According to recent research by McKinsey, Southeast Asia is home to four of seven of the world’s highest-performing emerging economies: Indonesia, Malaysia, Singapore, and Thailand. All four have seen per capita GDP growth of 3.5 percent annually since 1965. In addition, Southeast Asia’s tech startup ecosystem is at an inflection point, setting up the region’s economies for even more rapid acceleration in the years to come.
It’s also no surprise that when it comes to venture capital in Southeast Asia, LPs continue to have many questions about the emerging asset class. Here are a few questions I hear most often and our house views in response:
1. Can startups scale up quickly in a region this diverse?
For LPs considering any investment in Southeast Asia, the region’s large size is a major part of its appeal. If it were a single country, Southeast Asia would be the third most populous nation on the planet. It’s increasingly prosperous, too: According to a recent PwC report, around two-thirds of the Southeast Asian population will be middle-class by 2030, up from less than one-third in 2010. This is an ideal environment for bold, young startups to rapidly scale up, amassing huge returns and massive market share.
However, Southeast Asia isn’t one country. It’s a region of ten countries with ten different sets of regulations, dozens of different languages, and vastly different levels of infrastructural development. Many LPs are understandably skeptical that scale will be possible in this context.
While Southeast Asia is diverse in some ways, it’s homogenous in others. The rising middle classes in Thailand and Vietnam might speak different languages, but they often have the same aspirations and desires—for example, they often share an affinity for the same or similar brands and experiences.
A BCG report on the “mass affluent” in Southeast Asia—a growing category of people with disposable income to spend on premium goods—identifies shared preferences that transcend differences in language and nationality. These include a preference for immersive shopping experiences, a belief in exclusivity as a personal statement, and a preference for certain product categories over others (for example, cars over motorcycles).
Businesses in “traditional” non-tech sectors have been scaling across Southeast Asia for decades, so scaling across borders in the region is not new. More recently, many startups have proven they can scale up quickly—and often even profitably—across Southeast Asia.
To be sure, the speed at which businesses scale across Southeast Asian countries is a function of how each industry is regulated. In less-heavily regulated industries, such as e-commerce and logistics, startups have expanded and gained traction relatively quickly. For example, our portfolio company Ninja Van, a last-mile logistics business, entered six countries within four years of its founding. Today, NinjaVan delivers more than 1,500 packages per minute.
In more regulated industries such as healthcare and fintech, scaling happens more slowly, but obstacles are not insurmountable. As my partner at MHV, Michele Daoud, has pointed out, many startups in fintech, healthtech, and other red-tape-filled verticals have scaled successfully by working with regulators in different countries or choosing their business models carefully.
In short: The fact that Southeast Asia consists of multiple countries is no barrier to scale across many different industries.
2. Is there capital for startups to scale past Series A?
The short answer is yes. Capital exists and is particularly rich for companies looking to raise Series C/D rounds or beyond. We’ve seen large players ranging from private equity firms to the venture arms of Chinese tech giants to sovereign wealth funds participate in late-series rounds for Southeast Asian startups. We have also increasingly seen global private equity firms and large venture firms opening or expanding their offices in Singapore, a sign that this trend is here to stay.
The biggest challenge for startup funding may still lie at the Series B and C stage. For a Series B round, startups may be looking to raise more money than regional venture capital firms can provide, while still being too small or early to attract interest from international institutional investors. This means startups often have to get creative with their funding sources. For example, the Series B for Indonesia-based fintech startup C88 (our portfolio company) was led by Telstra, while Series C was led by Experian. Both Telstra and Experian are strategic investors that provide value beyond just capital, but they do not operate dedicated funds for Southeast Asia. This, however, provides interesting opportunities for LPs looking for co-investments.
In my view, it might be more appropriate to refer to the situation as a “Series B lag” rather than a Series B gap. In an emerging market, investors only begin to organize capital when they have seen evidence of deal flow. Therefore, capital markets tend to lag market opportunities and needs. Today, with more Series A companies scaling up in Southeast Asia, funds with mandates covering Southeast Asian tech will emerge. In fact, this has already started to happen, with firms like B Capital (launched in 2015) targeting post-Series A investments.
