Southeast Asia and its booming technology startup ecosystem is a new frontier: the Wild East. The regional ecosystem is no longer hiding in the shadows, and has made great strides over the past couple of years in terms of commercial innovation and investment activity. Still, despite its recent successes and heightened global recognition, the ecosystem remains a puzzle to many following it from the outside. Southeast Asia’s geographic distance from the West, its cultural and commercial differences, and its rapid pace of change make it difficult for outsiders to keep up with the latest technology and innovation developments. In order to understand how to capitalize on the unprecedented growth in the region, it’s necessary to first learn more about what’s actually happening on the ground. That’s why I’ve developed a brief guide to Southeast Asia’s startup ecosystem–a survey of the key dynamics at play. This guide is informed by the time I spent traveling to and exploring Southeast Asia’s startup communities over the past several months.
So where exactly do things stand in Southeast Asia’s tech startup ecosystem?
In short, there’s already a large spotlight on the region and competition has increased for startups and investors. But, future success for both of these parties is contingent on possessing a deeper understanding of local cultures, consumers, and commerce throughout the highly fragmented region.
I will now unpack this statement and suggest 5 key ideas that shed light on why there’s been such growth in the region so far, and what knowledge needs to be considered and applied for this growth to continue or even scale in the future. These ideas are by no means exhaustive, and are distillations of the main themes I encountered while based in the region.
1. The untapped potential of the Southeast Asian tech sector is no longer a secret. The word is out, and the development of Southeast Asia’s startup ecosystem is being followed now more than ever before. With more notoriety has come more competition. Even a few years ago, the dearth of VCs and quality angel investors in the region meant that a select few held all of the power and deals would present themselves. More recently, the rise of talented and experienced entrepreneurs and an infusion of new capital has shaken up this dynamic.
A major source of this capital has been other Asian markets, specifically China. Chinese technology giants such as Alibaba and Tencent have bet big on the region, pouring in billions of dollars and initiating a head-to-head battle for regional dominance. These companies have contributed significantly to the US$13 billion that has been invested in Southeast Asia since 2015. American investors have also begun to participate more actively–a recent study by Kroll and Mergermarket estimated that U.S. investors have accounted for 25% of investment instances in the region since 2015.
Increased levels of investment activity means investors must work harder and smarter in selecting opportunities to pursue. They must now sell themselves to promising startups just as these companies have to pitch in return. Additionally, there are now alternate avenues startups can and have been exploring in securing the funds they need outside of the traditional capital raising model, such as the ever-trendy yet highly speculative initial coin offering.
The boost in activity also has implications for local entrepreneurs: as more seasoned investors enter the market, they in turn expect more polished entrepreneurs and business strategies. Entrepreneurs must rise to the occasion and meet these expectations if they are to take advantage of this newfound capital. The playing field is intensifying on all fronts.
2. Market conditions are in place to enable startup success. Why exactly has the region attracted so much attention and seen such explosive growth in the past couple of years? Because of the convergence of several market factors that make Southeast Asian startups an attractive bet. Southeast Asia’s population of over 650 million is young and tech-savvy. Over 50% of the population is under the age of 30, and 90% of this subset has internet access. Not only do they have internet, but they are notably heavy internet users–mobile internet in particular. While many in these developing countries live in poverty, they still spend considerably on smartphones.
This emerging generation doesn’t just understand how to use technology, but also how to build technology. Southeast Asia has become a leading commercial innovation destination, and there is a plethora of talented junior level technical talent leading an R&D revolution. While the U.S. fell out of the top 10 in the 2018 Bloomberg Innovation Index for the first time in its history, Southeast Asian R&D hub Singapore moved up to the #3 spot on the list driven by its large investment in R&D funding and STEM education. Other notable Southeast Asian countries on the list include Malaysia (#26) and Thailand (#45).
Finally, as mentioned, Chinese corporate investors have supported and will continue to support much of the growth in the Southeast Asian ecosystem. These conglomerates have a lot to offer Southeast Asia’s leading startups beyond capital. Importantly, their employees offer knowledge and experience sorely lacking among the region’s startups, not to mention an unparalleled work ethic.
