Singapore: India, with a weaker business and innovation environment than South-East Asia (SEA), received $6.4 billion in venture capital (VC) funding in the 12 months to June, compared with only $1.6 billion received by the region, Singapore-based Jungle Ventures said in a report last week.

South-East Asia is under-penetrated by venture capital, compared with India, despite its addressable market being roughly equivalent to the tier-I cities in India, David Gowdey, managing partner, Jungle Ventures, said in an interview.

While India represents an enormous opportunity for Internet companies, and has a large enough domestic ecosystem to sustain very large businesses, its population should not be viewed simply in absolute terms, Gowdey said. He pointed out that a recent study by Goldman Sachs revealed that the urban middle class represents only 5% of India’s population, equivalent to 27 million people, compared with 156 million in China.

Edited excerpts:

When it comes to key ingredients which make for good VC ecosystems, your recent report said South-East Asia scores impressively on all fundamental factors, higher than India in almost all categories, and even better than China in a few. But, while South-East Asia countries as a whole seem to have a better macro picture than India, is the opportunity not being exaggerated? These are countries with very different governance standards, and ease of doing business also varies considerably.

We do not think the opportunity is being exaggerated because the intent of the report is to compare the current state of the two markets on several fundamentals which are required to grow Internet businesses. The report is not intended to say India is not an attractive market, but rather that SEA also has pretty compelling market dynamics in many of the categories, but is currently under-penetrated by venture capital, as compared to India.

One of the longstanding reasons mentioned against increasing the amount of venture capital funding in SEA is that it is a region of six key countries—Singapore, Malaysia, Indonesia, Thailand, Philippines and Vietnam—a collection of markets, and not one uniform market. While we obviously agree that founders and teams have to work quite hard to establish a regional business in SEA, given the complexity of the countries, we believe the opportunity to create large scalable businesses is sizable and will only increase over time.

Even India is not exactly a uniform market since significant variances exist in language, social nuances and local permits/regulations across parts of India, but these are not major hindrances to business growth if solved smartly. VC funds are largely investing in technology and Internet-driven business and apart from very few sub-categories such as financial services, transportation, etc., most other business models have low dependence on regulations and government and, therefore, this concern is overstated.

The Jungle Ventures’ study states that gross domestic product (GDP) per capita is higher across top SEA cities than in Indian metros. But several Indian start-ups such as Flipkart are now more than five years old, and are spreading faster into tier-II towns, which also have big populations. As India’s economy continues to grow at 7-7.5%, the smaller towns, taken together with the metros, are presenting a bigger opportunity perhaps than SEA cities. What is your take?

Our report primarily highlighted the lack of equivalent funding to address even the current size of the addressable market in SEA, which is roughly equivalent to the tier-I cities in India, where with 2-3x the consumer spending power resides.

Even in India, while the horizontal e-commerce platforms are selling to customers in tier-II and III cities, most consumer Internet companies see the majority of their volumes and value from consumers in the tier-I cities, since they tend to be better from a logistics, ability to pay, delivery costs, convenience, etc., perspective. We have not commented on the tier-II/III cities opportunity in India as being less or more attractive and definitely see it as a significant opportunity in the future for Internet companies.

How will SEA deal with a shortage of engineering talent that’s crucial for online start-ups and which Indian start-ups have easy access to?

We see this changing in SEA in a positive way over the last few years, as there appear to be more US-educated locals coming back in the market, as well as local start-ups beginning to attract more world-class talent. However, it still hasn’t reached the levels you see in India currently.

Locally, talent is also now much more aware of engineering as a skill set in demand, given the news about start-ups, large MNCs (multinational companies) opening offices—Singapore is the regional headquarters for many large global tech companies, such as Twitter, Facebook, Google, etc.,—later-stage start-ups expanding teams and hackathons, etc., becoming more regular in SEA.

NUS (National University of Singapore has been placed among the 10 best universities in the world for 13 subjects, including computer sciences where it ranks ninth, behind the US, UK and Swiss universities. Other universities in the region are also filling this void from an education and training perspective.

India’s Reliance Industries has launched an ambitious pan-India 4G network that promises to connect consumers in all Indian states to broadband speeds. Will that not negate the speed advantage that two-three countries in SEA currently have? In other words, India might continue to remain more attractive than higher-income SEA nations as a much larger population comes online.

Our research was only looking at the metrics at a fixed point in time. Again, we are not saying India will not improve on key metrics, but only that SEA probably rates better than what many people might have thought.

