Asia is currently one of the most exciting venture markets around the globe. Learn what savvy investors need to know about this culturally diverse and economically dynamic region for them to be successful.

Authors are experts in their field and only write about topics where they have experience. Toptal experts who are also in the field review and validate all of our content. 

By Alec Tseung

Alec is an analyst and has completed more than $5 billion worth of corporate, venture capital, and private equity transactions for Swiss Re and Tencent. Tencent is China’s largest internet company. He is also the co-founder and director of a Hong Kong-based financial advisory firm that has clients in Asia.

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Over the past decade, international venture capital has grown in Asia, largely due to ecosystem platforms (“super apps”) and gaming. The Asia-Pacific region is a rich market for investors due to a number of factors, including a large population, a rising middle class, and increased technological adoption.

Like much of the world, the area experienced a significant fundraising decline in 2022, but it’s also likely to weather the expected Southeast Asia is quickly becoming the most attractive venture market in the world. To make the most out of their investment dollars, VCs need to familiarize themselves with this diverse cultural and economic region.

Since the beginning of the decade, as an Investment Consultant in Hong Kong, I have been involved in private investment markets throughout Asia-Pacific. Investors targeting Chinese, Indian, and Southeast Asian markets should be aware that, despite being geographically close and considered an “emerging market,” the venture opportunities are very different. As regulatory environments shift and M&A -driven tech giants increase competition for VC, the market in one country may be affected by what happens elsewhere. These are the trends I think will shape the venture environment in these markets over the next few years.

China’s Tech Giants are displacing VC

For a better understanding of the venture capital market in Asia, it is important to first look at what’s going on in China. This has been a popular market for foreign investors. The mid-to-late 1990s was a period of great opportunity for investors. Western-educated Chinese businessmen lined up capital to fuel innovation in the tech sector.

The early successes of Japan’s SoftBank in investing in Alibaba and South Africa’s Naspers in investing in Tencent have attracted foreign VC investors who are looking for their next big bet.

Early foreign VC-backed technology companies grew to become the giants that we know today. They also changed the competitive environment of many industries in China, including the VC industry itself.

China’s tech giants have shifted their focus to building super apps. Instead of developing new products internally, they are leveraging the hefty wallets or using mergers and acquisitions for expansion. The opportunistic strategy has now disrupted the venture capital market in a country where VC firms used to dominate.

Foreign Investors Face New Obstacles

Many smaller, early-stage Chinese tech companies prefer to receive financial support from domestic tech partners over funds from foreign VC firms. This type of partnership acts as a stamp of approval from a trusted brand for the company’s business model and attracts users. The inclusion of the target company’s app offerings within the acquiring company’s larger ecosystem is also a plus since partnership opportunities are increased by the added visibility.

state-backed VC funds are also a threat to foreign investors. In response to the Chinese government’s efforts to reduce the influence of domestic technology giants, founders of new firms have turned to state-backed funds in order to win government favor and reduce the burdensome regulations.

The NASDAQ Golden Dragon China Index tracks Chinese stocks listed on US stock markets.

The Chinese government and regulators may occasionally relax their crackdown to help boost the economy, but I do not foresee any significant changes in the direction of the policy and initiatives they take toward the tech sector. It is unlikely that the emphasis on taming tech giants’ influence and supporting certain strategic sectors, such as semiconductors, AI, and electric cars, will be a temporary position.

To Breakthrough, Offer Strategic Value

Foreign VC investors, who are unafraid of these new barriers and eager to tap the potential growth in China’s tech sector, must understand that they need to bring more than money to the table. Strategic positioning plays a key role.

Is there a specific focus or industry expertise of the investing firm that would allow the target company to access new markets? Can the investing firm help the target company reach new markets?

When I was a member of the principal investment team at the international reinsurer Swiss Re, I made a cornerstone in an online Chinese healthcare company. According to recent estimates, the Chinese digital healthcare market is expected to reach $46 Billion in 2022. It will continue to grow with a compounded rate of 12.98% per year, which means a market worth $84.7 Billion by 2027. The sector, however, was only $15 billion in 2018. The sector was one of the fastest growing, with fierce competition from institutional investors.

We were competing for an allocation as a foreigner entering the mix. We had to compete against Chinese and international sovereign funds, Chinese state-backed investment firms, and various blue-chip investors. We won the deal by leveraging our insurance expertise. Our firm has a history of investing in insurtech and insurance companies around the world. We could offer advice to the target company about how to monetize their healthcare platform by partnering with insurers.

Some deals could have been more straightforward, so we formed a partnership or consortium to co-invest alongside a strategic tech giant. In these cases, our firm was required to demonstrate how it could position itself as a strategic partner who could benefit the China-based technology giant and then combine forces to win allocation.

We wanted to invest, for example, in a Chinese startup that was being courted also by a Chinese technology giant. We convinced the tech giant that we would co-invest with them in the startup by offering to help the tech titan’s overseas acquisitions as a trade.

India: A new destination for foreign VC

China’s increasingly restrictive environment has turned off many foreign VCs. A good number of them are now choosing an alternative market with similar growth prospects by Actively redirecting capital to India’s technology sector.