Investors are increasingly focusing on opportunities in artificial intelligence (AI) technologies as the funding winter in the startup space is set to worsen amid escalating geopolitical tensions, soaring interest rates and growing macroeconomic headwinds, Asian venture capitalists said on Tuesday at the Forbes Under 30 Summit Asia 2023 held in Singapore.
Venture capital funding fell 27% to a four-year low of $77 billion in the three months ended September from the previous year, and registering its seventh consecutive quarter of decline since peaking in 2021, KPMG said in a report published in October. Asia recorded a sharper year-over-year decline of 40% to $20 billion in the third quarter, according to the report.
“Next year will be worse,” Yinglan Tan, founding managing partner of Singapore-based Insignia Ventures Partners, said at a panel discussion on navigating capital amid a tougher VC landscape at the two-day summit, which gathered young entrepreneurs and trailblazers from a growing network of 30 Under 30 Asia list alumni.
Given the higher cost of capital and heightened macroeconomic headwinds, investors are putting more emphasis on startups’ profitability before committing investments and increasingly looking into corporate governance practices at the fast-growing companies. “CFOs used to be a nice-to-have, but now it’s probably a must-have, or at least appoint a VP of finance or finance manager,” Tan said.
Venture capital firms are not rushing to invest in startups given the rising cost of capital, growing geopolitical tensions and a slowing global economy, particularly in China, Tan said. Insignia has $500 million in dry powder, waiting to be deployed, he added.
“It’s a very tough environment to raise capital, particularly if you’re at the growth stage and looking for that capital where you want to scale and continue to grow,” David Gowdey, managing partner at Singapore-based Jungle Ventures, which has over $1 billion in assets under management. “I think that’s a very challenging space.”
Despite the challenging environment, investors are pouring fresh capital into a few hot sectors such as AI. For instance, Jungle Ventures was among the investors who participated in the $250 million series D fund raising by Builder.ai, a London-based modular app-building platform, in May. AI will help drive efficiency and cost optimization across industries, similar to how the migration to the cloud boosted productivity and drove costs lower in the past decade, Gowdey said.
While AI is likely to be broadly adapted across many industries in the next few years, investors should exercise some caution, said Hian Goh, founding partner at Singapore-based Openspace Ventures. “We need to be very skeptical as to what is real and what is hype,” Goh said. While there are a lot of interesting AI applications out there, it’s not clear how these innovations can be monetized, he added.
Goh said investors are generally more cautious in their investments as they have to realign their profitability targets amid rising interest rates. “There is money [to be invested] and there is pressure to actually find great companies at great prices,” he said. “So there’s a market clearing floor that we need to achieve.”
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