A version of this feature was published in FinanceAsia's December 2021 magazine.
Southeast Asia’s start-ups are on the rise.
In the summer of 2021, car marketplace firm, Carsome, became Malaysia’s first unicorn, while e-commerce site Bukalapak, listed in what remains Indonesia’s biggest IPO to date. Singapore’s Grab and FinAccel meanwhile, are two firms waiting in the wings, eyeing year-end special purpose acquisition company (SPAC) deals.
“The start-up ecosystem has come full circle. We’ve gone from an environment of young start-ups to those pushing for growth and ending up as billion-dollar companies,” said Vishal Harnal, managing partner at 500 Southeast Asia, the firm with enough foresight to have established early relationships with each.
According to Credit Suisse’s report, ASEAN Unicorns: Scaling new heights, published in October, the region is home to 35 unicorns (defined as a start-up valued at $1 billion or above), excluding those that are already in the process of listing. Since then, Thai crypto exchange Bitkub is one of 19 additional start-ups to have scaled up to reach unicorn status including fintechs, NIUM and Xendit, and car marketplace, Carro.
Public vs private money
For the most part, it is private money that has so far spurred the start-up investment scene. Data from Bain, Dealogic and SVCA indicates that in the full-year of 2020, Asian start-ups received $9 billion in funding from private equity, compared to $7 billion raised through IPO. In 2019, these figures sat at $12 billion and $8 billion respectively.
However, this could be about to change.
The report notes that, with the emergence of so many start-ups on the ASEAN stage, coupled with the increasingly high-values being assigned to each, the public sector may want in on the action.
By 2030, the number of IPOs in Southeast Asia is expected to surpass 300, according to Golden Gate Ventures’ SEA Startup Ecosystem 2.0 report.
Start-ups typically receive initial funding from venture capitalists or angel investors who choose to participate during early growth stage, often in exchange for an equity stake. For many founders, going public marks the next real milestone, although there is no specific checklist for when a start-up should list, beyond perhaps its pursuit of operational expansion or to support acquisition.
Thomas Tsao, founding partner of Gobi Partners, a venture capital firm headquartered in Kuala Lumpur and Shanghai that has $1.2 billion in assets under management, sees similarities between Southeast Asia’s start-up scene and that of China five to ten years ago, but he thinks that the investment cycle is compressing.
“In China, every big company stayed in its lane. Tencent did messaging, Alibaba did e-commerce and Baidu took on search. Then China got into the super app. Now, Southeast Asian companies are considering super apps from day one. They’re providing digital wallets, exploring ride hailing, e-commerce, fintech, buy-now-pay-later, they’re trying to do everything at the same time.”
The digital economy
While the pandemic has disrupted lives and livelihoods, it has also accelerated digital adoption across most industries. According to e-Conomy’s SEA 2021 report, 40 million new internet users came online this year, upscaling internet penetration in the region to 75%.
For everything from e-commerce to healthcare and education, consumers have had to adapt to new ways of working, shopping, and learning.
Fintech and e-commerce are the two sectors that have received the most investment to date, and this is set to continue. According to Fitch Ratings, while Southeast Asia’s population stood at over 580 million at the end of 2020, more than half remain unbanked.
“With the region looking to rapidly service the unbanked and underbanked, these (payment) solutions must also meet the needs of a much broader socio-economic range of people than might be seen in the West,” said Nagesh Devata, vice president for APAC at Payoneer.
From supporting gig economy workers such as freelancers in Malaysia, to connecting English teachers in Thailand with students in Indonesia, the New York-based fintech company helps entrepreneurs access global marketplaces. In Southeast Asia, it has partnerships like that of GCash in the Philippines and Vimo in Vietnam, which help underbanked entrepreneurs start successful businesses.
Meanwhile, the region’s e-commerce activity is currently dominated by Tencent-backed Shopee and Alibaba-owned Lazada – though individual countries also offer localised platforms such as those developed by Bukalapak, and Tokopedia, in Indonesia.
Pastures green
Growth in both verticals is likely to advance given the market potential, but there are three additional areas that VCs think might expand in the new year.
One emerging trend is what the Gobi team terms “Taqwatech”, which calls for entrepreneurs to serve the needs of the global community of 1.8 million Muslim consumers.
“I think this is going to be huge, and is something that’s underpinned by our market research. The reason why China and India have done so well is because they are big, homogeneous markets where people have exhibited similar consumption behaviour,” Tsao said.
Tsao’s view echoes the findings of Golden Gate’s report, which suggests that Southeast Asia will emerge as a global Islamic tech hub in the course of the next decade. The research predicts that Indonesia and Malaysia’s market size will grow by at least eight times across industries as varied as fashion to finance.
Current start-ups in this space include Islamic fintech players, Investree and Alami, and Islam-conscious holiday booking service, Tripfez Travel.
Rural digitisation is another area that could contribute to the next chapter of the regional growth story, according to the 500 Southeast Asia team, as cities form only part of the region’s success story.
“[Opportunity] is spreading beyond tier one cities, to solve very unique problems,” said 500 Southeast Asia’s Harnal.
The firm sees potential in those start-ups that build solutions to help leapfrog rural development and provide communities with the same access and convenience as cities.
For example, using sensory technology, Indonesian agritech company, eFishery, has developed a device that encourages appetite-based feeding to prevent farming waste and over-supply. It also offers users an online marketplace through which its users can sell their produce.
Game on!
The announcement by Facebook CEO Mark Zuckerberg in October to change the company’s name to Meta places a bold bet on the development of the Web 3.0 universe. Also known as ‘the metaverse’, the immersive online realm incorporates elements of the real world with AI and the gaming sector, and is set to gain prominence as companies continue to pursue digital transformation. Some Southeast Asian start-ups hope to cash in on the development.
“The gaming industry has discovered a whole new business model of playing for ‘real cash’, or cryptocurrency. Digital currency is attracting a lot of attention, which will lead to a lot of regulatory scrutiny, but I think something interesting will be developed here,” said Dmitry Levit, partner at Cento Ventures, which has $50 million under management.
Yield Guild Games is a decentralised autonomous organisation (DAO) based in the Philippines that brings together nearly 90,000 gamers who use non-fungible tokens (NFTs) in “play-to-earn” games that generate real cash flow. One of its most popular games is Axie Infinity, a flagship product of Vietnamese game developer, Sky Mavis.
The region’s rising stars
Start-up success stories have been so far largely concentrated in Singapore and Indonesia, home to 74% of the arena’s active companies, according to Credit Suisse. But Gobi Partners’ Tsao suggests that Malaysia is one to watch. He describes the country’s start-ups as ‘hippos’.
“When you look at a hippo in the water, it doesn’t look very big, because it’s mostly submerged. I think a lot of the Malaysian companies are like that. Investors are starting to realise their potential,” said Tsao.
The country’s Ministry for Science, Technology and Innovation (MOSTI) set a goal in February this year to develop five unicorns within a five-year period. The country’s second unicorn is rumoured to be drone-as-a-service (DaaS) provider, Aerodyne, one of 15 in 500 Southeast Asia’s portfolio companies that are currently valued above $100 million.
But do not discount Vietnam – already home to unicorns, VNG and VNPay. Golden Gate predicts that the country will emerge in 2022 as a ‘major start-up ecosystem’, likely to attract significant early-stage VC investment.
“We are investing more in Vietnam and the Philippines due to potential opportunity, and we continue to invest in Malaysia because we believe it is underinvested,” said 500 Southeast Asia’s Harnal.