3. Is there enough talent to sustain a technology ecosystem?
Talent will always be a challenge in a rapidly expanding market where there are simply too many exciting opportunities and too few qualified people to fill them. It’s no surprise that Southeast Asia faces a significant tech skills gap in the years to come.
The flipside is that talent will always be attracted to fast-growing markets. We’ve seen this in Southeast Asia with the rising numbers of “SEA turtles”—native Southeast Asians returning from study or work abroad. These individuals bring skills and connections honed in more mature startup ecosystems, contributing to the robustness of Southeast Asia’s own startup economy. Of the Southeast Asian tech founders we interviewed for the Slush/Monk’s Hill Ventures 2018 State of Southeast Asian Tech Report, around 50 percent were “SEA turtles.” The majority of survey respondents also agreed that “SEA turtles” have a significant advantage over their competition, both as founders and as employees.
When companies do struggle to fill important technical positions, Southeast Asia’s great diversity and proximity to engineering powerhouses like India enable other options. For example, startups like Gojek have acquired entire engineering teams in India to solve for a shortage of engineers in Indonesia. Similarly, our Malaysia-based portfolio company GoQuo has engineering teams in Vietnam and India. Because Southeast Asia is so diverse and open, it’s easier for companies here to collaborate with teams across national borders.
However, talent in senior and middle management does remain limited. These groups are defined by experience that is harder to come by in a young ecosystem. Roles that are in particular short supply include product managers, SaaS product marketers and sales leaders.
4. Are there opportunities for big exits?
There have already been several significant exits in Southeast Asia in recent years. In 2017, Sea Ltd.’s IPO on the NYSE raised more than US$800m, and Razer’s IPO in Hong Kong raised more than US$500m. These IPOs have served the very important purpose of educating Wall Street on Southeast Asian tech companies’ potential, the conditions of Southeast Asian markets, and the rise of the region’s digital consumers. As more financial analysts become familiar with Southeast Asian dynamics, other Southeast Asian tech companies have one less hurdle to overcome.
Realistically speaking, however, mergers and acquisitions (M&A) remain the most likely exit strategy for most Southeast Asian startups. Many strategic investors and corporates around the world view Southeast Asia as a market of interest, and the geographic locations of late-stage investors—who come from countries and regions such as China, Korea, Japan, Europe, and the US—also point to the sources of potential acquirers. In general, the attractiveness of the Southeast Asian market will be the key driver for continued M&A.
5. Can venture capital work as an asset class in Southeast Asia?
Only time will tell if venture capital will persist as an asset class in Southeast Asia. Clearly, conditions exist for venture capital investments to bear fruit; as noted above, Southeast Asia has a large, consistently fast-growing market; increasing accumulation of capital and talent; fast adoption of technology by a predominantly young population; and early signs of big exits.
But for venture capital in Southeast Asia to become a mainstay asset class for institutional investors, the market must demonstrate consistent investment returns over a sustained period of time. To be fair, Silicon Valley and perhaps China are the only tech ecosystems that have shown consistent returns. Still barely 10 years old, Southeast Asia’s young tech ecosystem still has much to prove.
For LPs willing to be patient, now is a great time to get into Southeast Asia venture. A cohort of fund managers, including Monk’s Hill Ventures, have already built an early track record with at least one fund under each of their belts. These funds have also shown distinct personalities, investment strategies, and abilities to execute. All LPs need to do is to poll some of the several hundred founders in Southeast Asia who have been funded to understand the differences among them.
For LPs who have gained conviction in Southeast Asian venture fund managers and who are willing to commit at this stage of the ecosystem’s development, access to potential leaders in the category will yield great rewards. History shows that leading fund managers often have the unfair advantage of superior deal flow and hence outperformance over a long period. Long-term partnership with leading managers over multiple funds is the proven approach for successful LPs.