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High interest rates, wars, and economic downturns have all contributed to a decline in startup investment, especially in Asia. The decoupling caused by the U.S.-China trade conflict has also hindered global startup funding.
The numbers don't lie.
According to Crunchbase, the Asian venture capital market peaked at $55 billion and around 3,000 deals in Q4 2021. Since then, it's been on a downward spiral. There were only 1,518 deals in Q3 2023.
While the amount of money invested seems to be recovering after hitting a low point in Q1 2023, it was a result of increasingly conservative investments in late-stage startups rather than early-stage startups.
McKinsey also analyzed Asia's venture capital market as struggling. While North American private market fundraising rebounded slightly in 2023, Asia's market plunged 39% YoY.
The main reason for this was the difficulty in executing investments in the Chinese market. China accounted for 83% of Asia's startup fundraising in 2017, dropping to 34% in 2022.
The question is, could Asia's venture capital market continue to slump in 2024?
There are both positive and negative signs. In this article, we'll discuss the current state of the Asian venture capital market and startup scene, as well as the signals to watch for going forward.
"The era of American hegemony is ending." - Harvard Business Review (HBR)
In early 2023, an HBR column co-authored by venture capitalist Hemant Taneja and journalist Fareed Zakaria sparked a conversation about the correlation between geopolitical change and VC. Their conclusion was that the accelerating "de-coupling" of economies around the world from domestic and global affairs has brought a new phase to venture capital investments in early-stage companies.
Why are geopolitical shifts affecting venture capital investments?
Historically, startup funding has been about seeking out market opportunities without boundaries. Since the end of the Cold War and the emergence of a free market dominated by the U.S., the dollar's loose monetary policy and a variety of financial instruments that dramatically boost asset values, venture capital, also known as "adventure capital" has emerged as a powerful investment vehicle with global returns.
Over time, things have changed.
Seizing growth opportunities outside of the U.S. has meant economic growth outside of the U.S. This has led to competition between countries. The US-China trade conflict was a tipping point. The world was then further disconnected as the COVID-19 pandemic dragged on for years. As geopolitical conflicts escalated, such as the Ukraine-Russia war, the massive trend of globalization began to be altered.
Reflecting this trend, the influential venture capital firm a16z began advocating for "American Dynamism" in 2023.
Recognizing the lack of manufacturing and production facilities in the U.S. during the pandemic, the firm switched its startup investment criteria to "support the interests of the home country." The idea was to focus venture investments in deep-tech industries such as semiconductors, EVs, aerospace, and national defense.
Of course, it's hard to say that the relationship between the two countries has completely broken down.
Starting in the new year of 2024, the US Treasury Secretary and the Chinese Vice Premier of the State Council met and stated that they "do not intend to pursue economic separation between the two countries." There are also moves to prevent market uncertainty from becoming too severe.
As we'll see later, globalization isn't over. It's more of a reshaping. Entrepreneurs and venture capitalists are also looking for other options.
However, the bursting of the tech bubble, global inflation, and the changing geopolitical landscape have all combined to dampen the venture capital market. According to SP Global, there were only 952 private funding applications, including venture capital, in 2023. That's down from 4054 in 2021.
We've moved from an era of cross-border investment in startups around the world to a world of startup incubation like we've never seen before.
The geopolitical transformation of the venture capital market is best exemplified by the split of Sequoia Capital, Sequoia Capital China, and its Southeast Asia office in 2023. In June 2023, the three formerly inseparable entities announced a "spin-off. U.S.-based Sequoia Capital and its China, India/ Southeast Asia divisions will be completely divided by 2024.
(See - Sequoia Capital to split into three parts, separating its China and India businesses)
Geopolitical conflicts were cited as the primary reason.
In August 2023, shortly after the Sequoia split, the Biden administration issued an executive order on foreign technology investment. The legislation aims to restrict investments that are contrary to U.S. national security and interests, particularly in technology sectors such as semiconductors, quantum computing, and artificial intelligence. It is expected to take effect in 2024.
Notably, the Wall Street Journal reported in July 2023 that a Chinese startup invested in by the China arm of Sequoia Capital came under pressure from the White House because it had a contract with the Chinese military. While Chinese companies such as Bytedance (parent company of TikTok) and Shein have seen strong growth, there have also been concerns about security in the U.S. and capital outflows from the country.
This has also led to a structural and branding breakup of the once globally active venture capital firm.
