Cover Story: VCs shift focus to Southeast Asia as global uncertainty deepens
This article first appeared in Digital Edge, The Edge Malaysia Weekly on July 14, 2025 - July 20, 2025
Venture capital (VC) fundraising has slowed sharply worldwide as investors face an uncertain exit environment, volatile markets and ongoing geopolitical risks.
Yet Southeast Asia is emerging as a bright spot. Industry players say the region’s steady economic growth, political stability and low operating costs are drawing growing interest from VC firms and investors seeking resilient opportunities amid global uncertainty.
The region’s relatively neutral geopolitical stance has made it an attractive, stable component in global portfolios, particularly for limited partners.
According to KPMG’s Venture Pulse report, many VCs are rebalancing their portfolios to mitigate geopolitical risk, shifting focus toward domestic and regional opportunities and away from companies heavily exposed to volatile export markets. Asean-focused investments, the report notes, are generally less vulnerable to tensions linked to US or China trade dynamics.
Still, despite these advantages, Southeast Asia’s VC landscape is not without its own challenges.
What many described as a “funding winter” has now dragged on for two years. Fundraising timelines continue to lengthen, leaving countless start-ups unable to raise capital altogether. VCs are adapting to a “new normal” of tighter capital flows, slower deal cycles and a shift toward performance-based capital allocation. This includes US funds that are traditionally significant players in late-stage funding.
Following US President Donald Trump’s announcement of a sweeping 25% import tariff on all Malaysian goods effective Aug 1, local VCs fear the move will dampen US investment sentiment across Southeast Asia and in Malaysia.
The tariff shock will hit the country hard as US is Malaysia’s third-largest trading partner, accounting for 11.3% of total trade in 2024. Exports to the US jumped 23.2% year on year to a record RM198.65 billion, driven by electrical and electronics, machinery and rubber products.
Foreign investors play a big role in funding the region’s start-ups. Of the total VC deal value in 2021, 92.1%, which is equivalent to US$16.7 billion, was from investors outside of Southeast Asia, according to Pitchbook’s “Southeast Asia Private Capital Breakdown 2024” report.
In Southeast Asia, VC fundraising fell by 54.2% between 2021 and 2024 — from US$4.8 billion to US$2.2 billion — Pitchbook reported in its 2025 edition.
In response, VCs are becoming more selective, prioritising businesses with immediate revenue streams and a clear path to profitability over “growth at all costs” start-ups. VCs also view local institutional support and a re-evaluation of funding structures, such as encouraging larger financial services firms to allocate capital to start-ups, as crucial for addressing these funding gaps.
But, some firms see an opportunity to invest at more reasonable valuations amid this uncertainty. Industry stakeholders say this creates a favourable window of deployment if investments are made in resilient sectors, which means fund managers must identify companies that are poised for long-term growth amidst current volatility.
Digital Edge speaks to VC players to understand how they are charting their course in this new global disorder.
Region to be beneficiary of global uncertainty
Southeast Asia’s continued economic growth and resilience have made it a beneficiary of global trade disruptions, with investors increasingly looking at the region for opportunities.
“As a venture capital (VC) player in Southeast Asia, I think it is a really good market to be in right now. We continue to grow as a bloc and also individually as a country. There are lots of opportunities for VCs to continue investing into this region. Southeast Asia has also been a beneficiary of the trade situation globally, so we see a lot of inflows and interest for incoming investors into this region,” says Amelia Ong, executive director and CEO of OSK Ventures International Bhd.
For instance, OSK’s portfolio companies are experiencing an average growth rate of 30%, she says.
Umar Munshi, managing partner of Hasan VC, says this is because of low costs as well as political stability. Additionally, countries such as Malaysia and Indonesia provide a sustainable environment for entrepreneurs, which attracts digital nomads, founders and investors who seek stable and cost-efficient bases.
Frank Kang, country head and associate partner of Antler Malaysia, adds that the geopolitical climate has made some institutional limited partners (LPs) more cautious. However, Southeast Asia’s relatively neutral position has worked in Antler’s favour. “Many LPs now see the region as a more stable part of the global portfolio, especially for diversification. We’re seeing family offices and sovereign wealth funds step in more actively. They tend to take a longer-term view and are looking to Southeast Asia for both growth and geopolitical balance,” he says.
