Venture Capitalists Shift Focus to Startups’ Profitability Path

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Deal activity in the Asia Pacific region experienced a 26.3% year-on-year decline in 2023, but experts suggest that subsequent years following a downturn often yield exceptional opportunities. Securing funding from cautious venture capital (VC) firms now demands more than just having a unique product; investors are increasingly prioritizing investments with a clear path to profitability.

Stephen Bates, partner and head of Deal Advisory at KPMG in Singapore, notes that VC firms are now posing questions such as, “What is your growth path to profitability and what is your cash funding time horizon?”. The decline in VC deals in 2023 reflects investor caution. Data from Global Data revealed a 33.2% drop in VC deals in the Asia-Pacific region last year. Additionally, in the fourth quarter of 2023, investments in the region plummeted to US$18.8 billion, the lowest level since the first quarter of 2017.

Bates emphasizes that VCs are meticulous about investing in companies that demonstrate progress towards their goals, particularly in challenging economic environments. Startups must focus on efficient investment spending and be prepared to pivot if necessary. Investors are keen on building successful companies to ensure returns for their limited partners. Aurojyoti Bose, lead analyst at GlobalData, highlights the importance of profitability and return on investments in the eyes of investors.

Despite the concerns of 2023, Bates remains cautiously optimistic about 2024, especially in the second half of the year. He anticipates a surge in deal opportunities, noting that years following a downturn typically yield exceptional results. Bates points out that many investors have substantial funds at their disposal and are actively seeking new investment opportunities while aiming to exit longer-term investments.

In Singapore, early-stage deals accounted for a significant portion of deal volume and value, according to data from Enterprise Singapore. Bates sees investment opportunities in Series B rounds across the ASEAN region, particularly in Singapore, which continues to foster innovation across various sectors.

For startups seeking Series B funding, Bates advises ensuring audited financials, robust forecasts, and strong corporate governance to attract VCs and investors. Moreover, startups should aim to secure funding that provides financial stability for at least three years to pave the way for profitability.