What LPs Are Missing About Southeast Asia’s Funding Downturn
A region between two waves
Welcome to a special edition of The Ascent, from AVV. Instead of our monthly look at Vietnam tech, this is a long-form take on a critical ongoing question: is Southeast Asia’s tech sector in the middle of a temporary, cyclical downturn, or a more fundamental, long-term reset?
By GP Binh Tran and Mike Tatarski (personal analysis of the authors, informed by AVV’s on-the-ground experience)
According to Coller Capital’s Global Private Capital Barometer, Southeast Asia ranks poorly among country-focused funds, with just 4% of respondents exposed to the region and 6% planning deployment.
Pan-Asia funds view the region more favorably, but this signal can’t be ignored, and we take it seriously. However, we believe it’s being misread.
Our top-line arguments:
Southeast Asia is not broken. It is between waves of value creation.
This downturn mirrors patterns seen in the U.S. post-dot-com and India post-2015.
Foundational infrastructure has been built; capital is now scarce and more selective.
Exit pathways remain the weakest link, though they show early signs of reopening.
Digital financial services are leading the next cycle with capital efficiency and liquidity.
The current debate is whether Southeast Asia’s downturn is cyclical or structural. There is evidence to support both interpretations, and any serious view of the region needs to acknowledge ambiguity rather than assume recovery.
Our thesis is that the region is not fundamentally broken. It is in the natural trough between two waves of value creation.
Cento Ventures, in its most recent Southeast Asia Tech Investment report, makes the scale clear: by mid-2023, the region had “reset all the way back to the pre-unicorn era.” Investment activity fell below its 2017-2020 baseline in H2 2022 and has remained stuck.
Meanwhile, DealStreetAsia’s latest Data Vantage report found that only one Southeast Asia-focused VC firm closed a fund in the second half of 2025, marking “the weakest stretch since tracking began”.
To quote the authors: “The outcome reflects a clear flight to conviction, with LPs concentrating capital behind managers with demonstrated DPI visibility, disciplined deployment and defensible sourcing.”
Where does this reality place the region in terms of development waves?
The First Wave: Infrastructure, Overcapitalization, and Mispriced Growth
In this period, capital requirements are high, margins are thin, and the work is difficult. But while this activity appears competitive on the surface, in reality, there is a surplus of money chasing similar ideas.
Several forces tend to inflate this first wave, often accelerating market development while obscuring underlying weaknesses. When companies fail or falter, LPs anchor to the losses. That’s rational, but it can cause them to miss the groundwork being laid.
The U.S. Case
LPs already accept this pattern in markets they know well.
For example, the dot-com era in the U.S. funded enormous infrastructure investment alongside many unsustainable business models. The crash that followed shaped LP psychology for years, and it took almost a decade for funding to recover.
Ultimately, the heavy capex expenditure that contributed to this crash helped the U.S. transition into a second, more productive wave. Historically, this is when the best venture returns are generated. What felt like stagnation in the first wave becomes the foundation for more durable and valuable companies.
The India Analogy
India followed a similar arc from around 2015: a post-correction ecosystem with infrastructure maturity and the beginnings of credible exit validation.
In the 2000s, India struggled with trust, payments, and monetization. Few exits materialized, and most capital went to later-stage PE-style deals.
Then, Aadhaar enabled identity verification and UPI transformed payments, while mobile data became ubiquitous and cheap. These shifts unlocked the next wave, which was not just infrastructure-driven.
It was catalyzed by validation events such as Flipkart’s acquisition by Walmart, which proved India could produce global-scale liquidity. In 2021, the ecosystem exploded: Indian startups raised US$38.5 billion, minted 44 new unicorns, and delivered over US$14 billion in exits, including IPOs for Zomato, Nykaa, and Paytm. By year-end, India ranked third globally in unicorn count and counted over 660 active venture investors.
This post-2015 India example required two factors: infrastructure buildout and exit validation. While Southeast Asia has been successful in the former, the latter raises a direct question:
What is the region’s equivalent validation event?
We have already seen several contenders. In 2025, Singapore-headquartered Airwallex was valued at US$8 billion as of its latest funding round, Meta acquired the agentic AI startup Manus for over US$2 billion, and Airalo became the world’s first eSIM unicorn.