What steps can the Indian government take in terms of ease of starting a business and taxation—two areas where it ranks particularly bad—so that it can compete with the likes of Singapore?

Over the last five to 10 years, the Singapore government has been very progressive in terms of how Singapore can be the centre of technology development in the region. Their efforts have included incentives to start-ups, incubators, angel investors, VC firms and even investors—limited partners—in VC funds. There is probably a great deal that other countries can learn from their efforts.

How bullish is Jungle Ventures on Indian start-ups compared with SEA start-ups?

We are very bullish on Indian start-ups. We are targeting about 20% of the portfolio to be invested in Indian start-ups and tend to invest in companies where we can help them expand their operations to include SEA.

India’s government has pushed through reforms that make it easier for investors to fund start-ups, and also allows start-ups to pay zero tax for first three years. Except Singapore, which nations in SEA have taken similar initiatives to make it easier for start-up ecosystem to flourish?

Malaysia has several institutes that help grow young start-ups and grow the e-commerce space. Notable ones include Selangor Information Technology and E-Commerce Council (SITEC) and Malaysian Global Innovation and Creativity Centre (MaGIC), focussing on e-commerce and start-ups, respectively. SITEC also provides several programmes for freshman entrants in e-commerce scope since most local business lack the knowledge of operating online business. The programme consists of ‘Online 100’, ‘App 100’, ‘E-Commerce Education’, ‘Top ECM 2016’, and mutually-related events. MaGIC, founded by the central government in April 2015, is a bigger organization seeking to build a vibrant community from every region of Malaysia and endow entrepreneurs with the ability to create something sustainable and to take pride in. Furthermore, MaGIC aims to catalyse entrepreneurship and help start-ups grow globally by matching venture capitalists with those start-ups. It even collaborated with Stanford University, one of the best and most prestigious universities in the world, to experience world-class courses and some companies in Silicon Valley to inspire creativity and entrepreneurship.

In Indonesia, June 2016 saw the launch of a government-backed initiative called the “1,000 start-ups movement". The programme’s goal is to grow 1,000 start-ups until the year 2020. Together, they will amount to a valuation of $10 billion. Initiators of the programme are Indonesia’s ministry of communication and information technology and Kibar, an organization calling itself a tech start-up ecosystem builder. As Indonesia focuses on the start-up ecosystem intently, it has recently reached out to Jack Ma of Alibaba to advise them on building this ecosystem. Thailand has also recently announced a keen interest to grow the local ecosystem, and started with announcing a $570 million venture fund for the same. Therefore, we see many such efforts and incentives being taken and coming to fruition, now and in the near future.

In terms of population and addressable market, India ranks second only to China. India has been described as the last huge unconquered market for the likes of Amazon and Uber, and for other start-ups. How will SEA compete with that potential opportunity, to reach that many people, which attracts top start-ups and top quality talent to India?

India represents an enormous opportunity for Internet companies and like China or the US, has a large enough domestic ecosystem to sustain very large businesses. However, that said, the population of a country should not be viewed simply in absolute terms. When assessing the scale of the opportunity a country or market presents, one must look at the real addressable market size and the spending power within that base—i.e. rural consumers versus urban consumers are very different. A recent study by Goldman Sachs reveals the urban middle class represents only 5% of the Indian population, so only 27 million people vs 156 million in China.

Exits have been a problem for several start-ups. How can India and SEA get over that hurdle, which prevents many investors from funding later rounds?

Exits, either via trade sales or IPOs (initial public offers), tend to increase as markets mature, but are also a function of how healthy the ecosystem is at all levels. It wouldn’t be fair to compare the internet ecosystem in SEA to the US as it really only started a few years ago, while the US internet space is much more evolved. Exits are a key ingredient to building a healthy and robust ecosystem and the more success stories SEA can generate, the higher the awareness of the region and, hopefully, more active participation by the larger global acquirers, such as Google, Microsoft, Alibaba. We are seeing an increasing amount of consolidation, or acquisition of smaller players, in India as companies try to build scale and become more efficient.

This trend has not reached SEA, but acquisitions of local players has been increasing over the last few years, as companies look to enter the region and establish a strong base of operations.

SE Asia has also been seeing M&A (merger and acquisition) interest from global tech MNCs, global consumer internet companies, as well as large Chinese tech companies... As for India, it is ranked third behind US and UK in the CB Insight Global Tech Exits 2015, while China is ranked 7 and Singapore takes the 12th position.

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