Sequoia China, founded in 2005, appointed Neil Shen as its new head and adopted a new brand name, HongShan (which was more familiar to the Chinese startup ecosystem already). The division, which had invested in the Indian and Southeast Asian markets for more than 17 years, began a new chapter under the brand name Peak XV Partners.
In announcing the spinoff, Sequoia Capital executives said so.
"Running a distributed investment business is getting increasingly complex."
That's because portfolio companies in different countries are facing conflicts of interest and market volatility. Global venture capital funds that once actively invested in Apple, Google, PayPal, Zoom, Bytedance, and Shein have been faced with the decision to cut their arms off.
Despite years of heightened geopolitical tensions, VCs with global networks and capital have been investing in startups across borders. As a leading player, Sequoia Capital had a competitive advantage in the global venture capital market.
But the current situation, where it is more advantageous to have a Chinese-language brand than to be known as Sequoia China, requires a different game plan.
Interestingly, after breaking away from its US back office, Peak XV quickly expanded its investment footprint in Southeast Asia.
According to TechCrunch, the VC, once known as Sequoia India, closed more than 10 investment deals and completed three exits soon after announcing the split from its headquarters. HongShan entered into negotiations to raise $2.8 billion in funding in July 2023, including support from the city of Hangzhou.
(See - Sequoia Capital’s and global investment shift - Rest of World)
This means that startup investment is still very much alive and well in Asia.
This might even present a unique opportunity for local players to find promising entrepreneurs and invest in the companies they build. Or, for those countries with less geopolitical conflict, it could be a relatively better time to enter foreign markets and snap up promising startups.
For example, in 2023, the first unicorn in the aquaculture industry was born in Indonesia. eFishery, a provider of IoT solutions for the fishing industry, raised a Series D round of funding, valued at $1.3 billion. Fintech startup InCred also raised a Series D in the same year, becoming India's second unicorn. In 2024, Silicon Box, Hashkey, and others became unicorns in Asia.
These movements fall into two main categories.
It is especially noteworthy that Asian entrepreneurs are actively pursuing globalization and expanding into global markets, either because they have found an unmet market need or because they are based in Asia. The spring of Asian venture will eventually kick off again with irresistibly attractive markets and entrepreneurs.
In 2023, Dr. Richard Dasher, director of Stanford's US-Asia Technology Management Center (US-ATMC), identified four main reasons for the global increase in venture investment and entrepreneurial activity in Asia.
1. digital infrastructure connecting the world: cloud computing, artificial intelligence, data and talent sourcing, etc.
2. the reopening of the sky after the pandemic
3. global-scale challenges: climate tech, sustainability issues, food supply, etc.
4. conservative venture capital execution: entrepreneurs being asked to be profitable in a larger market.
For the same reasons as #4, Asian entrepreneurs with a mandate to reach a larger market are leveraging conditions 1-3 to aggressively scale their businesses. According to a survey by South Korean startup support organization Startup Alliance, nearly half of South Korean startups were looking to expand overseas in 2022. This was despite the fact that the venture investment market remains rigid.
In the Asian market, a wide range of countries are also being mentioned as 'going abroad' destinations.
For example, OPN Holdings became the most highly recognized startup in the Japanese fintech market in 2023. The company was founded in Thailand and entered the Japanese market with investment from the Southeast Asian CVC. The momentum of the company, which was quite shortly after entering Japan, rose to the top of the "industry" between 2022 and 2023.
(See - 2023 Japanese startup trends roundup (2024 Playbook))
Venture investment still demands dramatic value creation. Dramatic value creation comes from disruptive approaches. Innovative teams have greater impact in markets where there is more room for change.
Asia, where entrepreneurs are still actively exploring markets, is a land of opportunity to nurture entrepreneurs and invest in entrepreneurs to drive social change.
Ernest Cu, CEO of Globe Group, a leading telecommunications company in the Philippines, said in a Nikkei Asia column.
"As startups grapple with current complexities, there are always opportunities for transformative growth and innovation, echoing the ethos that adversity often breeds innovation. (...) It is only through challenging times that great companies are built."
Addressing social issues that remain a challenge, especially in Asia, can provide a chance for Asian founders to scale both products and businesses.
While the entrepreneurial ecosystem and the venture capital market are undergoing challenges, there is still hope for Asian founders. Asian entrepreneurs are pushing through conservative market conditions to expand their businesses to other Asian countries and globally, or to create value by solving unsolved problems.
Hopefully, 2024 will be the year of Asian entrepreneurship.
Written by Jinny (underdogs)
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