Asia has become the world’s leading innovation powerhouse. Yet, in a world where every upswing is followed by a downturn, our brightest sparks — new economy clients — need support as they face difficult funding conditions.
Asia punches above its weight when it comes to commercial creativity. Regional applicants account for roughly 70% of international patent, trademark and industrial design filings — overrepresented compared to our share of the world’s population, which is around 60%, according to Statista. Asia hosts impressive digital start-up ecosystems that are integrating across borders, and has built established tech champions with global reach. Emerging economies here are modelling how to upgrade to online retail and real-time payments, increasing efficiency and moving millions of unbanked Asians into the formal economy.
Singapore personifies this spirit of enterprise and is now a hub for some of Southeast Asia’s brightest new businesses. We have nurtured an ecosystem built on a spirit of collaboration and support where the finance and investor community, start-ups and government agencies work together to develop a thriving community.
It’s no wonder that Singapore remains the top start-up investment destination in Southeast Asia in 2023, where its start-ups accounted for 63.7% of all equity deals in the Asean-6 group of nations, according to a report released in April.
However, it’s not all plain sailing for this burgeoning sector. As central banks raised interest rates to cool inflation, an era of ultra-low borrowing costs came to an abrupt halt. It has become harder and more expensive to roll over debt and appetite for startup equity has abated. IPO markets have cooled. Bain & Co estimates private equity (PE) deal values in Asia fell 44% in 2022 and exit values declined 33%.
This is particularly tough on pre-profit technology businesses. Data aggregated by the Asia Venture Capital Journal shows a precipitous decline. In 2021 early- and growth-stage tech businesses raised nearly US$120 billion. Two years later they got roughly US$30 billion ($40.62 billion). Interestingly, the pain is worse among growth stage businesses than start-ups — transactions more than halved for businesses in later rounds. All this is likely to prove costly for some players, particularly those with no clear path to profitability.
While investors may welcome a degree of consolidation, for promising firms that need a bit more time, capital constraints are an existential threat. Their loss would have ramifications for Asian competitiveness in the coming era, just when revolutions in biotech, nanotech, AI and quantum computing are getting underway.
So where does this leave start-ups who want to bring their businesses to the next stage of growth?
Profitability, a usual measure for lending decisions by traditional financiers, may not always reflect a business’s potential, particularly in its early stages. It necessitates taking a long-term view of potential growth by evaluating businesses based on historical portfolio performance, key operating metrics, growth plans and customer acquisition strategies.
See also: Prudential launches global AI Lab in Singapore to accelerate innovation
Beyond funding, early-stage businesses also face many challenges as they try to scale up their operations. From access to talent to adhering to regulations and finding the right partners, start-ups at various stages of growth can face an uphill struggle in forging a new path.
It is hence important for banks to understand the complexities facing early-stage, fast-growing businesses, particularly as they face macro-economic pressures. Having had a long history of supporting entrepreneurs, we know that giving young businesses access to the right network can make the difference between a fledgling and a future unicorn.
The path ahead necessitates a paradigm shift in how we perceive and engage with startups within our financial ecosystem. It's not just about surviving the present tumult but thriving in it by fostering an environment of innovation and resilience.
Banks and financial institutions must pivot towards more agile, supportive roles, providing both capital and a stable banking relationship. This approach will sustain emerging champions and foster a healthier, more vibrant financial market ecosystem.
Collaboration, patience and a shared vision for the future are the keystones for navigating this new landscape.
Amanda Murphy is the head of commercial banking for South and Southeast Asia at HSBC. Wong Kee Joo is the CEO of HSBC Singapore
