Cooley LLP Partner David He
Southeast Asia’s startup ecosystem has spent the past few years on a rollercoaster; soaring valuations, a brutal funding winter, and now, what some are calling a cautious recovery.
But according to David He, Partner at Silicon Valley law firm Cooley LLP, the real story isn’t about recovery at all. It’s about reset.
“We’re closer to 2019 than we are to 2021,” He tells e27. “And 2019 was a much healthier venture environment.”
Also Read: Funding winter is the best time to build a startup
Drawing on over a decade advising startups and investors and hundreds of venture deals across Asia, He offers a ground-level view of how capital, expectations, and behaviour have fundamentally changed.
From frenzy to fundamentals
To understand today’s market, He breaks the past few years into three phases.
Unprecedented capital inflows defined the boom years of 2021 and 2022. Global crossover funds, which traditionally focused on public markets, entered private markets aggressively, deploying capital at speed and scale.
“It was almost a trader mentality,” He says. “Investors were issuing US$50 million term sheets rapidly, doing limited diligence, and moving on to the next deal.”
For founders, it created a distorted incentive structure. Fundraising became the focus, often at the expense of building sustainable businesses.
That changed abruptly in 2023 and 2024.
As interest rates rose and capital tightened, the ecosystem entered a “funding winter.” Valuations fell, deal terms became more stringent, and many startups were forced into survival mode. “It was a wake-up call,” He says. “Founders had to shift from raising money to actually making money.”
Why the downturn may have been necessary
While headline figures still show reduced deal volume and funding levels, He argues that today’s environment is fundamentally healthier.
Investors are no longer competing blindly for deals. Instead, they are:
- Conducting deeper due diligence
- Deploying capital more selectively
- Supporting portfolio companies more actively
At the same time, founders are more disciplined and are now focused on revenue, cost control, and sustainable growth.
“Everybody is being much more deliberate now,” He says. “And that’s what sets companies up for long-term success.”
Capital isn’t gone; it’s evolving
The perception that funding has dried up is only partially true. What has changed is the nature of capital.
Startups today are increasingly exploring alternatives to traditional venture capital, including:
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- Venture debt, which allows companies to raise capital without dilution
- Private equity and strategic investors, which offer different structures and expectations
- Corporate venture capital, which brings both funding and commercial partnerships
“If venture capital starts to look like private equity in terms of control, founders will just go directly to private equity,” He notes.
This shift reflects a broader evolution: capital is still available—but it is more disciplined, and founders have more options.
AI: Capital magnet or distortion?
One of the most significant trends reshaping capital flows is the rise of AI.
Globally, AI startups are absorbing a disproportionate share of investment.
But in Southeast Asia, the picture is more nuanced. The region is largely building application-layer AI, tools and platforms that sit on top of foundational models developed elsewhere.
“It’s very hard to compete with the US and China on core AI infrastructure,” He explains. “Southeast Asia is more AI-adjacent.”
While this means fewer “50x” valuation opportunities, it also creates practical advantages. AI is helping startups:
- Reduce operational costs
- Accelerate product development
- Improve efficiency without constant fundraising
“If the AI bubble corrects, capital may flow back into more traditional sectors,” He adds.
The trust deficit: Lessons from eFishery
Recent scandals, including the collapse of Indonesian agritech startup eFishery, have cast a shadow over the ecosystem. (Cooley acted as legal counsel for eFishery during its Series D round announced in July 2023)
He describes the eFishery case as relatively straightforward in hindsight.
“There were two sets of accounts: management-reported and audited, and investors relied on the wrong one.”
But the broader impact is more significant.
For international investors unfamiliar with the region, such incidents reinforce concerns about governance and transparency. “It pours cold water over the ecosystem,” he says. “And that’s unfortunate, because there are many strong, credible founders here.”
Unlike more mature markets like the US or India, Southeast Asia still lacks a deep pool of high-profile success stories to offset such failures.
What investors are really looking for now
In today’s environment, investors are scrutinising startups more closely than ever, especially on fundamentals.
From a legal perspective, He highlights four critical areas:
- Corporate structure: Ensuring proper ownership across jurisdictions
- Intellectual property: Clear and defensible ownership of technology
- Regulatory compliance: Particularly around data, privacy, and financial rules
- Commercial contracts: Avoiding unfavourable terms with large enterprise customers
There is also growing scepticism around regional expansion narratives.
“Just because something works in Vietnam doesn’t mean it will work in Indonesia or the Philippines,” He says.
Also Read: When debt replaces equity: How SEA startups mask a funding winter
A shifting sector landscape
Capital allocation is also becoming more selective.
Investors are increasingly favouring B2B SaaS, deeptech, and AI and infrastructure plays. Consumer-facing businesses, once dominant in Southeast Asia, are facing more scrutiny, though they remain viable in large markets like Indonesia.
“The companies that succeed are the ones with steady growth, strong execution, and clear unit economics,” He says.
Exit reality: No quick wins
While some optimism has returned around IPOs and SPACs, He remains cautious. “SPACs are still a secondary option. If you can IPO, you IPO.”
In reality, the most likely exit paths for Southeast Asian startups are:
- Strategic acquisitions
- Private equity buyouts
- Secondary sales to new investors
A wave of exits is expected in the coming years, driven by fund lifecycle pressures. However, not all will deliver strong returns. “Many funds are reaching the end of their lifecycle,” He says. “They may accept lower returns just to exit.”
A more mature ecosystem emerges
For He, the current moment represents not a downturn, but a recalibration.
The excesses of the boom years have been corrected. The harshness of the funding winter has passed. What remains is a more grounded, disciplined ecosystem.
- Founders are building real businesses
- Investors are making deliberate decisions
- Capital is being deployed more responsibly
“This is what a sustainable venture ecosystem should look like,” He says.
The question now is whether Southeast Asia can translate this discipline into consistent success stories, and finally establish itself as a global startup powerhouse.
The post AI hype, hard lessons: Where SEA’s startup capital is really going appeared first on e27.