Lim of Monk’s Hill Ventures: In this environment, start-ups don’t look like they’re growing as much as they did two years ago when funds were raised, so there’s a good chance VCs will have to sell at a very huge discount. Photo: Monk's Hill Ventures Lim, a managing partner at Monk’s Hill Ventures, one of the first VC firms in Singapore investing in early-stage technology companies, explains that the collision of these two realities spells trouble for peer firms who had to make good on their returns to investors. “If all goes smoothly and a start-up successfully goes public or gets acquired, a VC recoups the funds or, better yet, generates a profit on their investment,” he explains. “But in this environment, companies are not growing as quickly as they did two years ago. They are also not raising new rounds of funding at higher valuations as easily. Many companies may also be distressed or are overvalued and need to be written down.” This means getting “good exits” will be a challenge for these firms, especially those currently deploying their first fund. Lim believes this will be seen as underperformance in the eyes of investors, which affects their confidence in re-investing in a second fund. In turn, it will discourage new investors from participating in future funds due to the lack of a track record of success. “Naturally, this will lead to some of these folks not being able to raise [their next fund] and hence may have to step out as an active investor,” says Lim. Today, global VC investments in 2Q2023 stood at US$77.4 billion across 7,783 deals, the sixth consecutive quarterly decline according to a KPMG report. In Asia, VC investments dropped from US$22.9 billion across 3,148 deals to US$20.1 billion across 2,395 deals between 1Q2023 and 2Q2023.
The venture capital (VC) world in Southeast Asia will go through a culling, in which newer firms currently deploying their first fund may not be able to raise another in the coming years, resulting in their premature death. This reality, according to Kuo-Yi Lim of Monk’s Hill Ventures, is the culmination of three factors — too much capital deployment post-pandemic, the plummeting valuations of start-ups, and a climate of caution among investors today. The low interest rate environment of 2020 and 2021 saw high amounts of capital pumped into the VC ecosystem. A CB Insight Report noted a “new all-time high” in global VC activity in 4Q2021 worth US$621 billion ($853.25 billion). Back then, Asia ranked the top region for the number of VC deals, taking up 36% of the global deal share. Start-up valuations were soaring although some businesses being valued in the billions have not yet turned a profit. A record of 23 start-ups in Southeast Asia achieved unicorn status — a term referring to privately held companies valued at over US$1 billion. In 2022, the arrival of rising high inflation, a rapid surge in interest rates, geopolitical tensions and instability in the global banking system burst the bubble. As it stands, the majority of the VCs in Southeast Asia are primarily invested in the pre-seed and seed stage of funding, with a total AUM of between $10 million and $200 million. They are also most likely to be in their first or second fund, and backed by individuals, family offices and corporates, which Lim describes as “inconsistent VC asset investors”.
