Startup funding in Asia is shifting to early-stage deals as a sharp decline in listed tech stocks keeps investors away from companies close to an initial public offering.
Investors poured USD 36.3 billion into Asian startups in the first three months of 2022, down 34% from a record USD 54.7 billion in the October-December quarter of 2021, according to data provider CB Insights. The figure was flat compared to the USD 36.7 billion in the first quarter of 2021.
The number of first quarter deals stood at 2,875, about 10% more than the previous year, according to CB Insights. But total invested capital fell due to the smaller size of “late stage” funding rounds for companies considered to be close to going public, a trend investors said was due to the falling shares of their already listed counterparts.
“The downward pressure on the valuation for listed companies would naturally translate to lower valuation for later stage deals,” said Chua Kee Lock, CEO of Singapore-based venture capital Vertex Holdings. “Those who are putting money into later stage deals will be conscious about what the potential IPO valuation is. Let’s say the valuation for the last [funding round] used to be 10–15 times revenue. Now it is perhaps eight to nine times.”
A pandemic-fueled boom in tech stocks last year led to some large listings of the region’s startups, such as South Korea’s Coupang, Indonesia’s Bukalapak, and India’s Paytm. In addition, Singapore-based Grab went public via a special purpose acquisition company. The stock prices of these companies have all fallen by more than 50% since their peaks.
The median valuation for late-stage companies fell from USD 681 million to USD 600 million, according to CB Insights. The headwinds in public markets will pose a challenge for late-stage companies in Asia that are gearing up for an IPO. Food and grocery delivery services topped the list of biggest deals during the first quarter, with Getir from Turkey raising USD 768 million and India’s Swiggy raising USD 700 million. Swiggy has begun preparations to raise at least USD 800 million in an initial public offer early next year, Nikkei reported in February.
Indian online education company Byju’s said in March that it raised USD 800 million, but half of that came from its founder and CEO.
As fund managers have already raised large commitments for new funds and need to deploy them, money is still flowing into startups. In Asia, venture funding for early-stage startups, which are less sensitive to market fluctuations, accounted for 67% of total deals in the first quarter, up from 64% in 2021, according to CB Insights. The median valuation of these companies rose to USD 30 million from USD 22 million in the fourth quarter.
“For early-stage [companies], we don’t think that a large correction has been made yet,” said Kaede Kotsuki, a partner at Shanghai-based investment fund Lun Partners Group. “Several large VC firms in the US and China have raised a huge amount of capital, and a lot of that capital hasn’t been deployed yet. Especially for early-stage companies, they are able to raise capital quite easily.”
Globally, cryptocurrency-related startups topped large early-stage funding deals. Yuga Labs, the US-based company behind popular non-fungible token brands, raised USD 450 million in March. The frenzy has spread to Asia. Singapore-based crypto gaming startup Ethlas Labs recently announced the appointment of Wui Ngiap Foo, Grab’s former head of technology, as CEO along with USD 6 million in seed funding.
In China, hardware-related startups, such as those involved in the semiconductor and energy sectors, have raised large amounts of early-stage funds. Clounix, a developer of chips used in networking equipment, in February said it raised RMB 400 million (USD 63 million) after raising the same amount in October. Energy Singularity, which is developing fusion technology to generate electricity, also raised nearly RMB 400 million in February.
Chua cautioned that the pressure on late-stage valuations will eventually “filter through” down to young startups.
Sequoia Capital China was the most active investor in Asia in the first quarter with 57 deals, according to CB Insights.