3. There’s still much room for improvement and international involvement. Yes, Southeast Asia’s startup ecosystem has reached unprecedented levels of growth. And yes, market conditions suggest this growth is primed to continue. However, there’s still much room for improvement and international involvement. In terms of investment, there’s an incredible gap between early-stage funding levels and later-stage funding levels. According to a report authored by Google, US$9 billion of the US$13 billion invested in Southeast Asia’s startups since 2015 was raised by the region’s 7 unicorn companies (private companies valued at more than US$1 billion). There is a substantial need for more experienced investors focusing on early-stage companies guiding what could be the next generation of Southeast Asian unicorns.
U.S. based corporations must also step up their game if they are to compete in the region. Uber tried and failed to effectively grow its ride-hailing business in Southeast Asia, leading to the sale of its regional operations to homegrown success story Grab. Amazon entered the region in 2017 by launching in Singapore, and more recently moved into Vietnam. However, regional retail e-commerce sites like Lazada and Shoppee continue to rule supreme in the high-growth e-commerce space.
4. Barriers to entry include lack of local knowledge and regulatory hurdles. Given the vast potential for startup growth in Southeast Asia, what stands in the way of sustained growth, and why have many foreign investors and companies who attempted to create a foothold in the region stumbled? Answer: it’s really hard to scale within the region.
The first and primary challenge is understanding local consumer behaviors. Until this point, I’ve been speaking of a singular Southeast Asian startup ecosystem. Practically speaking, this does not exist. In contrast to the U.S. and its relatively homogenous market of 325 million, Southeast Asia is highly fragmented. It is comprised of many distinct national ecosystems, some of which are either large enough or developed enough to exist as standalone ecosystems, such as Indonesia or Singapore, but most of which do not have the size and resources to grow scalable businesses on their own.
Local knowledge is crucial in tackling the logistical and infrastructural challenges in each market. It’s impossible to copy and paste existing business models and market strategies. For example, credit card penetration is extremely low in much of the region. It took Uber 2 years post-entering Southeast Asia to begin accepting cash as payment. Amazon will be faced with this same payments challenge as it attempts to expand further, while also confronting the general distrust of online sellers in countries like Vietnam. To complicate matters even further, many Southeast Asian countries such as Malaysia are ethnic melting pots with multiple different ethnic populations, fragmenting the consumer market even further.
Beyond the need to more closely study and understand local behaviors, prospective entrants must also overcome burdensome regulatory hurdles. Singapore has built an innovation and technology hub by instituting international-friendly business regulations and practices. However, other countries are lagging in this regard. For example, Thailand’s Foreign Business Act dictates that foreigners cannot own more than 49% of any Thai-registered company’s shares. This law, along with high tax rates, has significantly impeded foreign investment and consequently Thai startup growth. No less than a third of Thai startups currently list themselves in Singapore, and of those that do register in Thailand, many are lured away to other countries at the Series A stage.
5. Local partners and a regional mindset are needed for scalable growth. In order to fill these gaps and succeed across Southeast Asia’s disparate ecosystems, it’s necessary to partner with locals on the ground who bring market knowledge and relationships. For entrepreneurs this could mean partnering with a local co-founder or hiring hard to come by local senior talent, and for investors this could mean building a local team or co-investing with another local firm.
Another key to success is maintaining a regional mindset from day 1. As I mentioned, many of the national Southeast Asian ecosystems do not have the market size or supporting resources (e.g., domestic capital, experienced senior level talent, or corporate partners) to scale. Even in Vietnam, which has a population of over 90 million people, it’s nearly impossible for homegrown startups to scale outside of the country because of how localized their products typically are. While keeping in mind the need to adjust between markets and adapt to local preferences, it’s paramount for companies to think regional from the onset and to build products accordingly.
A regional mindset represents the ‘Goldilocks’ approach–the not too small, but not too big growth strategy–for many Southeast Asian startups. A hyper-localized approach is not viable in many countries apart from massive markets like Indonesia with its 260 million people. Even in Indonesia, ride-hailing unicorn Go-Jek has plans to expand regionally to promote long-term growth. On the other hand, global expansion is not typically a viable option for Southeast Asian startups due to cultural, logistical, and language barriers. Therefore, swift regional expansion has proven to be the most effective long-term growth strategy for the startup success stories I’ve come across, from Thailand’s Priceza to Malaysia’s Supahands.
These 5 ideas provide a foundation of knowledge about Southeast Asia’s startup ecosystems. Keep learning and exploring!