SINGAPORE - Despite macroeconomic headwinds looming large in the new year, venture capital (VC) firms remain cautiously optimistic.

Several VC firms that The Straits Times spoke to have maintained their investments in the tech space despite 2022 proving to be a tumultuous year for the sector.

The euphoria that fuelled the fast growth of many young tech firms quickly evaporated, and tech’s most prestigious companies reported steep declines in profits as well as manpower cuts, as they grappled with rising interest rates and inflation.

However, this valuation reset in the tech space will present good opportunities for VC firms with a large amount of committed but undrawn capital, otherwise known as dry powder.

Ms Madhu Shalini Iyer, a partner at Rocketship.vc, a global early-stage VC firm, said: “It is a tough period for everyone, and we envision a slowdown for at least the next 12 to 18 months. A lot more emphasis will be placed on due diligence. Investors are going to be taking their time to close deals, and the bar for start-ups is also getting higher.”

Rocketship will continue to invest as some of the best opportunities emerge out of tough times, she added. “Do not operate out of fear, but rather, out of a place of caution and experience, and be ready to seize the opportunities that present themselves,” Ms Madhu said, adding that the areas of e-commerce and fintech are set to feature prominently in 2023.

Despite market uncertainties, the long-term opportunities for South-east Asia remain strong, said Mr Abheek Anand, managing director of Sequoia Southeast Asia, which actively invests in early-stage tech companies across all sectors in the region.

Describing South-east Asia as being at an “exciting juncture with deepening markets, higher consumption power and high talent density”, Mr Anand said that it is a great time to start a company.

He added that as companies trim expenses and make tough choices in this environment, stronger businesses will emerge over the long term. “There is plenty of capital available to fuel growth in the region. But this, in turn, can put pressure on companies to grow fast, and founders may become impatient to make progress. Tons of discipline will be needed to use capital sensibly and not mistake burn for building enduring companies.”

Founders will also have to build companies more frugally when faced with short-term slowdowns, he noted.

Some factors that VC firms look at when evaluating the investment potential of a start-up remain the same, regardless of the state of the economy, said Ms Carmen Yuen, general partner of Vertex Ventures Southeast Asia and India.

Some of these factors include a company’s financials, such as whether a start-up has a clear path to profitability, with traction for its product or service.

VC firms also assess a product or service to determine if it is unique and addresses a significant need and a significant market potential.

They also look at a start-up’s exit potential, be it public listing or acquisition.

A good track record of success and expertise in the industry, as well as a clear vision for the company, will also give start-ups an edge.

“Investors who have the capital and bandwidth to take on new deals now will find great opportunities in these uncertainties,” Ms Yuen said.

She also agreed with other observers that digital payments and fintech are set to be promising areas of tech in 2023.

“There continue to be opportunities in the fintech space, such as ‘buy now, pay later’ and ‘save now, buy later’ propositions. What will be of interest will be how the dominant player can win the game without burning through huge sums of investments,” she said.

E-commerce will also be a key area of interest, Ms Yuen added.

“South-east Asia and India have a large and growing base of digital users who are exposed to e-commerce at a young age.

“Many companies are investing in e-commerce platforms and logistics services to meet the demand for online shopping. Social e-commerce has become a dominant business model as consumers are accustomed to purchasing based on the recommendation of peers and influencers,” she said.

Another area of interest would be digital health, where many investors are interested in telemedicine and home-based care.

Disease management and technologies that improve the efficiency and effectiveness of healthcare delivery such as electronic health records and data analytics are also of growing interest, Ms Yuen said.

Ms Madhu notes that telemedicine still has some way to go. “There is a lack of a key dominant player in the telemedicine space, and in some areas, there seems to be some hesitancy by doctors to come on board such digital platforms.”

Some sectors are also set to experience more headwinds in the new year, such as those directly related to interest rates, said Mr Karan Mohla, a partner at B Capital.

Similarly, B Capital sees healthcare, fintech and climate tech as some core areas of focus.

The firm does not do any capital allocation to each sector as it really depends on the level of innovation by each firm, Mr Mohla said.