Few IPOs and exits spell trouble for VCs

This week’s On the Rise looks at why VC secondaries are a tough sell in SEA and the ROI dilemma that VCs face in the AI age. [Read from your browser]( On the Rise 🚀 Welcome to On the Rise! Delivered every Tuesday via email and through the Tech in Asia website, this free newsletter breaks down the biggest stories and trends in emerging tech. If you’re not a subscriber, get access by [registering here](. --------------------------------------------------------------- IN FOCUS In today's newsletter, we look at: - [Why VC secondaries are struggling to take off in Southeast Asia]( - The VC struggle to raise funds in the AI age Hello {NAME} When I was in middle school, I tried to convince my friends that we should all pool our cash to buy a [book]( for our Dungeons and Dragons campaigns. The first question out of their mouths was: “Who gets to keep the book?” My answer - “me, it was my idea” - brought my first attempt at collective investing to a screeching halt. It was a great insight for my 12-year-old self. If you’re trying to convince people to give you money, they’re going to want to know what they’re getting out of it - and it better be good. VC firms are facing the same difficult issue today: convincing capital providers that they’ll see a high return on their investments. It hasn’t been going well recently. The funding drought in Southeast Asia is in its third year, including a [drop of over 60%]( since the peak in 2021. The effects have even started to filter down to the secondary markets, where investors are often on the hunt for up-and-coming startups.  ---------------------------------------------------------------  [India’s sold on VC secondaries but SEA isn’t buying it]( The current state of secondary shares markets is the focus on this week’s Big Story. Collin talks to investors who say the offerings from many VCs are far from ideal. Some are only offering shares from “mediocre” companies, with lower chances to IPO or achieve exits - two key focuses for prospective buyers. It’s a global issue. According to the [Wall Street Journal]( the amount of capital being sought by VCs is greater than the amount of expected returns. In short, there is a liquidity crunch in the VC space “greater than after the 2000 dot-com crash.” But the situation is worse in Southeast Asia, where the [distributions to paid-in capital]( ratio - a measure to calculate the returns for investors in a fund - is the lowest in the world, according to a recent [report](.  --------------------------------------------------------------- Returns to haunt VCs Why are VCs facing so many issues, so soon after seeing a banner year in 2021? Interest rates are up, returns are down, or bonds are back - take your pick. There is also the general concern among limited partners (LPs) that tech is already in another bubble. In short, LPs and private equity firms with capital to invest have more options for higher returns than they have had in 20 years, while startups now have new channels to raise funds. VCs are no longer the go-to option. The fight for [return on investment (ROI)]( has gotten so competitive that many VCs are now looking outside of the tech industry for investments. Last week my colleague Glenn wrote about VC firm East Ventures [backing]( Har Har Chicken. While East Ventures is a sector-agnostic investor, it is still unusual to see a VC invest in a fried chicken establishment. Har Har Chicken would have been an anomaly if it wasn’t for the similar bets made by other VCs. These firms have invested in companies like travel gear brand [Torch]( mom and babycare retailer [Gently]( and [Moom Health]( a Singapore-based female supplement retailer. While these investments may signal a trend toward tried-and-tested business models, they don’t get to the heart of the matter: having too much money invested in what’s hot and not having enough ROI. The poster child for this issue is AI. In the US, VC funding in AI [amounted to US$55.6 billion]( in the second quarter. Exits, however, generated only US$23.6 billion in value. Simply put, there are too many budding multilingual chatbots and industry-specific large language models, but not enough returns. This has led to two major drops in stock markets in just the last two months. So where do we go from here? The answer to that may come on September 18, when the US Federal Reserve is expected to cut interest rates by 25 basis points (0.25%). This isn’t going to suddenly increase funding, but there are concerns that if the Fed doesn’t cut rates soon the stock markets could fall by as much [as 20%](. That could put VCs back in the spotlight, but in the worst possible way. -Scott  --------------------------------------------------------------- DEEP READS Also check out Tech in Asia’s coverage of the emerging tech scene [here](. 