot of growth and innovation. Investors looking to tap the region’s burgeoning investment opportunities will benefit from understanding the nuances of this diverse and rapidly evolving market. Amit Anand, the Founding Partner of Jungle Ventures – a key player in the SEA venture capital scene, provides key insights into navigating the complexities of this emerging powerhouse.

Unique challenges & opportunities for GPs & LPs in Southeast Asia’s VC Ecosystem

As a relatively young ecosystem, venture capital and the technology sector in SEA have come a long way in a very short period of time, fuelled by several factors such as government policies, improving infrastructure to attract investors and startups, the availability of funding which accelerates growth and innovation in the tech ecosystem, and sizeable under-penetrated populations which have seen rapid adoption of technologies in recent years.

As the ecosystem matures, we will see more challenges and opportunities that come with it. There is huge potential for buyout and financing platforms focussed on founders, as founders and early investors look to capitalise on their growing value of equity. Similarly, some fifty companies with amazing consumer loyalty and unit economics are waiting to tap the public markets as the opportunity re-opens.

While LPs could wait out for some of these aspects of the ecosystem to develop in other markets like the US and enter later, they cannot risk the same in SEA which is a relatively smaller market. The SEA market is quickly self-selecting into top-tier managers that best-in-class founders are eager to work with, and room for growth with these managers may be limited as compared to other markets. It will pay significantly more to be early in SEA as compared to other markets, and may even be the only way to capture the opportunity.

Bridging execution and innovation

SEA is similar to some other markets in terms of the potential evolution and opportunity to create value, but time shifted by 5 to 10 years. However, SEA is very different in that it is primarily an execution risk underwriting market, whereas most developed markets are innovation risk underwriting markets.

Most investments made in SEA are business models involving execution of innovation with help from technology. Talent and capital pools, while growing, are still underdeveloped thus increasing the chances of failure due to execution challenges. In such a market, GP selection and their underlying portfolio construction should reflect this limitation. Local operating experience over multiple cycles and industries and concentrated portfolio construction is key to mitigating such macro and execution risks.

It will usually be the last one standing to win Asia. Founding teams will need to have this mindset, and be supported by GPs with the right operating skill-sets to mitigate operating blindspots, and capital that can last through multiple cycles. Diversifying into more companies limits attention and capital resources significantly increasing the chances of average outcomes or failure.

Emerging trends in SEA

Diversification beyond consumer sectors

While consumer internet, consumer fintech and software are coming of age and will remain the mainstay of investing for most funds, new sectors such B2B fintech, B2B commerce, healthcare and climate will be on the rise over the next three to five years. With increasing numbers of compelling B2B investment opportunities in fintech, healthtech, edtech and greentech, investors should adapt to strategically diversify their portfolios to capitalise on these emerging sectors.

Cross-border growth and global tech ecosystem

The cross-border growth of companies within and across SEA will help to further propel the region’s development as a leading global technology ecosystem. Not only does cross-border expansion significantly expand the TAM available to companies, it also de-risks their execution with exposure to multiple currencies and different maturity cycles of different countries, fuelling exponential growth and innovation.

Regulatory nuances and the importance of due diligence

SEA is a mix of best-in-class regulatory frameworks in some sectors or countries, mixed with significantly underdeveloped areas in other sectors or geographies. It will be critical to adjust your approach depending on the segment and country for best results.

Irrespective of sector or geography, due diligence on founders and governance frameworks is a key area of focus, especially in early-stage companies. Deep local expertise and networks will also be highly beneficial, if not essential, to ensure due diligence processes are conducted comprehensively.

2024 outlook: accelerating growth and robust investments

The opportunities in the technology sector in SEA have seen significant tailwinds over the last decade or so - young demographics, local talent returning from overseas education / work experiences, the rise of venture capital, COVID-induced tech adoption, and governmental push for digitalisation amongst others. These secular trends continue to create more opportunities for founders and investors to create great value from investing in the growth potential of the region.

Apart from 2021’s anomalous growth, SEA has been growing consistently in terms of number of startups, venture capital funds raised and deployed, and exits through trade sales and IPOs. We see this trend accelerating through the next few years as more founders seek growth opportunities across the globe and focus on this emerging but untapped market opportunity.

With focus on more robust investments, investors should make fewer but more high conviction investments, which is great for founders and investors alike. The region’s biggest risk is still in execution, and with more resources, talent and capital per investment, one can expect to see a higher success ratio, as well as larger value being created with less risk.

Want to learn more about venture capital in India and South East Asia? Watch our interview Amit Anand filmed at SuperReturn Asia 2023: