Venture capital (VC) firms in Southeast Asia are becoming more selective in the investments they make, according to a The reason for this shift is attributed to the maturing of the Southeast Asian startup ecosystem as well as increased competition among venture capital firms in the region.
The report highlights the growth of the Southeast Asian startup ecosystem, which has led to a larger pool of companies seeking funding. While this presents more investment opportunities for venture capital firms, it also increases the competitiveness of the selection process. Consequently, venture capital firms are becoming increasingly selective in their investment decisions, focusing on companies that demonstrate a clear path towards profitability and sustainable growth. Read on as we share more insights as to what venture capital firms of Southeast Asia are looking for:
Importance of Proven Track Record and Profitability
Another factor driving the increased selectiveness of venture capital firms in Southeast Asia is the growing competition from new sources of capital. The region has seen a surge in corporate venture capital funds and private equity firms in recent years, making it harder for traditional venture capital firms to secure investments in desirable companies. As a result, these firms are becoming more selective in their investment decisions, prioritizing companies with a proven track record of success and a clear path to profitability.
A company with a proven track record of success is a significant indicator of its potential for future success. This is because a company that has already demonstrated its ability to generate revenue, scale its operations, and grow its customer base is more likely to continue doing so in the future. On the other hand, investing in a company without a proven track record is a significant risk, since there is no way of telling how well it will perform.
Similarly, profitability is a crucial factor for venture capital firms, as it is a sign that a company can sustain its growth and generate returns for its investors. Investing in a company that is not yet profitable increases the risk of the investment, as there is no guarantee that the company will become profitable. By focusing on companies with a clear path to profitability, venture capital firms can mitigate risk and increase the chances of generating returns for their investors.
Presence of Niche Sectors
Firstly, by specialising in a specific area, these firms can gain a deeper understanding of the market and its specific challenges and opportunities. This allows them to identify the best investment opportunities that may be overlooked by other venture capital firms not as familiar with the market.
Additionally, focusing on niche industries can also help venture capital firms differentiate themselves from their competitors. By demonstrating a deep understanding of a particular market, they can position themselves as the best partners to achieve success within the industry potential and current clients and investors.
Moreover, companies in niche industries often face fewer competitors, which makes them more attractive investment opportunities. For example, a company that specialises in a specific technology or product may have fewer direct competitors, which reduces the risk of market saturation and the threat of new entrants. Investing in these types of companies increases the odds of generating returns for their investors naturally.
Attractiveness of Startups
In addition to the abovementioned factors, venture capital firms in Southeast Asia seek opportunities to collaborate with other investors. By pooling their resources and working together, they can gain access to a larger pool of investment opportunities, which helps mitigate risk and increase their chances of success.
This increased selectiveness of venture capital firms also positively impacts the Southeast Asian startup ecosystem. Startups that receive investments from these firms are more likely to succeed, as they have access to capital, mentorship, and other tangible as well as intangible resources that can help them grow. Additionally, the focus on profitability and sustainable growth does contribute to creating a more stable and mature startup ecosystem. Startups that do not have a sustainable business model will be phased out quickly. Take, for instance, the Indonesian quick commerce firm, Another startup,
Hence, startups that have a clear path to profitability and sustainable growth are more attractive to venture capital firms, as they are seen as lower-risk investment opportunities that are more likely to generate returns for the investors.
As the Managing Partner of Gunung Capital, a private investment management company, we will continue to be rigorous in our due-diligence process for our clients. Aside from looking at companies that strong investors back, we endeavour to ensure that the company shows strong unit economics to increase the chances of investment success.