Additionally, the uncertainty in the market has made valuations reasonable, making it a strategic time to invest, says Joseph Lee, managing partner of Kairous Capital. This creates opportunities for VCs that invest in sectors that “will continue to grow”.
“Generally, investors will be more cautious during the current geopolitical situation. However, given that most of our existing and potential future investments are more dependent on Asean markets instead of the US market, we are less likely to be affected,” he says.
“In fact, on a positive note, the public equity market has been so volatile [as a result of] the short-term outcome of the trade deals, we are seeing more investors turning to alternative assets, looking for investment stability.”
This is why it is “business as usual” for Kairous’ Southeast Asian investments. On the other hand, the cross-border VC exercises caution with companies that are heavily involved with cross-border trade outside the region.
Lee says Kairous is avoiding investing in companies with significant exposure to selling to the US or buying from China until the trade situation stabilises due to the unpredictable nature of tariffs and the potential impacts.
However, he says Southeast Asian countries should still leverage China’s technological dominance in various sectors. “I don’t think it’s wise for any Southeast Asian country to ignore China. The technology is so advanced even [in areas] like robotics. We know that technology is a critical part of a nation’s future development. Therefore, partnership with China is also very critical.”
The ongoing geopolitical realignment, which has been intensified by the tariffs, is also fostering alliances among emerging markets, says Umar. This provides access to previously untapped markets, which creates new growth and expansion opportunities for start-ups.
Moving away from the US
The world is increasingly ready to look beyond the US for long-term innovation and investment returns. This presents an opportunity for Malaysia and the broader region to build globally recognised companies in technology and artificial intelligence (AI), says Thomas Tsao, co-founder and chairperson of Asia-focused VC firm Gobi Partners.
Historically, countries that benefited from manufacturing for the US tended to reinvest their wealth back into the US, driven by a “there is no alternative” mindset. US capital markets were viewed as the most liquid and attractive, making them the default destination for global investment.
Tsao argues that this pattern is beginning to shift. As nations develop their own innovation hubs and capital ecosystems, more investment capital will be directed inward or toward regional opportunities, rather than flowing reflexively to the US.
Institutions are not completely withdrawing from the US, but instead are cautiously reallocating funds, exploring new opportunities in Asia and reducing overexposure to American risk.
“While the US was outsourcing manufacturing to the rest of the world, the rest of the world, including Malaysia, was outsourcing innovation and creativity to the US. Now, the rest of the world wants it back. That’s the trade that’s going on,” says Tsao.
“There are a lot of people who believe innovation can be done only in Silicon Valley. I think from a geopolitical standpoint, what’s going on is confirming our thesis that great entrepreneurs can be found anywhere … Now, people are seeing there’s a bigger corridor if you can connect the markets of Asean with China, Japan and [South] Korea.”
What will become of VC investment horizon?
In Southeast Asia, there is a desire for quick exits. The uncertainty arising from trade wars will only cause local investors to push for exit too early, which may pressure founders to prioritise short-term liquidity over long-term growth.
Raja Hamzah Abidin, CEO of RHL Ventures Sdn Bhd, says investment horizons will remain a point of contention. While Southeast Asian LPs find the traditional 10-plus-two VC cycle too long, US investors are more comfortable with longer horizons.
But the fact that VC operates with a long-term horizon of seven to 12 years also means that it can weather economic cycles more patiently than other classes, notes Umar.
VC is not about immediate return; it is about shaping a company’s trajectory for the long haul, says Tsao. “A cycle is 10 years. Gobi, we’ve been around for 23 years. That seems like a long time, but in VC terms it’s only two cycles. You look at the US guys, they’ve been around for five cycles,” he points out.
“Everybody’s a long-term investor until they’re not. They get impatient … Everybody’s fixated on the short term. If you want short term, that’s what hedge funds are for. Venture is about changing the trajectory in a long-term and patient manner.”
Essentially, VC investments offer diversification in volatile public markets. For long-term investors, this asset class allows participation in sectors like digitalisation or sustainability while learning from new business models, says Ong.
Funding is a challenge
US funds have traditionally played a key role in late-stage venture capital (VC) funding in Southeast Asia. However, ongoing geopolitical tensions and trade uncertainty are making US investors more cautious, according to Raja Hamzah Abidin, CEO of VC firm RHL Ventures.
