This article first appeared in Digital Edge, The Edge Malaysia Weekly on December 29, 2025 - January 4, 2026

Start-ups across Southeast Asia are facing a tougher fundraising landscape as investors pull back, leaving founders with a shrinking pool of capital and tougher expectations.

The dwindling funds means that founders in the region must demonstrate solid fundamentals such as a realistic path to profitability and the ability to scale, industry players tell Digital Edge.

Tech start-ups in the region raised US$2.6 billion (RM10.61 billion) in the first nine months of 2025, which is a 58% decline from the US$6.2 billion raised during the same period in 2023, according to a report by Traxcn.

Meanwhile, Kuala Lumpur-based start-ups raised US$17.3 million and Petaling Jaya accounted for a further US$6.8 million in the first nine months of 2025.

“With weak private markets expected to persist over the next 12 to 24 months, we anticipate fewer deals being completed, stricter investment requirements and downsizing among fund management companies unless limited partner (LP) liquidity improves within the next six months,” says Amelia Ong, executive director of OSK Ventures International Bhd.

This is in contrast to 2021 when capital deployment hit US$9.5 billion in the second half of 2021, the highest level in the region’s history, according to a report by Cento Ventures.

“During the 2021 funding frenzy, many founders received investment regardless of performance, particularly if they attracted attention,” notes Justin Lim, managing partner at NEXEA Ventures.

However, this was followed by high-profile blow-ups. For instance, Indonesian agritech unicorn eFishery collapsed amid allegations of inflated sales and fraud, with investigators saying the firm overstated revenue by nearly US$600 million over nine months. Its former CEO is now facing a criminal probe. Kumpulan Wang Persaraan Diperbadankan (KWAP) was one of the investors.

Singapore-based fashion platform Zilingo was another example. It went into liquidation in 2023 after auditors uncovered serious financial irregularities.

Malaysia had a failed investment with FashionValet, a homegrown fashion e-commerce platform whose losses — combined with a costly bricks-and-mortar expansion and pandemic shocks — led to accumulated losses of RM127 million by 2022. Khazanah Nasional Bhd had invested RM27 million and Permodalan Nasional Bhd RM20 million.

As funding tightened, these blow-ups exposed recurring red flags: poor governance, overstated revenues and unsustainable burn rates. Industry players say this reinforced investor fears about backing companies without clear profitability, disciplined execution or credible exit pathways.

“Investors in the 2021 and 2022 VC (venture capital) gold rush were vibe investing, following what everyone was doing. The due diligence exercised then was not high. Local LPs are now significantly more cautious today, after failing to see returns from past investments,” says Lim.

This caution is tied to the region’s weak distributions to paid-in capital (DPI), which interviewees say has been underwhelming as exit activity remains scarce and funds struggle to return capital to LPs.

DPI shows how much cash has been paid to investors relative to their initial investment.

“Southeast Asia’s poor DPI is defined by years of excess capital and inflated valuations. Investors were essentially making high-risk bets, akin to buying a lottery ticket, hoping for a single, massive unicorn to justify the entire portfolio,” explains Lim.

“Crucially, these investments had a negative expected return over the long term, meaning, statistically, the investors were making wagers that were unlikely to pay off. What we do know is that high valuations and excess capital is a recipe for disaster, though that’s not exactly a secret.”

That being said, Malaysia’s early-stage funding ecosystem had shown resilience — attracting US$360 million in early-stage funding in two years, said Khazanah managing director Datuk Amirul Feisal Wan Zahir.

“Founders continued building despite narrower fundraising windows and investors continued backing founders despite softer global markets. That persistence on both sides is what trust looks like in practice,” he said during his keynote address at the Malaysian Venture Forum 2025.

The demanding investment climate today will also create opportunities for high-performing founders, Lim adds. “They are no longer overshadowed by those with compelling themes or flashy presentations; instead, their ability to deliver measurable outcomes is now preferable,” he says.

“This is a good thing as it is not a total capital drought but rather a situation where everyone, including investors, need to prioritise results.”

The current retreat is a much-needed correction that forces both fund managers and start-ups to raise their standard.

“Continued inefficient use of capital creates an ecosystem that will eventually stagnate … While painful, purging ineffective investors and companies is vital for the long run as it enforces discipline and ensures that capital flows only to those capable of delivering solid outcomes,” says NEXEA’s Lim.

This tougher funding environment means founders must now be far more efficient with their budgets and growth targets, as valuations reset and fundraising rounds continue to shrink, say VCs.

Investors are also increasingly backing start-ups with strong intellectual properties and differentiated artificial intelligence (AI) capabilities compared to those focused solely on operational execution, says Karen Lau, chief operations officer of Sunway Innovation Labs (Sunway iLabs), the innovation lab and corporate venture capital (CVC) arm of Sunway Group.

“Two years ago, we weren’t pushing founders on AI. Today, it’s the first thing we look at. We expect founders to articulate a real AI moat: the proprietary data only they can access, the proprietary technology they possess, how rapidly they can iterate with AI and how deeply their solution can embed into enterprise workflows,” says Lau.

Crucially, companies are also expected to realign their business plans and improve profit margins — as investors increasingly focus on DPI and exits.

Building stronger, more profitable start-ups is what creates real exit pathways, whether through mergers and acquisitions (M&A) or initial public offerings (IPOs), says Sivapalan Vivekarajah, co-founder and senior partner at ScaleUp Malaysia Accelerator. He adds that Malaysian funds have had poor DPI due to the lack of exits.

“The dependence on M&A for an exit is misplaced because there are no acquirers in Malaysia or Southeast Asia. Without acquirers, there will be no exit. The other option is an IPO, but for this, there needs to be profits,” says Sivapalan.

In this regard, OSK’s existing portfolio companies are being encouraged to pursue acquisitions or mergers for inorganic growth. “To strengthen outcomes, we have been actively supporting portfolio companies through value creation, covering areas ranging from sustainability initiatives to client referrals and advisory referrals for trade-sale or IPO transactions,” says OSK’s Ong.

OSK is set to continue to deploy out of its newly launched funds — ET Fund II and OSK-SBI Fund II — that will enable the firm to invest during the current market downward cycle and exit during the corresponding upward cycle in the next five to seven years, says Ong.

“[This is] while we roll out our fund platform to cater for individual deal special purpose vehicles that will be very interesting for different types of investors such as high-net-worth individuals and family offices,” she adds.

Meanwhile, NEXEA will continue to back early-stage founders with clear purpose and execution skills, which Lim believes will consistently deliver high returns.

NEXEA is actively raising capital for its early-stage fund that has already begun to invest and aims to finalise fundraising in the first half of 2026.

“We will continue building our premier start-up community that attracts under-represented founders, and when the alignment is right, [we will] make disciplined investing with the right partners,” adds Lim.

On the other hand, iLabs is focusing on both financial returns and strategic value. The CVC is also aiming to improve outcomes by integrating portfolio companies into Sunway’s business units to accelerate pilots and enterprise adoption.

“For example, Sunway has also allocated RM30 million to AI adoption, including collaborating with scale-ups to drive real implementation. This win-win approach strengthens Sunway while helping our portfolio companies scale sustainably,” says Lau.

It also is looking to position Malaysia as a regional vantage point connected to the world’s leading tech hubs through its access to a16z in Silicon Valley, the China International Capital Corp in China and the Cambridge deep-tech ecosystem.

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