1️⃣ [Malaysia could be its own worst enemy on path to tech success]( Over the past decade, Malaysia has done a lot to build up its tech infrastructure. It built data centers, attracted semiconductor giants, and started to address the talent gap that hinders the tech aspirations of so many countries. And then it goes and does something to make everyone wonder if the country has really changed. In this story, we look at some recent events in Malaysia that have the tech industry asking “why would you do that?” 2️⃣ [Malaysia’s EV race electrifies as local brands undercut on price]( Malaysians are rushing to join the EV craze, prompting national carmakers to launch models that capture the growing demand. In August, Proton revealed its first EV, the Proton e.Mas, while Perodua unveiled its inaugural EV unit, the eMO-1, in May. Pricing so far has been one of the major hurdles to get Malaysia to buy EVs, but industry observers expect competitive pricing will attract more interest. 3️⃣ [Preference shares in your startup’s funding deal? Be careful]( The devil is in the details, and many founders learn this the hard way at a later stage of the company’s journey. The eagerness to close funding deals in early stages of a firm lead to many failing to read the fine print in their documents. This piece looks at the common industry-standard clauses for these agreements and the less conventional terms that startup founders should be wary of when closing funding deals. ---------------------------------------------------------------  EXPERIENCE #TIACONFERENCEJKT LIKE A PRO Maximize your time and network with the best You’re missing out! Thousands of founders, investors, and executives from AWS, LINE, Sociolla, LinkedIn, East Ventures, OCBC Ventura, and more are already snagging their Pro Passes for TIA Conference Jakarta. The Pro Pass is your ticket to exclusive networking events, catered five-star meals, and on-demand session replays. But hurry, this pass is in high demand and sells out quickly. [Grab your Pro Pass now]( for US$131 before prices increase on September 19. ---------------------------------------------------------------  EVENTS HAPPENING You can also check out a curated list of trending tech events [over here]( and Tech in Asia’s signature events [here](. [Tech in Asia Conference Jakarta on October 23 - 24]( Feeling lost in the Gen Z lingo? Join us at TIA Conference Jakarta and hear from these media moguls who will spill the tea. Learn how to navigate the world of short-form content, leverage AI to personalize content recommendations, build authentic and engaging communities, and more. No cap, this session is gonna be fire. [Get tickets at 40% off]( before price increases on September 19. [Leadership Collective: Building at Scale on September 26]( Product people, ditch the handoff headaches and discover how cutting-edge tools are smashing silos between disciplines and fueling a new era of product development. Learn how to optimize workflows, empower teams with expanded skill sets, and accelerate product lifecycles. Seats are extremely limited - [apply now.]( [Gemini Day for Startups: Indonesia on September 26]( Join Google Cloud’s Evania Jiady along with industry leaders from 3Dolphins.ai, Alfabeta, and SPUN Global as they spill the tea on what works, what doesn’t, and how to get ahead in the AI game. Expect unfiltered insights, actionable strategies, and a clear vision for leveraging AI in your own startup. Limited seats available - [apply for your invite today.]( [SYNC 2024 on October 08]( Get ready to dive deep into the exciting world of AI at SYNC 2024! Prepare to be inspired by thought-provoking roundtable discussions where industry trailblazers will share their perspectives on the future of AI in Asia. You’ll also get the chance to discover Asia's most promising AI startups at our demo discussion segment. This exclusive event is by application only. [Find out more today.]( ---------------------------------------------------------------  That’s it for this edition - we hope you liked it! Do also check out previous issues of the newsletter [here](. Not your cup of tea? You can unsubscribe from this newsletter by going to your “edit profile” page and choosing that option in our preference center. See you soon! [ADVERTISE]( | [SUBSCRIBE]( | [HIRE]( | [FIND JOBS]( P.S. Don't miss out on the biggest tech news and analysis. Add newsletter@techinasia.com to your address book, contacts, or safe sender list. Or simply move us into your inbox. Too many emails? 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