Rakuten Capital’s Saemin Ahn thinks Southeast Asian VC needs a different model, as good startups don’t get enough ‘oxygen’ compared to the U.S.

Saemin Ahn made his name betting on Southeast Asia. Now, as the region starts to pull itself out of a years-long venture funding slump, he’s not sure the old model works for the region anymore.

“I’m pretty pessimistic about the prospects of venture capital investment in Southeast Asia,” Ahn, who leads international investments for Rakuten Capital, the corporate venture arm of Japan’s Rakuten Group, tells Fortune. “The way firms scale and succeed in Southeast Asia has a very different velocity curve [than the U.S.], which isn’t very compatible with venture capital.”

Just five years ago, Southeast Asian digital companies such as Grab and Sea won large funding rounds from investors like Baillie Gifford and Hanwha Asset Management. While the share of total venture funding remained small, observers were hopeful that Southeast Asia’s young, digitally-savvy population would fuel the next generation of internet unicorns.

Things are much cooler now. In the first nine months of the year, only $10.7 billion flowed into the region, just over 1% of a total $679 billion, according to data from the Founders Forum Group and Dealroom. About $4.5 billion of that went to just one company, DayOne, a Singapore-based data center company. And yet this low share still represents a recovery: Last year, funding to Southeast Asian startups was three times lower.

Today, Ahn argues, the lion’s share of global venture capital is concentrated in the U.S. and North Asia. Venture capital is a derivative of other money flows: only “a fraction of the fraction of the fraction” of the money that enters a market ever reaches startups, he explains. Companies need to post stellar results to win more VC money—and Ahn fears that the region’s startups aren’t delivering.

“A lot of the Southeast Asian companies that have gone public or are about to go public, they’re not showing those results at all,” he says. “If you build something that’s of quality in Southeast Asia, you just get a lot less oxygen than if you build the same thing in the U.S.”

Take Grab, perhaps the golden child of Southeast Asia’s tech sector. Since the company went public on the Nasdaq via a SPAC listing in late 2021, shares have fallen by around 75%.

“In the past few years, many entrepreneurs who set up shop [in Southeast Asia] have either assimilated into the corporate ecosystem, or moved to more developed markets like North Asia and the U.S.,” Ahn observes, adding that rising inflation and higher interest rates have also raised the cost of funding. “Even with venture capital, you still need critical mass… I think it’ll be very hard for Southeast Asia to get any material spotlight for the next two to four years.”

Rakuten Capital now focuses its investments on North Asia (excluding China), the U.S., and parts of Europe. A report by Lightspeed Venture Partners found that outcomes in Southeast Asia are significantly less capital-efficient—generating only half the value per dollar invested as compared to markets like China.

“To succeed as a venture capitalist in this region, you’re going to have to transform yourself into an entity that not only does equity investments, but also looks seriously at other levers like mezzanine or tranche financing, debt and credit, that can help your company grow more productively,” Ahn explains.

Ahn’s pessimism on Southeast Asia is a stark contrast to his record. He started Rakuten Ventures in 2013 as one of its founding managing partners, and says his team exclusively focused on Southeast Asian investments. (Rakuten Ventures later changed its name to Rakuten Capital.)

“We were lucky enough to catch onto the macro trend of people becoming interested in Southeast Asia’s growth and potential,” he recalls. “Investors like Sequoia Capital were all moving into the region, and we were able to invest in some really great companies.”