Markets are down, but you should double up on seed-stage checks

This piece was written by Joash Lee and Henry Wong, general partners at VC firm Iron Key Capital.

Seed-stage investment deals are down in Southeast Asia, and that’s a big missed opportunity.

With global uncertainties on the up and funding hard to come by, the VC landscape has shifted. Still, history shows that market contractions are opportunities for investors, as they offer the chance at gaining superior returns over the long run.

Some investors are pivoting to private equity-like strategies. While this is mostly in the US and Europe, Asia will likely follow over the next couple of years.

Despite this, we believe that seed-stage investing has great promise, especially for emerging fund managers. But why seed, and why now?

Macro influence

Periods of economic volatility, such as the time after the global financial crisis and the aftermath of Covid-19, have spawned innovations.

For instance, Airbnb and Uber took advantage of changing consumer behaviors after the global financial crisis and employed cost-conscious models. Similarly, companies like Zoom and BioNTech scaled quickly because of Covid-19.

Today’s environment echoes these periods: Valuations are reset, megafunds are cautious, and founders are pushed to build sustainable businesses.

Structural forces within the VC space also make seed investing more attractive now.

For a start, the growth of megafunds in the last decade has amassed a historic level of dry powder, which is capital that must eventually be deployed. Though dry powder in the Asia Pacific has declined from its peak in 2023, fund managers remain under pressure to invest this capital.

The economics of VCs do encourage large funds to focus on late-stage deals. With these investments, they can write bigger checks and earn higher management fees and carried interest.

It’s also more efficient to make a few large deals rather than lots of smaller ones, as less due diligence will be required. This dynamic has left seed-stage firms underserved.

Seed investing requires more operational involvement than large firms can typically offer, too. Finding and supporting early founders is labor-intensive work that is hard to scale.

These factors have led to the decline in the number of active seed investors even though the pipeline of entrepreneurs is strong.

Tech in Asia data shows that from 2020 to 2023, Southeast Asia’s startups most commonly raised seed rounds. However, last year, bridge funding rounds overtook seed rounds, with 138 deals compared to 120.

So far in 2025, the trend is holding: Seed rounds lead, but series A rounds are close behind, 37 to 34. Tracxn data paints a similar picture, with seed funding in the region at US$50.7 million in the first half of 2025, down 50% from the second half of 2024.

Finally, new, smaller venture funds have slowed down. Limited partners are more cautious about investing in first-time fund managers, which has created a gap for seed-stage companies.

With plenty of dry powder and less competition at the seed stage due to these factors, investors who are willing to buck trends have an opportunity. They can make better deals on better terms than at any time in the last decade.

Baked in advantages

Seed-stage investors have consistently outperformed later-stage funds, growth equity, and public equities on an internal rate of return basis. Seed investments are also less affected by market cycles, as early-stage valuations depend more on innovation than public market sentiment.

In fact, the average duration for a seed-stage deal to mature is seven to 10 years. This could help fund managers diversify and hedge against short-term fluctuations.

Our analysis also shows that returns for seed investments after a recession tend to get a bump.

As the investment was made during a recession, it was likely for a lower valuation. As things become more stable, the firm becomes attractive to later-stage investors with more cash to deploy, boosting valuations and providing exit opportunities.

Beyond financial returns, seed investors tend to have a front-row seat to technological breakthroughs. This gives these investors the chance to establish relationships with other innovators and position themselves as key partners in emerging ecosystems.

Which sectors hold promise?

Emerging technologies such as AI and Web3 are revolutionizing sectors from healthcare to education. For instance, applications like diagnostic imaging and AI-enabled platforms are creating new opportunities.

Amid the AI boom, upstarts in the space need proprietary data and must have real-world utility.

AI firm Cluely, for instance, initially developed a tool to help users “cheat” during coding interviews by using AI to provide real-time solutions in a hidden browser window. It later pivoted to building a tool that helps with job interviews, sales calls, and even social interactions.

The firm has seen good signs of traction, with an over US$7 million annual recurring revenue.

Web3, meanwhile, is maturing. There’s now more clarity in regulations around the sector and greater institutional adoption.

Solutions operating with the underlying technology that powers Web3, in particular, are becoming more secure and interoperable.

We believe the best opportunities over the next two to three years are in the infrastructure that helps Web3 scale and reach more users.

What this means for founders and investors

The combination of economic volatility, structural VC shifts, and tech breakthroughs has created a unique window to find solid early-stage deals.

Pre-seed and seed-stage investments hold the greatest potential over the next three to five years, and general partners investing in early-stage deals will thrive amid a tough climate.

But what is the takeaway for founders?

Capital will be carefully deployed, so startups must be clear on their firm’s purpose, and they need to build moats around data, agents, and distribution.

The AI upstarts that stand out will have proprietary data assets, differentiated models, or unique workflows that competitors cannot replicate. Founders should avoid throwing “AI” in their pitch decks without a clearly communicated use case, as investors can easily spot this.

Attractive Web3 startups, meanwhile, should solve real problems with interoperable solutions.

Those who use these emerging technologies to address specific industries, such as edtech, HR tech, and medtech, will have the most value. For instance, one of our portfolio companies, MyStandard, is an HR tech startup building a Web3-based talent acquisition platform.

However, these startups tackling specific challenges must own their data. We recently passed on funding a startup that helps clients draft legal documents, as due diligence revealed that the tool was a ChatGPT wrapper without any datasets and could easily be replicated.

Though we are in uncertain times, this is the best moment to capitalize on AI and Web3 in non-gimmicky ways. Concrete data points proving traction like conversion rates, customer testimonials, and usage metrics are key.

Builders should also be aware of geopolitical factors when choosing where to base their solutions and raise capital, especially if their product involves sensitive technologies or cross-border data flows. This also means evaluating data protection laws, crypto regulations, or export controls that may impact operations.

Southeast Asia offers a chance for seed investors to get ahead. The region’s markets vary greatly in size, regulatory frameworks, and culture, making hyperlocal knowledge essential to customize offerings and go-to-market strategies for each country.

The region also has a young, digital-first population, rising internet penetration, and increasing government support for innovation. The most successful seed investors cultivate deep local networks, partner with regional VCs, and stay nimble to capitalize on emerging trends.