As access to large foreign cheques tapers, local VCs must be more strategic and selective in capital deployment. Foreign investors have long dominated the region’s VC landscape — in 2021, they accounted for 92.1% of total deal value, with US firms such as Sequoia and Y Combinator particularly active in markets like Indonesia, according to PitchBook.
“This whole trade war does not help the funding situation. But I feel like its [the] new normal that we as VCs have to live with and [continue to] fight the battle. I would say there’ll be more strategic funding that comes into play. I would [also] say there’ll be even more focus on performance and returns,” says Raja Hamzah.
“It’s either you [have] extremely strong performance or you meet a strategic mandate. Obviously, if you have a combination of both, then the chance of getting funding is [there] but the large ticket sizes will probably slow down.”
American investors represent a large portion of global VC funding, which means their caution ripples across Southeast Asia and beyond.
Follow-on capital has become more scarce due to VC firms’ risk-averse behaviour, says Umar Munshi, managing partner of Hasan VC. This means that early-stage start-ups now face hurdles in raising capital for subsequent rounds.
As a result, VC funds are reluctant to back risky ventures that may fail to raise additional rounds and prefer to support start-ups that have immediate revenue streams and profitability potential, says Frank Kang, country head and associate partner at Antler Malaysia. This means VCs are becoming more selective, supporting portfolio resilience and favouring sustainable growth over hyper-scaling.
For example, many VCs are now investing in more traditional, stable and profitable businesses like food and beverage or retail. “I think that’s not necessarily because of geopolitical issues. It’s more the market volatility and the whole funding environment. It’s very dry and in this situation, a lot of VCs tend to play a bit safer and invest into businesses that are already making profits,” says Kang.
Hasan looks at camel start-ups, which he describes as resilient, adaptable and resourceful, rather than unicorns. Umar says camel start-ups are able to endure the current global climate of unpredictability as a resilient mindset is more critical now compared to the “rapid scale at all costs” mentality.
“Founders who are focused on making a quick buck from hype cycles are not on our radar. Our programmes are designed to nurture sustainable, capital-efficient business models that can weather economic and market disruptions, aligning with our ethos of purposeful growth,” he stresses.
Hasan offers an online accelerator programme that identifies, nurtures and invests in early-stage start-ups that engage in ethical business practices. It is backed by an active group of angel investors in several continents, says Umar.
Amelia Ong, CEO of OSK Ventures International Bhd, says heightened geopolitical risks and long liquidity horizons are making investors more cautious of untested businesses.
While sovereign funds, family offices and high-net-worth individuals are increasing exposure due to their long-term outlook, some corporates are pulling back, preferring assets with shorter lock-up periods and quicker returns.
“Fundraising has been extremely slow in the last 18 months and with that, companies have had to become a lot more aggressive with their sales, cost rationalisation and ultimately become profitable as soon as possible. In this new era, I would love for more capital to be allocated from larger financial services firms with the support of regulatory decisions,” she says.
“This will address the scale of local VCs, the growth of start-ups and exit performance which will, in turn, provide structure and comfort to LPs (limited partners).”
She says local institutional support remains critical. For instance, in the UK, 17 of the largest direct contribution pension funds have pledged to invest at least 10% of their defined contribution default funds into private market assets by 2030, potentially unleashing an incremental initial £50 billion of funding for private assets, with at least half earmarked for the UK.
Adopting such a model where financial institutions are encouraged by regulators to allocate capital to start-ups could catalyse substantial ecosystem growth, says Ong.
Debt as long-term play
Ong says venture debt is an essential tool in the current funding environment for growth-stage companies that cannot access traditional bank financing due to stringent credit requirements.
This is why OSK is doubling down on venture debt. This funding mechanism provides growth-stage start-ups with capital without the need for immediate dilutions, which bridges them through difficult funding cycles. These companies can seek equity financing once market conditions stabilise, she says.
Importantly, venture debt helps build financial discipline and a credit track record, Ong explains. Companies develop the capacity to manage interest payments and principal obligations, positioning them for eventual integration into mainstream banking and institutional finance.
This also means that companies can grow to a certain valuation before they look for equity financing.
