The world economy is reeling under the combined impact of geopolitical risks, rising inflation and interest rate hikes. This is visible in the depressed GDP growth rates and the wild fluctuations of volatile and nervous stock exchanges. At the end of H1 2022, the S&P 500 was down 21 per cent from the peak, with valuations touching 16.6x, a 30 per cent correction from the 23.6x peak we saw in 2021.

With COVID-19 still mutating and erupting sporadically and political turmoil in many regions, the markets remain muted and listless. Charting the dynamics of the global economy, and in particular, the Southeast Asia region, is a detailed report I did for Kickstart Ventures, a corporate venture capital firm that invests in early- to early-growth stage tech startups globally.

 

In March 2020, when the market realised the immense magnitude and possible repercussions of the mysterious virus, it plummeted by 34 per cent, eroding a vast amount of investor funds and sentiment. The steep plunge was relatively short-lived, as the market rebounded, taking the S&P 500 less than five months to retrace its recent high.

The current market deviation, now in its ninth month, from its high in January 2022 is showing little sign of easing with the Fed rigorously imposing dramatic interest rate hikes to curtail inflation.

VC funds pivot

Amidst this dismal scenario, growth has not stalled in the SEA region. Relatively less affected by the pandemic, the region’s agility and resilience have continued to attract investments that have enabled it to surge ahead.

Even as the pace of startup fundraising decelerates, the smart money hasn’t abandoned the region completely. While China-focused funding dries up, funds have been channelled into the SEA region. 

SEA VCs are still very upbeat about the region’s positive demographics and ability to grow. Among the prominent VCs which have raised larger funds in 2022 are Sequoia (US$850M), Elevation Capital (US$670M), Jungle Ventures (US$600M), East Ventures (US$550M), Insignia Ventures Partners (US$516M) and Wavemakers Partners (US$136M).

SEA levels rising

In 2022, VC fund flow across the world has lost a bit of pressure but is still going strong in the SEA region. After crunching the figures, data suggests that while the average monthly deal value has dropped to US$1.6B in 2022, the deal count has risen 16 per cent YOY to an average of 102 deals per month.

This implies that while deal sizes are getting smaller, more deals are actually getting done, suggesting a larger proportion of earlier-stage deals. To put this fact into perspective, the average of US$1.6B per month deal value in 2022 is still a 2x increase over the 2020 figure of US$800M.

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At Kickstart, we have seen H1 2022 deal flow count to be steady at 318 deals, vis-a-vis the same period last year. The 2020 deal flow was the largest with 745 deals, with 2021 coming in second at 678 deals. If current trends hold, 2022 will likely track the deal count of 2021, which is remarkable given the multiple headwinds the world and the region are now witnessing.

Leading the growth wave and attracting a large quantum of funding are three potentially high-growth areas that have not only weathered the pressures of the pandemic but have displayed substantial growth and future potential.

3-D growth areas

The pandemic revolutionised the world, forcing people to re-align their priorities. Gauging the emerging needs, the focus is now on digitisation, decarbonisation, and decentralisation. These 3 “Ds” are now the key thrust areas that are set to register three-dimensional growth in the years ahead. 

Digitisation

Businesses and consumers have realised the immense value of going digital. This is reflected in a Google study, which estimates the SEA digital economy to be worth US$170B in 2021, which is expected to grow to US$360B by 2025. Attracted by the convenience, variety and payment options, e-commerce as behaviour is likely to persist and snowball.

Here in the Philippines alone, we estimate digital penetration (defined as the value of the digital economy divided by GDP) to be only four per cent, compared to Indonesia at six per cent, underlining tremendous growth potential given similar demographics. This digital economy is mainly driven by e-commerce, transport and food, online travel, and online media. 

Decarbonisation 

Numerous nations and media are pivoting attention on the adverse impact of climate change. According to the UN, 90 per cent of disasters are related to climate-change effects, costing the global economy US$520B, and pushing 26 million people into poverty.

The Philippines, too, because of its geographical location, is acutely experiencing climate change, bearing the brunt of around 20 typhoons yearly. In parallel with the escalated ESG spending, there are numerous startups focused on tackling the decarbonisation problem in an attempt to mitigate the long-term challenge of climate change.

Decentralisation

In the arena of decentralisation, blockchain is possibly the biggest innovation that is here to stay. The tarnished image of cryptocurrency and its recent meltdown has made people wary of blockchain products, too.

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However, blockchain is a versatile solution with applications in digital identity, smart contracts, land titling, real-time payments, etc. Despite its volatility and speculative nature, commercially feasible and robust blockchain-based products and services are sure to become the preferred choice of tomorrow.

Our view

We have identified these three “Ds” as this generation’s thrust areas because a large quantum of development and innovation is concentrated in these business spheres, attracting both investment and talent.

While tracking trends in the SEA region, we saw that deal flow across the region remained largely the same compared to previous periods, as e-commerce and fintech account for the lion’s share of deals. The two sectors combined contributed 42 per cent of the deal count and 57 per cent of aggregate deal value during the 2nd quarter of 2022. B2C commerce, e-commerce enablers, B2C and C2C commerce combined to account for 64 per cent of e-commerce deals. In the fintech space, wealth tech, e-payments, and lending combined to account for more than 90 per cent of fintech deals.

The challenges of the pandemic gave a strong impetus to companies in the e-commerce, fintech, and healthcare domain. E-commerce grew sharply and tapered off slightly after 2021, while fintech grew slower but inched up steeply after 2021. Healthcare, on the other hand, grew rapidly in 2020, although it lost a little steam in 2021, the sector grew five per cent in the first half of this year.

While global markets, both public and private, undergo a correction, SEA will fare better than the rest as smart investors continue to be keen on the 3 “D” catalysts of the SEA growth story. With SEA estimated to grow 5.0 per cent and 5.2 per cent during the same period and with the Philippines seen to grow >6.3 per cent for both years, we believe that the SEA growth will stay resilient given the structural tailwinds.

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