ALL leads point to South-east Asia slinking into the spotlight in 2019 as investors' attention on the US and Europe waned - and VCs that The Business Times spoke to are certain that interest will only go up from here.
Even as emerging markets such as Indonesia suffered from tightening monetary policies and trade tensions, VC investments appeared relatively unaffected.
"In general, the capital outflows in 2018 were from hot, short-term money. Generally, VCs and limited partners (LPs) are longer-term sources of capital looking at the fundamental prospects of the region - a growing, younger, digitally-savvy, middle-class population - and buying into this promising outlook," said Foo Tiang Lim, partner at Seedplus.
According to financial data firm Preqin, venture capital deals in Asean rose 35.6 per cent year-on-year to US$8 billion in 2018, as at Dec 18.
The proportion of global aggregate deal value in the US fell from 64 per cent in 2012 to 37 per cent; in Europe, the proportion dipped from 11 per cent to 9 per cent. In South-east Asia however, the figure has risen from 0.7 per cent in 2012 to 3.2 per cent in 2018.
VCs are positive that 2019 will be a strong year for fundraising, barring any major downturn in the world economic situation. Last year saw notable firms increasing the size of their funds, with blockbuster war chests of US$80 million to US$100 million now looking like the new norm.
Finian Tan, chairman of Vickers Venture Partners, said: "Interest in top quartile venture has never been as high due to the importance of technology and evidenced by the top five companies in the world all being venture-backed tech companies."
He added: "The persistence percentage of top quartile VCs is the highest of all asset classes. The chance of remaining in the top quartile is reported as 50 to 60 per cent for subsequent funds, and as high as 70 per cent in some studies. This is mainly due to the halo effect where top quartile funds attract the best deals which leads to better performance, creating a virtuous cycle."
Preqin's research puts the number of Asean-focused funds actively raising money at 43 as at Dec 20, with an aggregate target capital of US$3.7 billion.
Yet some are more cautious with regard to fundraising. "2019 will be a mixed fundraising year for VCs," said Insignia Ventures Partners founding partner Tan Yinglan.
"Tailwinds include the growth of the digital economy in the region and better understanding by limited partners of South-east Asia. Headwinds include the tail end of a global boom cycle."
Rekanext managing partner Ambar Machfoedy observed that there seemed to be a slowdown of investor interest from China due to macro-economic conditions. In contrast, investors from the US, Japan and South Korea have shown greater appetite for South-east Asia.
"Earlier in the year, we have had Chinese investors interested in funds that make investments in startups that could be strategic to the Chinese economy. This changed recently when the Chinese were noticeably more wary and preferred to hold back on making any investment," he said.
But Mr Machfoedy indicated that investors are still interested in the region for the long term. "They are just not as aggressive as they were in the last few years, and what we are witnessing is just a momentary pause on the part of the Chinese investors."
Further evidence pointing to increasing investors' interest in startups, especially in those in the region, comes from corporates aggressively allocating capital to venture investments over the past three years. Examples include ST Engineering's US$150 million global fund and Grab's US$250 venture fund for Indonesian startups.
"From the USA, as I understand it, Goldman Sachs is rebuilding and boosting its venture investment team in South-east Asia, a market which the same venture unit exited four to five years ago when it felt that it was too nascent," said Mr Machfoedy.
VC firms here are of the opinion that a rising tide lifts all boats. Amit Anand, managing partner of Jungle Ventures, said: "Strategics have always had a role to play in tech ecosystems, and we welcome them. If done right, they can provide leverage to startups especially in areas such as distribution." He noted that startups also realise that the priorities of strategics can change frequently and hence they never want to raise money only from these venture arms.
Still, venture units have to work to differentiate themselves. This is due to the abundance of capital at the Series A stage and beyond, thanks to the seed stage efforts over the years by regional VC firms providing deal flow for later stage funds.
Players here are ramping up efforts to sharpen their competitive edge in a bid to get into the most attractive deals. Insignia's Mr Tan said that at his company, investments decisions are made very fast - sometimes in only 30 minutes.
"If we are on your side, we will do anything to enable your success. This includes getting ex-Google or Amazon engineers to help build out your technology stack or getting you access to our global network of over 30 unicorns - who have built out a combined US$1.2 trillion of market capitalisation in technology - to help you build a great company," he said.
Between the seed and Series A stage, VC firms adopt a largely collaborative approach to create a growth launch pad for startups. Opportunities and investment decks are shared with each other, and co-investment happens often.
Seed stage VC firm Trive Ventures is banking on its ecosystem assets to grow startups' valuations. It has two regional programming schools, a pay-it-forward incubator and a government-backed blockchain accelerator that was launched this month.
Trive managing partner Christopher Quek said that startups will continue to struggle in getting seed to Series A funding in 2019, as the competition is severe. "Trive gets around 200 pitch decks every month while other known VCs get two to three times more," said Mr Quek.
That said, startups in the deep tech and healthcare space might have cause for joy, as VCs look increasingly beyond the popular options of fintech and e-commerce.
Some VCs prefer to adopt a sector-agnostic approach. For Golden Equator Capital, a startup's ability to tap into millennials, the biggest spenders of today, is powerful.
"I'm looking for companies that are thinking about the next pattern of consumption, which is very difficult to predict," said managing partner Daren Tan. "What we understand right now is a simple equation, which is if I spend more money to create more visibility, engagement and loyalty will come. But that's not the case anymore."
Despite the flurry of excitement for 2019, challenges remain. Boon Siew Kam, partner at global law firm Dechert, pointed out that certain industries will experience market saturation. "And in some cases, the disrupted are gearing up to disrupt the disruptors - such as the banks with respect to mobile payment or the real estate companies with respect to co-working spaces," said Ms Boon.
With prior early stage deals maturing, some portfolio companies could start getting into fail mode or not getting their expected exits, she added.
SeedPlus' Mr Foo said that ultimately, the health of the ecosystem will rely on predictable exit paths for founders and investors alike. While 2017 saw Razer amassing HK$4.1 billion in a Hong Kong initial public offering (IPO) and Sea raising US$884 million in New York, 2018 was a silent year for the region's startups.
Mr Foo said: "The IPO market for South-east Asian tech companies is still relative nascent, hence I would expect most exits to be via trade sale or M&A. I do expect the pace to pick up as competition among the homegrown unicorn companies heats up. It will be interesting to see the likes of Tokopedia and Grab acquiring startups to build their competitive edge."
And even two decades on from the dot-com bubble, rising valuations are raising the occasional eyebrow.
But Jake Robson, partner at international law firm Morrison and Foerster, said that this should not be a huge cause for concern yet as the region's venture capitalists tend to be more conservative.
"On a scale from one to 10, to put it very simplistically, I would say we're at five or six at the moment."
The Singapore Venture Capital & Private Equity Association (SVCA) reckons that 2019 will be an interesting year for all stakeholders in the startup scene.
Its chairman Thomas Lanyi said that globally, the US-China trade tension could throw up both challenges and opportunities for the region as firms navigate new rulings, reassess their risks, reposition their supply chains and allocate their resources and partnerships accordingly.
Dr Lanyi said: "Geographically, we believe that Singapore, Vietnam and Indonesia will continue to see the most activity. National elections in Indonesia may add an interesting dynamic; and Malaysia, under a new government, may generate the occasional surprise."