Unicorn funding drops from 2018 high; strong growth for early-stage deals

FUNDING for unicorns in South-east Asia has tapered from a 2018 high, as investors start to shy away from heavy cash-consuming businesses.

According to the 2020 e-Conomy report by Google, Temasek and Bain & Co, investments for the region's 12 unicorns in the first half of 2020 fell to US$3 billion, down 41.2 per cent from a year earlier, and nearly a third from 2018.

Between 2016 and 2019, unicorns in the transport and food sectors received the lion's share of funds raised - totalling US$15 billion, or 37.5 per cent, of US$40 billion. E-commerce unicorns were next, at US$7 billion.

However, as these sectors mature and remain largely consolidated around a handful of late-stage companies, it is unlikely for record amounts of capital to follow continuously, said the report, which was released on Tuesday.

Focus will now shift heavily towards profit levers for an eventual exit.

Already, deal value across the region has declined steadily from the US$14.1 billion raised in 2018, dropping 14.9 per cent to about US$12 billion for 2019. This year, deal value fell even further in the first half, dropping 18.2 per cent year on year to US$6.3 billion.

On the other hand, the number of deals in the first half of 2020 had risen to 735, up from 626 a year before.

This comes on the back of strong growth from non-unicorn investments. Early-stage funding - which includes seed, Series A and Series B rounds - make up more than 95 per cent of these yearly deal transactions.

Between 2016 and 2020, the average deal size for seed and Series A has nearly tripled, while that for Series B has doubled, said the report.

However, mid-stage funding - for Series C and Series D rounds - has plateaued, said the report. There were 17 Series C and D rounds in H1 2020; down slightly from 19 in the same period the year before. Total amount raised had increased by 9 per cent to US$700 million.

Overall, momentum was largely sustained through the first half of the year, buffered by deals that were likely struck before the pandemic.

Moving forward, investors will likely be more selective and staying on a path to profitability will be "more critical and urgent than ever" for businesses in the Internet economy, the report added.

More capital - and the dry powder available - has been directed towards budding sectors such as fintech, edtech and healthtech instead.

For example, deal value in the fintech industry rose to a record high of US$1.7 billion in 2019, a 40 per cent jump from 2018. The industry continued to ride on its strong momentum in the first half of this year amid the pandemic, on the back of various high profile deals such as Mitsubishi UFJ Financial Group's investment into Grab Financial Group, Gojek's acquisition of Indonesia's Moka, and Ant Group's injection into Wave Money.

More investments and consolidations are expected in the coming years as financial and strategic investors capitalise on the fast-growing digital financial services sector, the report added.

On the other hand, healthtech and edtech are both set to "take off", as the pandemic helped lower old barriers and injected new impetus to these sectors.

Healthtech firms have made huge strides during Covid-19 - accelerating commercial interest in telemedicine platforms, attracting greater regulatory and policy support, as well as pushing for more integration and collaboration between existing providers and telemedicine startups.

Healthtech usage has grown by up to 4.5 times during the pandemic, and has largely retained its users even as restrictions eased for most countries in South-east Asia. Investments in the sector have also been rising over the years, reaching US$220 million in the first half of 2020, up 15.8 per cent from US$190 million a year ago.

Edtech too, saw a steep uptick in 2019 to stand at US$270 million - more than three times that of 2018 - despite prior years of modest funding. A large proportion of funds were put into online learning platforms such as Indonesia-based Ruangguru, which raised US$150 million in December 2019 - making it one of the largest rounds for a South-east Asian edtech company.

The report added that new startups will emerge and funding will continue to grow post-Covid-19, as investors seek startups that have benefited from the online learning trend induced by the pandemic. Furthermore, the report expects that educators have yet to tap the full potential of edtech, which could be unlocked by deeply integrating innovative methodologies into current curriculum.