“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.

A delicate balance

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.” 

Southeast Asian startups which Rakuten Capital has backed include Indonesian tech firm GoTo, and Singapore-founded cashback platform ShopBack and hotel platform RedDoorz. “A lot of the investments we made on the first and second generation, they’ve done very well for themselves and exited themselves out,” Ahn says.

Three years in, Rakuten decided to broaden its geographic remit. “We just realized that the Southeast Asia investment team could also apply their know-how to everything global,” Ahn recounts. “We were able to do investments that the corporation liked, so they asked, ‘Hey, you want to try that in the U.S. and also in Japan?’”

His seven-person team invests in more than 90 companies, many of them in e-commerce and fintech—in line with Rakuten Group’s key business priorities. (The conglomerate runs more than 70 companies, including online shopping platform Rakuten Ichiba, travel booking service Rakuten Travel, mobile network provider Rakuten Mobile, and crypto exchange Rakuten Wallet.)

A different AI bet

VC firms are pouring capital into AI, with one measure putting the new technology at 80% of global venture funding. This money is going to a handful of U.S.-based firms: frontier labs OpenAI, Anthropic, and xAI, and self-driving firm Waymo.

Most AI infrastructure money in Asia is going into hyperscale data centers. Malaysia, for example, has attracted over $34 billion in investments from cloud providers like Google, AWS, Microsoft, Alibaba and Tencent—and possibly another $50 billion from SoftBank—and is today one of the world’s fastest-growing data center markets. China, India and Japan also house fast-growing data center industries.

The AI trade has looked a little shaky in recent months, however, as investors worry whether there’s enough demand to justify the massive amounts of money being invested in AI infrastructure. In recent weeks, data center operators have pulled their IPOs, or seen their shares plunge. 

In Southeast Asia, questions remain about whether the region’s energy grid can reliably power these gargantuan campuses.

Ahn argues that investors and firms should look instead to small compute clusters, rather than the gigawatt race. “Everyone is trying to build a data center that’s as big as possible, but not a lot of the focus is going to smaller or micro-clusters where inference and edge nodes can live,” he observes. 

An example of infrastructure for such micro-clusters is Nvidia’s newly released DSX pods, which offer computing power in a modular, scalable form. “You can actually start to install these pods—even inside Singapore—next to charging stations,” Ahn says. “You can enrich countries with AI even without giant data centers that need two or three years of construction and also labor. The potential upside [of this tech], even in the short term, is the right-sizing of data center compute and inference for each country.”

Another early AI bet Ahn made is on its plumbing, specifically heterogeneous computing systems, which can use more than one kind of processor or core. “It means that you take AMD, Nvidia and Baidu chips, and you try to weave them together to have one strong compute unit, so that you can train your LLMs or do inference,” Ahn explains. 

When he first talked about heterogeneous computing, roughly two years ago, “people really didn’t care about it,” he recalls. But now, things have changed. In September, San Francisco-based startup Gimlet, which creates software to divide AI workloads across different types of chips, raised $300 million in a new funding round that brought the company’s valuation to $3 billion.

Ahn’s investment philosophy comes down to timing. “I’d say the most important part is trying to look at where the market’s going—where supply and demand is going—and trying to articulate what companies could help us fill those deficits.”

And as for Rakuten Capital, he hopes it will remain Rakuten Group’s de facto strategy arm, while potentially moving into new realms including start-up incubation. “Rakuten Capital’s ambition also lies in building interesting businesses from everything that we’ve learned,” Ahn concludes. “What happens if we could incubate things inside Rakuten Capital and make them something that’s worthwhile for Rakuten HQ? I think that’s one of the small hopes that we have for the future.”

Saemin Ahn will be speaking at the Southeast Asia 500 Summit on Nov. 3 in Ho Chi Minh City, Vietnam. Join executives from the Fortune Southeast Asia 500, policymakers, and investors to examine the forces reshaping one of the world’s most important growth regions. Apply here.

In Fortune’s Asia Agenda column, released at least twice a month, we speak with Asia’s top business leaders about how they are building for the future and the lessons they’ve drawn from leading companies in one of the world’s fastest growing and most dynamic regions. Explore all of our profiles here.