2024 has turned out to be another trying year for startups, marked by a subdued macro landscape and arid funding environment. But inconspicuously, the dark cloud is starting to lift, revealing a new set of opportunities to build on. Here are some of our thoughts as we reflect on 2024 and look into 2025.

Revisiting our 2024 predictions and looking into 2025

1. Food inflation and agritech solutions

While core inflation subsides generally across the region, food prices remain sticky and volatile. Small-scale farmers, who operate with tight operating margins (<10%), limited working capital, and little access to formal credits (60-120% APR for informal credit), are particularly fragile. We continue to see new agritech startups tackling these perennial challenges through IoT, SaaS, marketplace, and credit solutions. In addition, many early movers (e.g., Techcoop, Chickin) are now leveraging the initial wedge to directly aggregate supply in a given product category (essentially, becoming first-tier suppliers themselves) as a way to expand market ceiling and capture more margins.

The transformation of SEA agrifood systems is a decade-long opportunity. We expect more innovations in the coming years.

2. Alternative sources of public capital

Only one SEA startup opted to go public in the U.S. in 2024 (NYSEAMERICAN: RYDE). Amidst subdued IPO markets, cross-listing on a board that has historically been tepid towards SEA stocks proves to be almost impractical.

On the other hand, liquidity concerns are too real to ignore. One viable approach is to create a regional market that enables startups to tap various domestic pools of capital. We are seeing early innings of greater regional cooperation and integration. For examples, the recent initiatives seeking to establish a joint data infrastructure or enable access through depository receipts represent a step in the right direction.

3. ESG reporting to draw investments

General interest in ESG investing is waning, with only 48% of investors still considering ESG this year, down from 53% in 2023 and 60% in 2022 according to the Association of Investment Companies’ ESG tracker. More have come to realize that “E” and “S” are too hazy to guide investment decisions. The issues are systemic and cannot be resolved with better reporting tools alone. Instead, investors are shifting their focus to “G”, which is more tangible and has historically shown a stronger correlation with investment performance.

While the near-term friction could be discouraging, the long-term importance of reporting based on quantitative metrics still holds. In this regard, the combination of sensors and AI, by virtue of their ability to gather and analyze a vast amount of data, presents a major opportunity for disruption (e.g., Redaptive, Aquila.is).

4. Political and regulatory uncertainty

Political and regulatory uncertainty continued to dampen the early-stage funding activities in Indonesia and Vietnam. In both countries, the deal value and number of deals are at record low since 2020.

As the newly elected Indonesia government signals greater support for startups, we expect the startup ecosystem to defrost next year. As to Vietnam, a lack of regulatory clarity on key issues such as personal data protection and debt collection will likely remain a serious challenge.

2025 predictions

1. PE-driven exits will recover first

We expect a surge of PE-driven exits in 2025, considering the capital cycle. In 2021, $20b was raised by SEA-focused PE funds when the interest rate was close to zero and investor confidence at peak. That proves to be an outlier year - only $8b has been raised since then.

Even assuming full deployment of the $8b, at least $6b of the dry powder available in 2024 was raised in 2021. That capital has been committed for more than three years, putting GPs under great pressure to deploy within the next 1-2 years, thereby accelerMating exits for the early stage investors.

2. Stablecoin will gain mainstream adoption

Stablecoins have become a “killer app” of cryptos by, inter alia, enabling consumers and businesses to transact in a cheaper, faster, and more transparent way and without border constraints. It is quickly gaining mainstream adoption as a medium of exchange, transferring ~$700b of organic transactions in Nov 2024 - more than double the volume recorded in Nov 2023. This is largely driven by infrastructure advancements - more than half of stablecoin volume is now transferred on the layer-2 networks, which radically lower the transaction costs from dollars to cents.

Following the (re)election of President Trump and Stripe’s recent $1.1b acquisition of Bridge, the momentum has reached unprecedented levels. Riding the structural shift, we anticipate a surge of new startups next year, particularly on the B2B side.

3. Lending growth will rotate from Indonesia to Philippines

Lending has consistently been the biggest fintech subsector in Southeast Asia, contributing about two-thirds of revenues.

However, growth in Indonesia, one of the largest markets, is starting to taper off. Fintech lenders there experienced revenue growth less than $100m for the first time since 2021. This is largely caused by two salient changes: first, newly imposed caps on rates (0.1% and 0.3% per day for productive and consumptive loans respectively); and second, intensifying direct competition from (digital) banks, who used to lend through fintechs but have grown increasingly wary. The second-order effect is that banking licences will be increasingly pertinent and require earlier consideration in the face of stagnant growth, narrowing margins, and anticipation of a recessionary cycle (where book-based multiples tend to be much more resilient).

Lending is like a pendulum, perpetually swaying between undercapacity and overcapacity. At this juncture, the Philippines appears to be swaying upwards, growing at a double-digit rate. There exists an observable credit gap, especially in SMEs lending. Risk-averse and slow, banks lend only against collaterals and take 3-6 months to make any decisions. As a result, SMEs are forced to borrow from the last generation of non-bank lenders, who typically charge 60-70% APR at a disproportionate risk premium. The credit landscape is ripe for disruption by agile and tech-enabled startups like ProCredit and Netbank.

4. Voluntary carbon credits will emerge anew

In early 2023, when voluntary carbon credits were booming, a damning investigation by Guardian revealed that 90% of offset credits certified by Verra are worthless “phantom credits”, shaking the very premise of the voluntary carbon markets. So the music stopped.

This year, a new wave of startups started to emerge from the debris, with a focus on addressing the quality problem on the supply side. Just within the first 4 months of 2024, over $560m was raised, recovering from the 2023 low. Commercial progress, however, could not match the high spirit. Of the dozens of startups we met this year, none had managed to cross the bar of $1m in ARR. Demand driven predominantly by “altruism” is too elastic to monetize at scale.

One principal catalyst for increased demand is Article 6 of the Paris Agreement, which establishes a framework for countries to trade carbon credits to meet their Nationally Determined Contributions, thereby promoting the incorporation of voluntary markets into the compliance markets. Operationalization is set to begin in 2025. In the next 1-3 years, we foresee a significant strengthening of demand.

Looking ahead

Despite the short-term uncertainties, our conviction on the region’s potential stays strong. Stay tuned as we delve deeper into the investment themes in future articles.