Malaysia’s ecosystem is still in the early stages of using venture debt as a tool, says Raja Hamzah. Currently, profitable start-ups prefer conventional bank loans, which are cheaper than debt.
Venture debt is also more suited for mature start-ups, says Joseph Lee, managing partner of Kairous Capital. It is not recommended for early-stage start-ups that lack predictable revenue streams because debt can increase financial strain. As such, venture debt can be a powerful tool, but only in the later stages of the start-up life cycle.
The role of VCs goes beyond capital. This is why Ong says VC firms must provide operational guidance alongside value creation. For instance, OSK’s team actively works with portfolio companies to assess how geopolitical situations such as tariffs affect their supply chains.
On top of that, it works with investors to align portfolio investments with both immediate market needs and longer-term structural growth trends, says Ong.
Chinese businesses entering region
Overall, companies that are focused on the local market are seen as less impacted by tariffs and geopolitical tensions if they have minimal exports or business with the US, say investment pundits. This is because these companies are siloed from external shocks, at least in the short term.
But there is a twist. Chinese consumer brands are increasingly entering the Southeast Asian market, intensifying competition for local players, says Raja Hamzah Abidin, CEO of RHL Ventures Sdn Bhd. This is because the US is becoming a less attractive growth market for them.
Chinese companies often bring aggressive pricing, faster franchising, local partnerships and assembly hubs, which put serious competitive pressure on Southeast Asian players.
For instance, Chinese food and beverage brands had opened more than 6,100 outlets in Southeast Asia as at Dec 31, 2024, according to a report titled “Chinese F&B in Southeast Asia”. This includes Mixue Group and Chagee.
Southeast Asian companies need need to gear up to face this challenge. “There’ll be increased competition. So, it’s how you leverage the competition to grow or you’ll be affected by the competition,” says Raja Hamzah.
This also means there are more Chinese investors entering the Malaysian market. Raja Hamzah highlights that the country has a “golden opportunity” to tap into these investment flows. The key, he says, is to open up the market and allow them to take risk capital positions.
Realistically, as in any risk capital environment, two-thirds of the companies may fail. But, if the remaining third succeed, the returns can be substantial, which makes it worthwhile for everyone involved, he adds.
Additionally, these experienced investors with their strong exit track records can help local companies achieve successful exits, which could be a game changer, he adds. “I think we just need one or two exits to do well to actually show that Malaysia is a serious player,” says Raja Hamzah.
Which sectors will bear fruit?
Venture capital (VC) must focus on core areas with a long-term lens as geopolitical situations remain fluid, say industry players. This means VCs need to identify opportunities that are headed the way of VCs with the tariffs in place.
For Amelia Ong, executive director and CEO of OSK Ventures International Bhd, these are in the areas of technology and sustainability. OSK is commited to three long-term verticals that Ong believes will remain robust despite the geopolitical noise — digitalisation, sustainability and the convergence of online and offline models.
Umar Munshi, managing partner of Hasan VC, sees the formation of new companies in sectors such as fintech, ethical e-commerce and digital education. “Fintech stands out, particularly in the area of halal finance, where start-ups are innovating ethical financial products that align with faith-based values. This sector is gaining traction due to increased demand for inclusive and value-driven financial services,” he says.
“A significant niche showing green shoots is the Muslim lifestyle sector, where faith-aligned products and services are attracting both founders and funders.”
Joseph Lee, managing partner of Kairous Capital, believes in investing in “must-have” sectors during periods of uncertainty. These are sectors that meet human needs and remain relevant even during downturns, such as healthcare, education and food. “Nice to have” sectors should be approached with caution during turbulent times, he advises.
Start-ups that leverage artificial intelligence are also essential, says Lee, as the technoloy has become indispensable. Hence Kairous is drawn to start-ups that utilise AI and other technological solutions.
“VCs are a very important player in the ecosystem. From Kairous’ perspective, as we continue to invest in technology, we hope that these technologies can actually help to improve the efficiencies of businesses, from AI to automation to digitalisation. If you look at China as a whole their businesses are much more efficient because the country continues to invest in technologies,” he adds.
VCs such as Hasan VC are also integrating AI to improve the speed, depth and precision of their investment evaluations.
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