Up until a few years ago, the lack of VCs and angel investors in Southeast Asia (SEA) meant that only a select few held all of the decision-making power on the investment opportunities that presented themselves. More recently, this has changed. SEA is witnessing the emergence of talented entrepreneurs and an increase in the new capital. So, the cultural, logistical, and language barriers are no longer holding back the thriving startup ecosystem in SEA.

For example, in China, Alibaba and Tencent are pouring in billions of dollars in the local startup ecosystem (US$13 billion from 2015, source: Economic Times) to establish regional dominance. As a result, even the American investors have been compelled to invest in the Southeast Asian market. According to a recent study by Kroll and Mergermarket, more than 25% of investment occurrences in the region are coming from prominent U.S. investors.

SEA Ecosystem At A Glance

In terms of the total amount of funding recorded in 2018, Singapore is leading the pack. However, Indonesia continues to have the highest average deal size. This can be credited to GOJEK and Tokopedia, the country’s two unicorns. They boosted the average deal size per startup to a ginormous US$220 million.

The number of startups in Singapore has gone from 2,800 in 2003 to 4,300 in 2016 with VC funding jumping from $80 million in 2010 to $1.2 billion in 2017.

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With the SEA startup ecosystem reaching unprecedented levels of growth, investors must now sell themselves and pitch to up-and-coming, promising businesses. Additionally, startups can also explore alternate avenues (aside from the conventional capital raising model) to secure funds they need. For example, Initial Coin Offering (ICO) that are gaining substantial popularity in the mainstream investment world. As more seasoned investors make an appearance in the overall market, entrepreneurs must prepare to meet their expectations and offer more polished business strategies.

The Reason Behind The Growth

So, why exactly has SEA garnered so much attention and witnessed such explosive growth in recent times?

The convergence of several market factors is also responsible for changing the way people across the world look at the SEA startup ecosystem. For example, SEA has become a prime destination for commercial innovation. This is due to the plethora of junior-level technical talent that’s at the front lines of an R&D revolution. According to the 2018 Bloomberg Innovation Index, for the first time in its history, SEA has been hailed as the R&D hub. Singapore is on the #3 spot in the said list that also includes Malaysia and Thailand at #26 and #45.

Moreover, with a population of over 650 million, most of it being young and tech-savvy (50% is under the age of 30 and 90% has internet access), people in SEA spend a considerable amount of time on their smartphones and are easily influenced by what the market has to offer.

Finally, the leading corporate investors in SEA continue to lend their support to the growth of the SEA in ways that exist beyond the capital. Their employees not only have a compelling skill-set and professional experience needed to back a fledgeling startup but also an unparalleled work ethic that sets them apart in the global workforce.

The Challenges

Considering the enormous potential for startup growth in SEA, what challenges await the foreign investors and other conglomerates attempting to establish a strong foothold in the region?

Local Customer Behavior

The primary obstacle that’s holding back sustainable growth is understanding local customer behaviour. Contrary to the United States, SEA is a relatively homogenous market of 325 million that comprises of distinct national ecosystems. Some of them are large and developed enough to function as standalone ecosystems, for example, Indonesia or Singapore. However, others do not have the size, bandwidth, and resources to support scalable businesses, for example, India and the Philippines.

That being said, being acquainted with the local know-how is crucial to combating challenges related to logistics and infrastructure in any market. You cannot copy and paste business models and market strategies that work for a different target audience and geographical location. For example, credit card penetration is remarkably low in SEA. As a result, it took Uber more than 2 years after launching in the region to accept cash payment. Amazon will be dealing with a similar challenge as they expand further in the region. They will also have to address the general distrust people have in online sellers (especially in countries like Vietnam). If that wasn’t complicated enough, many SEA countries like Malaysia and India have an extremely fragmented consumer market, owing to the different ethnic populations that reside in these places.

Regulatory Hurdles

Apart from the local culture, prospective entrepreneurs and investors must also overcome regulatory hurdles as they try to make a mark in the SEA ecosystem. Countries like Singapore strictly adhere to international-friendly business regulations and practices. On the other hand, Thailand’s Foreign Business Act clearly forbids foreigners from owning more than 49% of shares in a Thai-registered company. Along with high tax rates, this has largely deterred foreign investment and startup growth in Thailand. It comes as no surprise that less than a third of Thai startups have chosen to either register themselves in Singapore or plan a move to other countries when the opportunity presents itself.

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The Scope

In order to bridge these gaps and achieve success in the disparate ecosystem of SEA, it’s important to have your feet on the ground and onboard people who can bring both market knowledge and strong customer relationships to the table. For entrepreneurs, this means hiring local senior talent, or partnering with a regional co-founder, while for investors, this means co-investing with a local company or building a local team from scratch.

Corporations based out of the U.S. also need to step up their game if they are looking to compete in the SEA region. For example, Uber attempted to and eventually failed to effectively expand its cab-hailing business in the SEA. This explains their sale to the regional, homegrown success story Grab. Even the retail e-commerce platforms Shoppee and Lazada continue to rule the regional e-commerce space in SEA, making it difficult for Amazon to make a successful breakthrough.

Most SEA also countries have plenty of their own startup incubators that are supported by the government and established companies. For example, Ho Chi Minh City in Vietnam is spread across 11,000 sq. meters and is set to invest $90 million in startup and innovation programs in the coming years. Similarly, the government in Penang (Indonesia) introduced The Cradle Fund in 2003 that’s backed more than 700 startups by disbursing grants worth $6,000 ringgit to $200,000.

All in all, every country advances forward at its own pace depending on the infrastructure available, market dynamics, the readiness of talent, and various other economic variables involved in the process. We can expect more entrepreneurs and unicorns to come of SEA in due time.

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