These are encouraging data points that globally competitive companies can emerge from the region, but they don’t solve the core LP concern: repeatable, broad-based liquidity.
There is an additional key structural difference between the two: fragmentation.
Southeast Asia is a collection of distinct mid-sized economies with no unified payments layer. Instead of US$50 billion winners, it may produce more mid-sized US$500 million to US$2 billion exists across markets and sectors.
We underwrite this by assuming that most companies won’t be able to go beyond their initial markets and price accordingly. A low entry valuation makes up for a “low” US$200-300 million exit.
The Weakest Link: Exit Infrastructure
The most fragile part of our thesis for Southeast Asia is how companies exit, given the limited organic liquidity and lack of IPOs.
That said, the infrastructure is not static. Several IPOs are reportedly in preparation, with early pre-IPO transactions becoming visible, such as the MUFG-Ayala realignment in Mynt.
Additionally, several significant block trades and take-private events represented over US$2 billion of liquidity in 2024 alone, though these are often missed in headline exit narratives.
These include Singapore’s PropertyGuru, which was bought by EQT Private Capital Asia for US$1.1 billion in August 2024. Earlier that year, Japan’s NTT Data acquired a majority stake in Malaysia-based GHL Systems for US$155 million.
The second wave will depend on these pathways deepening significantly
Where the Second Wave Is Already Visible: Digital Financial Services
Given this unresolved constraint, where is capital efficiency strong enough to generate returns? The answer, increasingly, is digital financial services.
In the second half of 2024, this sector accounted for 74% of all capital deployed in Southeast Asia, absorbing US$2.1 billion for the year.
While not strictly a fintech startup, our portfolio company TechCoop is an example of a capital-efficient business model enabled by data. They provide flexible payment options to agricultural MSMEs in Vietnam, and raised US$28 million in equity in early 2025.
This sector also dominates exit proceeds, with financial services generating 42% of exit liquidity from 2020 to 2024, driven by payments acquisitions and secondary sales.
Southeast Asia’s next generation of winners may be more capital-efficient, more embedded in financial infrastructure, and less dependent on consumer subsidy models.
A Falsifiable Bet, Not a Narrative
The credibility of our argument requires falsifiability, and here’s our disclaimer: if Southeast Asia has not recovered to baseline investment activity by the end of 2026, then a structural reset is underway.
Our bet is that this is the first vintage where regional companies can be truly capital-efficient, building on mature rails, with AI and fintech leverage shifting unit economics.
Specifically regarding AI, we see portfolio companies such as Obello and ByteRover scaling and attracting diverse investor interest. VuCar is another prominent regional example outside of our portfolio.
What Does This Mean for LPs?
The Coller data above accurately captures LP hesitation. Rather than a broken market, we believe this indicates the shift from a capital-heavy first wave to a more disciplined, capital-efficient second wave capable of producing strong outcomes. For LPs evaluating the region, several considerations are worth weighing:
Vintage timing favors contrarian entry. The best-performing VC vintages in the U.S. and India were deployed during periods of maximum skepticism. Current entry valuations in SEA are at multi-year lows, which improves return potential if exit values normalize even modestly.
The return profile will look different. LPs expecting U.S.-style power law distributions with US$50 billion+ outcomes should recalibrate. SEA is more likely to produce US$200 million-US$2 billion exits driven by trade sales and secondary transactions.
GP selection matters more than market selection. In a compressed market, the gap between top-quartile and median GPs widens. LPs should prioritize managers with demonstrated discipline on entry pricing, sector-specific deal flow advantages, and a track record in challenging environments.
Digital financial services are the leading indicator. Fintech’s dominance in both capital deployment and exit proceeds reflects the natural monetization layer of the region’s digital infrastructure. LPs looking for early proof of the second wave should focus on this vertical as evidence.
AI is an accelerant, not a standalone thesis. Instead of building foundation models, the most promising regional AI companies are applying AI to existing workflows where the region has domain data and distribution advantages, rather than competing with Silicon Valley.
Ultimately, Southeast Asia’s downturn shows the next wave will be built with greater discipline. This current is period will look like an inflection point, not an aberration.
If you have comments or a counter-argument, let us know!