How Southeast Asia's new economy champions navigate tougher financing conditions

Capital is the lifeblood of innovative companies, which must often invest heavily in new technologies and platforms before they can commercialise them. After more than a decade of ultra-low interest rates and abundant venture capital, new economy firms in Southeast Asia face a changed landscape as they seek to extend their funding ‘runways,’ or cash resources to fund that investment.

Since the beginning of 2022, US interest rates have risen from close to zero to above 5%, increasing the cost of capital globally.¹ Venture capital investments have withered, with private funding falling to its lowest point in six years, according to research by Google, Temasek and Bain & Company.²

Opportunities for founders and early-stage investors to exit via initial public offerings have been scarcer in more volatile equity markets since the listings of Grab and Bukalapak in 2021. Pre-profit start-ups no longer have easy access to the IPO market.

A tougher funding environment has added to the challenge for entrepreneurs in Southeast Asia. According to a survey conducted by Funding Societies, about 70% of SME respondents in Southeast Asia have relied on seed money from their personal savings and friends and family networks to start their businesses.³ Some 23% had obtained funding from traditional banks, and the remaining 7% of respondents used alternative sources, such as crowdfunding and other digital finance platforms.

Finding finance

Government schemes to support start-ups can be a valuable resource for new economy firms in Southeast Asia. Singapore offers generous support programmes,⁴ and the governments of Indonesia,⁵ Vietnam,⁶ Thailand,⁷ the Philippines⁸ and Malaysia⁹ have all rolled out incentives to foster innovation and the creation of tens of thousands of new technology start-ups.

Banks are the dominant source of funding in Asia Pacific – accounting for nearly 80% of credit, compared to just a third in the US.¹⁰ Many lenders have traditionally found it challenging to finance new and unproven business models in the technology sector. But some banks are evolving their approach to meet the needs of clients active in a regional digital economy that was set to deliver USD100 billion of revenue in, according to the research by Google, Temasek and Bain & Company.

For its part, HSBC is committed to financing the growth of new economy businesses across Southeast Asia. HSBC has established a dedicated USD1 billion ASEAN Growth Fund to help corporates and non-bank financial institutions across South and Southeast Asia scale their businesses to the next stage. It provides access to corporate lending for companies that have a proven track record in generating a sustainable cashflow stream, even if the overall group may be loss-making.

Smart strategy

To sustain growth in a more challenging funding environment, businesses will need to focus on controlling costs and lifting revenues. They must also reconsider their approach to funding to manage their cost of capital and secure their long-term viability.

Exploring partnerships with firms in other markets can also allow start-ups to expand across borders or develop their capabilities without having to make substantial investments themselves.¹¹ Securing the right partner can also boost a start-up’s credibility, enhance its appeal to customers and—particularly relevant in the current climate—make it more attractive to potential investors.¹²

As Southeast Asia’s digital economy expands, cross-border e-commerce is also creating growth opportunities for new- and old-economy firms. Making it easier for customers – whether they are consumers or business – to pay through a company’s digital platforms can be an important revenue driver over the years ahead.

From winter to spring

While the last two years have been more difficult for new economy firms looking to raise capital, there are reasons to be more optimistic in 2024.

Innovative businesses in Southeast Asia remain attractive to investors because of the region’s exciting growth prospects: HSBC forecasts GDP growth in the six biggest economies to accelerate to 4.6 % in 2024.¹³

Southeast Asia also benefits from a broad expansion in consumption among its increasingly affluent population of 670 million. On average, one individual enters the middle-income bracket every two seconds in the region, creating a compelling market for start-ups across several sectors. In particular, there are high hopes for e-commerce, digital financial services,¹⁴ health tech, green tech, the clean mobility ecosystem and artificial intelligence.¹⁵

As multinational companies seek to diversify their supply chains, businesses across Southeast Asia are becoming more important to global manufacturing, creating new opportunities for innovative companies. In a recent HSBC survey, 91% of international businesses expressed a desire to expand their operations in ASEAN.¹⁶

There are also signs of a potential thaw in the funding ‘winter.’ The cost of capital may start to decline if the US Federal Reserve begins to cut interest rates this year, as markets expect. HSBC economists see the Fed’s first rate cut coming in June.¹⁷ At the time of writing, US equity markets – including the tech-focused Nasdaq – had risen to record highs, pointing to a recovery in investor risk appetite in the US at least.

There is no question that this has been a challenging time for new economy companies in Southeast Asia to access capital. But government support programmes, progressive approaches to financing from banks like HSBC, a smart approach to strategy, the region’s strong fundamentals and the prospect of lower interest rates all point to businesses in Southeast Asia being able to adapt and thrive.