A Look Back: 2023’s VC Trends In SEA vs Malaysia

By Business Intelligence & Insights Team, Cradle

Venture capital (VC) acts as a catalyst for innovation and economic growth, playing a pivotal role in shaping the fates of startups, especially in Southeast Asia (SEA) and Malaysia. In Malaysia particularly, according to MYStartup data for 2023, 72% of the investments in Malaysian startups came from VC funding.

This week’s analysis delves into the VC trends from 2022-2023, providing valuable insights for entrepreneurs, investors, and stakeholders by studying patterns and the impact of VC on the startup ecosystem in both SEA and Malaysia. The aim is to improve understanding, identify opportunities, and assist informed decision-making in the dynamic landscapes of SEA and Malaysian startups.

In 2022, Foreign Direct Investment (FDI) in Southeast Asia (SEA) increased by 5% to a historic high of $223 billion. The crucial question is: do these FDI figures align with the trends in domestic funding in the region and Malaysia?

Trends in Funding on the Decline Since 2022

The total number of fundings in Southeast Asia (SEA) and Malaysia has been consistently declining since at least Q2 2022, echoing a global trend. While the private market experiences fluctuations, the current trajectory contrasts with the highs of 2022/21.

Yet, it is too early to raise alarms. Interestingly, current trends in SEA and Malaysia resemble patterns from before Covid. A bit of context: Echoing an article in The Diplomat, The US Federal Reserve’s decision to lower interest rates during the Covid era led to increased investments in SEA and a surge in stock market investments as investors sought better returns in a low-interest-rate environment. This suggests that the extravagant funding rounds in 2022-21 were likely exceptions, and the current trend indicates a return to normalcy.

However, there is a notable lack of correlation between funding trends in SEA and Malaysia throughout 2023, with both exhibiting almost opposite trajectories. In SEA, despite the ongoing decline since Q2 2022, the last quarter of 2023 saw a rise in investment volume, reaching $4.2 billion, driven by significant funding activities in Singapore and Indonesia. In contrast, the second half of 2023 in Malaysia constituted only 18% of the overall funding for the year.

Link Between FDI and VC Funding

In Malaysia, the second quarter of 2023 witnessed a sharp decline in Foreign Direct Investment (FDI) to $1.1 billion, the lowest since Q3 2020, following a drop from $3.1 billion in the first quarter. Although there was a slight uptick to $1.6 billion in September 2023, a critical question arises: do these FDI figures align with the domestic funding trends? Calculations reveal that funding in Q1 2023, the peak for Malaysia, constituted only 2% of the overall FDI in the same period.

Similarly, in SEA, 2022 saw a 5% increase in flows to the region, reaching a historic high of $223 billion. This dynamic is further highlighted by the fact that total VC funding in 2022 accounted for 11% of the total FDI inflows, illustrating the complex relationship between FDI and domestic funding activities in the region.

What’s in store for 2024?

The outlook for 2024 is uncertain, and it’s too early to determine if funding activities will increase or decrease. The decline in deals and total capital raised in 2023 raises questions about venture capitalists as to what may have caused the “phenomenon”. Despite challenges, many VCs are optimistic that this year will be slightly better than 2023, with some anticipating a gradual improvement in the startup funding market.

 

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