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Revival of small start-ups amid downfall of tech giants
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uch of the tech industry had a rough year in 2022 as major companies went through axing sprees. However, smaller-scale start-ups experienced distinctly different fortunes as their fundraising improved.
A report released in November by DealStreetAsia called Data Vantage found that fundraising had plunged to a seven-quarter low in the July-to-September period of this year, partly due to the challenging macroeconomic situation.
Growth-stage funding drove most of the increases in total investment in 2020 and 2021, but that situation flipped in 2022, as funding rounds of Series C and above saw a tapering of 25 percent in value.
Nonetheless, the volume of deals has held up and could even exceed 2021 levels as private equity and venture capitalists cut more deals with early-stage start-ups.
Tan Boon Kim, executive director of innovation and enterprise at Enterprise Singapore – a government agency for enterprise development – said Singapore had experienced similar dynamics in the tech sector, despite its more mature business ecosystem.
“Given the current macroeconomic climate, it comes as no surprise that investors have become more cautious. Fundraising and listing prospects are now less favorable. But it is encouraging to see that venture funding in Singapore has continued at a healthy pace,” said Kim on Dec. 21.
Read also: Indonesian start-up founders still look to Singapore for first leg up
In the first three quarters of the year, Kim said, Singapore had recorded US$8.4 billion in deals, just shy of the previous year’s $8.5 billion. There were 517 deals closed within the period, an increase in volume of 6 percent year-on-year (yoy).
He went on to say that, notably, there was an uptick in investments from the seed stage to series B, with the figure up 45 percent to $4 billion and the volume up by 14 percent to 453 deals, compared to the same period last year.
“This reflects early-stage investors’ keen interest in funding younger start-ups – especially amid more sober valuations – that have the potential to disrupt industries and drive growth,” said Kim.
Kim revealed that in particular, innovative early-stage start-ups in the green technology and energy space have captured the attention of opportunistic investors. On top of environmental sustainability, rapid urbanization, digitization and an ageing population are the key trends that will “open up doors for start-ups to innovate and add value to society”.
“The year ahead brings about a myriad of opportunities. Start-ups must act fast to capture new demand. But amid a more cautious fundraising climate, they will want to exercise prudence while demonstrating profitability in a more competitive environment in order to attract investor dollars,” said Kim.
Roshan Raj Behera, the Southeast Asia partner of Indian management-consulting company Redseer, said early-stage funding was less affected by current macro conditions as start-ups in the cohort offered an avenue to invest in large untapped opportunities.
Read also: Yearender 2022: Stormy season for Asian tech behemoths
“[Small-scale start-ups] offer balanced growth to profitability exposure and are not hamstrung by concerns of valuation down-rounds,” Roshan told The Jakarta Post on Dec. 20.
He said he could not see any reason for a slowdown in early stage funding because companies that fill a need gap and are able to clearly provide a growth path to profitability would continue to get funded.
He went on to say that these smaller-stage start-ups typically provided leverage in the “first-wave sectors” such as live commerce, e-commerce enablers, open finance, etc., which explained their unbothered upward trend as they enhanced existing companies in the ecosystem.
‘Nontraditional’ paths
One start-up belonging to this category is Broom, which has an automotive financing business model. The company was established in 2021 and received pre-seed funding of $3 million in February 2022. Later in November, Broom was granted a loan of Rp 100 billion ($6.4 million) by DBS.
Early-stage funding’s positive course can also be credited to how many small start-ups operate in large traditional sectors like agriculture and manufacturing, areas that have yet to see meaningful disruption or digitization.
Lastly, investors are still backing smaller start-ups in sectors that address emerging needs, for instance, sustainability through electric vehicles, carbon audits, etc., with Xurya as an example of start-ups in this category.
PT Xurya Daya Indonesia, a solar power rental and installation start-up, received an additional series A funding injection from global trading and investment company Mitsui & Co and PT Surya Semesta Internusa after receiving $21.5 million in initial series A funding from East Ventures Saratoga, Schneider Electric and New Energy Nexus in December 2021.
Despite the solid performance in early-stage funding, DealStreetAsia wrote that it too could come under pressure if wary investors decided to back known winners rather than gambling on new, unfamiliar firms.
“Private equity and venture capital investors have shied away from making big bets in near-initial public offering [IPO] companies [in 2022] given exit uncertainties and the global bear market. This has led to a scarcity of large-sized, growth stage investments and an overall fall in deal value,” wrote DealStreetAsia.
According to DealStreetAsia, Southeast Asian start-ups raked in a relatively small US$12.68 billion in investment in the first nine months of 2022, about 54 percent of the total annual fundraising in 2021.
The 46 percent gap is very unlikely to have been bridged in the fourth quarter of this year, making it almost certain that 2022 fundraising will remain lower than the 2021 value.
“[Late-stage start-ups] might be more circumspect in capital raising. Their first priority will be to get their unit economics and cash runways sorted. Once that is done, they will be back in capital-raising mode, and in the meantime, they can consider alternatives in the form of bridge loans or convertibles,” said Roshan.
