The startup ecosystem in the emerging economies of Asia-Pacific is still at a nascent stage, but is rapidly evolving. Asia-Pacific region has overtaken Europe in terms of deal value and has emerged as hotbed for venture capital (VC) investors, who are attracted by the region’s growth prospects.
As per the research report by Aranca, China and India, two key economies in the region, have grown at a substantial rate over the past decade and are fast becoming the hot destination for global venture capital investments.
“While lack of transparency, regulatory framework, lack of infrastructure and poor governance continue to act as impediments in the short term. However, long term investment and growth prospects look robust as Asian governments continue to focus on favorable policy reforms and good governance,” says Nishant Sindhwani, Senior Research Analyst, Investment Research at Aranca.
Technology-driven start-ups in the Asia-Pacific region such as Telison, BOE Technology Group, tap4fun from China, and Edureka from India have been featured in the list of Deloitte’s top 10 fastest growing tech firms.
Considering the talent base and growth potential, several global venture capital firms are seeking opportunities to invest in Asia-Pacific’s startup ecosystem. During 2010–15, nearly 7,773 companies raised funds via VC investors in the region. Moreover, the region witnessed nine big ticket deals in 2014 raising over $19.7 billion, which is up 9 times from $1.9 billion in 2013. This trend has continued in 2015, and since the turn of the year the region captured $15.9 billion (a total of 754 investments) in venture capital funding till date.
Despite the tremendous growth potential, total VC investments in Asia-Pacific have been lower than the Western economies due to the lack of investor confidence in emerging markets.
Investment in Tech startups and eCommerce remain in vogue. Of the 1,357 VC deals carried out during 2014 in Asia-Pacific, nearly 27% were in software-driven technologies developed by enthusiastic start-ups to fill the gap in local markets. During the same time, the eCommerce sector also gained momentum and raised around $3.9 billion through 100 deals (or average equity amount of around $46 million per company).
Whereas comparing with the US startup ecosystem in 2014, the amount of capital raised in the US increased nearly 56% to $57.1 billion through 5,541 deals compared with $36.6 billion raised in 2013. On the other hand, the amount of capital invested across the Asia-Pacific region jumped about 311% year-on-year to $38.9 billion in 2014. The software publishing, eCommerce, Internet publishing & broadcasting, and web search portal segments in Asia-Pacific raised $13.3 billion through 720 deals in 2014, up ~4 times from $2.8 billion in 2013.
As compared to developed countries where VC investors play a crucial role in nurturing companies that offer new and innovative services, the VC industry in India and China is still at a nascent stage. This however is balanced with a well-developed education system and technological advancements entrepreneurship is being promoted and rewarded with increasing investor interest in these countries.
507 startups with innovative technologies and service offerings raised their first round of capital from VC investors in 2014.
China and India have remain unaffected by the global economic downturn and have continued to register a good GDP growth rate over the past few years, thereby attracting most of venture capitalist investments. In 2014, startups of these two economies jointly raised an amount of $34.6 billion. As per the report, until now China has led India in attracting investors. However, with China’s economy showing signs of subdued growth in recent years, investors might turn their attention toward India in the long run.
Silicon Valley investors also showed interest in the Asia-pacific region’s emerging startup economy. Both India and China witnessed a total of 8 deals in the startup ecosystem of around $100 million making it to $19.7 billion in total.
The following table shows all the major investments:
Apart from India and China other countries such as Singapore, Malaysia, and Indonesia are also experiencing an increasing number of investors entering the region, rise in investments and increasing valuations.
With economic reforms, increase in number of smartphone users and improved internet penetration have made the Asia-Pacific region a hub for technological innovations. Tech startups thereby attract huge VC funds, who are targeting a long term view and to create technological giants in the region. In 2014, 11 startups in China raised Venture Investments at an aggregate post-money valuation of $46.8 billion, while five companies in India raised venture investment at a post-money valuation of $10.6 billion.
The Exit Strategy
The success and failure of a VC investment is determined by the value a VC firm is able to generate from its portfolio company at the time of exit. An investor can consider various routes at the time of exit, with trade sale (acquisition by a strategic or financial buyer) and IPO being the two most popular options among VC investors. Globally, an IPO has been the most preferred exit route, with companies raising $83.2 billion in 2014.
Some of the challenges that the VC investors face are weak regulatory systems, poor infrastructure and cultural differences, which makes it difficult for the investors to monitor their investments in the region.
Despite so many startups having made their mark in their respective fields, the startup ecosystem is still evolving. To inculcate a healthy startup culture and environment for some more to incubate it is essential for a country to have startup friendly norms and an environment promoting innovation and news ideas for budding entrepreneurs.